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Will 2019 be in Favor of Security Token Offerings?

2017 was the year of the Initial Coin Offering, a new way for companies to raise money. Since then, over $22 billion have been raised for companies of all sizes, from pre-product startups to companies with publicly traded equities on traditional stock markets.

This fundraising gold rush was partially fueled by the Bitcoin and Ether’s colossal rise, but also through the invention of a more liquid investment instrument.

Over the past several years, myriad companies and other organizations raised capital by selling new digital tokens. Often the tokens conferred upon the holder some right such as (just by way of example) access to a software service (“utility tokens”), a payment stream from a debt instrument, or equity in the issuer.

These tokens then typically traded on public markets. The initial sale of a new token came to be known as an “Initial Coin Offering” or “ICO” (a modification of the standard securities term “Initial Public Offering” or “IPO”).

Issuers generally did not believe these tokens to constitute securities and thus did not register these offerings with securities regulators in the jurisdictions in which they were sold.

Due to how liquid the tokens were, speculative secondary markets developed, allowing investors to purchase the tokens and then sell them for a higher price, often by orders of magnitudes.

Quickly, however, many securities regulators disagreed. For example, in 2018 the U.S. Securities Exchange Commission Chairman stated he believes nearly all ICOs to constitute securities. Various national regulators began taking action against token issuers, seeking monetary penalties and blockade of further sales (see, for example, my prior post here).

Likely as a result, the total funds raised via ICOs decreased through 2018. Increasingly, many issuers sold tokens in jurisdictions (such as Singapore) with looser cryptocurrency regulations, and many token exchanges prohibited access by U.S. citizens (although even this may not suffice to put a sale out of the SEC’s jurisdictional reach). But the U.S. capital market is too big, and issuers began to look for ways to retap it.

The truth is security tokens can accelerate the democratization of venture capital. Blockchain technology and smart contracts introduced an efficient means to raise capital without the use of intermediaries and serve as the basics for the creation of security tokens, too.

As a vehicle for fundraising, security tokens allow companies to raise capital without having to turn to investment banks and stock exchanges. Businesses like Securitize, Polymath and Harbor, along with completely “tokenized” funds such as Spice VC, demonstrate this very well.

Also it’s important that digital assets can be offered all over the world without formal registration, aren’t always tradable, and do not come with any legal rights for token holders attached. But STOs promise something a little different. The “S” in STO suggests that the token follows a strict legal framework designed to protect investors and ensure complete clarity over what is being offered.

In principle, STOs should follow the legal framework that other securities have to follow, but there is still huge ambiguity over whether digital assets and tokens should be considered securities. Financial regulators still have some catching up to do. Thailand’s National Legislative Assembly has reportedly approved an amendment to the existing Securities and Exchange Act on February 8th, according to the Bangkok Post.

The amended act is expected to go into effect this year according to Tipsuda Thavaramara, Deputy Secretary-General at the SEC.

The Director of the Corporate Communication Department at the SEC, Pariya Techamuanvivit, said that once this happens, it will be legal for businesses to launch security token offerings using blockchain technology.

Meanwhile, if you’re a bit confused about STOs and all that stuff, check out our most comprehensive guide, which will help you figure out what STO is, how it works, and what’s hidden behind this industry’s disrupter. You can also check the latest Security Token Offerings (STOs) in Coinspeaker’s STO Calendar.

Will 2019 be in Favor of Security Token Offerings?

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