The ICO has come under a lot of scrutiny recently. In the United States, the SEC has tried to make startups that raised money through an initial coin offering return the cash to investors. The problem? The lack of a legal definition of whether a token is a security or a commodity has caused friction in the community.
Can the STO solve the problem? We find out below.
What is an STO?
STO stands for Security Token Offering. It is a new and more regulator-friendly alternative to a Initial Coin Offering (ICO) which allows a company to sell shares of their company in the form of a tokenized asset. In an STO, investors buy security tokens that represent an ownership interest in a company, like a traditional stock.
What is the difference between an ICO and an STO?
An ICO allows a company to raise money by selling a “utility token,” which gives investors access to certain products or services, without giving up a portion of their business.
An STO allows a company to raise money by selling a “security token,” which represents an ownership interest in the company and can grant voting rights to the token holder.
ICOs are generally reserved for blockchain companies, as the utility tokens being sold must have a specific use within the company’s ecosystem or on its platform.
Security Token Offerings can be used by any company, as security tokens can be sold as shares of a company, even if the company does not use blockchain technology.
ICOs have generally been open to any and all investors who meet an individualized set of guidelines outside of a standardized regulatory framework.
Meanwhile, STOs are aimed at institutional and accredited investors and are designed to meet the requirements of global regulatory bodies such as the US Securities and Exchange Commission (SEC).
Why are companies changing gear?
From a regulatory standpoint, the SEC has said that it considers almost all tokenized assets, with rare exceptions, to be securities.
Recently, companies that sold their tokens as “utility tokens” through an ICO, without registering these assets as securities with the SEC, were forced to pay fines and reimburse investors.
Unless a company can make a clear case for its token to be classified and sold as a “utility token”, such as Civil. many companies are moving away from ICOs in favor of STOs to avoid running afoul of SEC regulations.
Until now, fundraising for blockchain companies has been largely unregulated. In the future, that will have to change. There has been an evolution in the legal definition of tokens and security token offerings are believed by many to be a step in the right direction.
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