Investor confidence plummets when a quick Google search brings up long lists of negative reports, all trumpeting the alarm that more than 80% of ICOs are scams.
Don’t believe me? A recent study by the Satis Group LLC is a case in point as reported in an informative article at Hackernoon. The study concluded:
- 81% of analyzed ICOS turned out to be scams
- 6% of ICOs failed outright
- 5% went dark
- Just 8% were eventually traded successfully on an exchange
From the investors’ point of view, these incriminating statistics can raise more than enough red flags to deter them from participating in what is perceived as an ultra high-risk ICO. The potential for robust returns can’t overcome the unsustainable risk of being scammed and the ICO falls to the lowly status equivalent to high-risk, low-value, penny stocks in the mind of the investor.
The STO (security token offering) could prove to be the essential fundraising instrument which restores investor confidence in the crypto-community.
The STO combines the versatility and democratizing funding power of the ICO with the traditional reassurance of securities case law precedence and regulation investors now need to restore confidence in decentralized financing and investment.
And make no mistake, there is incredible growth, enough to reassure the financial community that fundraising, the crypto way, is here to stay. In fact, total funds raised through ICOs in 2018 came in at nearly $8 billion (or $7,852,477,041 to be precise) according to ICOdata.io.
Flying in the face of the bear market, crypto adoption nearly doubled in 2018, up to 35 million users from 2017’s 18 million user participation in the crypto-economy.
The potential crypto-investor pool has never been deeper and the new STO fundraising method may be just thing to keep the unscrupulous sharks out of the water. Below we’ll look at the differences between the two methods for tapping into the vast resources of the crypto-crowd.
From IPO to ICO
One of the primary attractions of the ICO for startups is the freedom from regulation and the need to win “government verification” as required for the traditional IPO. The only other alternative is to recruit venture capitalists to provide the cash infusion to launch a project.
The ICO system bypasses the numerous legal and administrative obstacles which might require a company to prepare for years in advance before they’re able to reach out for public funding. Launching an IPO is a complex process involving a plethora of governmental regulatory agencies including the SEC and the IRS. Then, after the IPO is finally issued, only a limited number of investors are able to participate.
The high cost of cutting all that traditional IPO red tape is prohibitive for many small businesses and even medium-sized enterprises. The time and expense involved with a traditional IPO most certainly rule it out as a “kickstart” option for new startups. Enter, the Initial Coin Offering, or ICO the fundamental building block of 21st Century Decentralized Financing.
The innovative blockchain ICO changed all that providing a wide open stream of capital for companies and an extensive pool of potential investors free from regulatory burdens. Any company at any time can launch an ICO and tokens can be purchased by anyone anywhere in the world. Funds can frequently be raised in a matter of minutes rather than years. Low-cost fundraising projects especially, benefit from the simplicity of issuing a crypto-token to secure the funds they need immediately to get time-sensitive projects up and running quickly.
ICOs level the playing field and clear it from obstructive regulatory actors but there is a toll to be paid. The same deregulated environment which attracts SMEs and legitimate entrepreneurs is also a magnet for unscrupulous companies and scammers. In the unregulated “Wild West” of the ICO world, there are no guarantees that the investor’s money won’t simply disappear. Enter, the Security Token Offering, or STO.
From ICO to STO
Security tokens are the next evolution in decentralized finance, following on the footsteps of the innovative ICO. Traditional securities are defined as a fungible instrument holding value which represents either debt or equity. Securities as equity represent ownership in a company such as shares of stock, and holders may be entitled to capital gains and dividends. Common traditional debt securities include:
- Certificates of Deposits
- Government bonds
- CDOs (Collateralized Debt Obligations)
- CMOs (Collateralized Mortgage Obligations)
- Corporate Bonds
Debt security holders typically receive interest payments on the principal. Securities are traded on stock exchanges and they are considered as assets when they’re transferred between investors in secondary markets. As such the STO is in the spotlight for its potential as a valuable tool to allow companies to digitize assets on the blockchain.
STOs are true securities even though they exist on a blockchain and are therefore subject to the same laws and regulations as traditional securities. This is the most significant advantage of the STO over the ICO. STOs are backed by actual assets as opposed to ICOs with unsupported utility tokens without collateral or security law protection.
STOs continue to reduce the barriers of entry encountered with traditional IPOs and exchanges exist which permit investors to trade security tokens. They “democratize” the investor pool and boost confidence with regulatory compliance. The STO retains the versatility of decentralized financing and offers a host of unique advantages including 24/7 markets, fractional ownership of high-value assets such as real estate or fine art, not to mention highly reduced minimum investment rates which open the door to more investors. The assurances provided against fraud as compared to an ICO are exactly what STOs provide at a time when prudent use of blockchain technology is critical in the wider transition to open financing.