The acronym STO stands for Security Token Offering while the acronym ICO stands for Independent Coin Offering. The two terms have both been thrown around a lot of recent. They may sound the same, but they aren’t the same. The major similarity of both is that they are a safe way of raising money by companies.
ICOs were very popular in 2017. ICOs raised over $6 billion in startup capital worldwide last year. But unfortunately, ICOs were marred by various scams and pyramid schemes which led to various companies and websites banning ICO related adverts and promotions. In 2017, over 70% of ICOs were scams. This created the need for something better. Something more trustworthy that investors could count on.
STO was introduced to resolve this. With an STO, people can buy digital tokens or coins the same way they would for an ICO. But, these tokens are now backed by tangible elements like revenue, profits and assets in a company. So, STOs are more like holding shares in a company but with more versatility than traditional shares.
Here are 5 major processes that distinguish an STO from an ICO.
1. Registration with the SEC:
Unlike ICOs, all STOs must be registered with the Securities and Exchange Commission (SEC). This makes them quite similar to shares. So, if you invest in an STO, you get some rights to the organization or firm that issued the token just like a shareholder.
The registration process with the SEC is part of what makes STOs safer than ICOs. Investors get more security as fraudulent organizations are warded off. The registration process with the SEC is similar to the registration process for IPOs (Initial Public Offerings).
STOs make use of regulated offerings like Reg CF, Reg D 506(c), Reg A + and Registered. So, an STO is a regulated token offering that registers with the SEC or uses available securities exemption like Reg A+ to do it.
2. Filing of public documents:
Companies that are registering an STO must file documents that become accessible to the general public through the SEC’s EDGAR database. An external audit must be included among the filings. The external audit is needed so investors can get a good, objective analysis of the current condition of the company. The filed public documents must contain relevant information like properties owned by the company, investments made by the company, management team, security that is being sold etc.
3. Publishing of a prospectus:
A prospectus must be published by the project team of an STO. A prospectus is different from a whitepaper in the sense that it is more detailed than a whitepaper. The prospectus must be examined and approved by the SEC before the STO project can move ahead.
4. Filing of quarterly and annual financial reports:
Companies that have filed STOs are mandated to file quarterly and annual financial reports. These financial reports must follow specified patterns.
5. Different trading mechanism:
STO security tokens are based on Alternative Trading Systems (ATS) with broker-dealers who are registered with the SEC and supervised by FINRA. The use of ATS and broker-dealers is expensive as they must be supervised with a chief compliance officer, they must pass FINRA exams, they must understand several rules and they must be well-trained. So, STOs require a lot of knowledgeable and skilled people for trading to occur. This makes it much difficult for fraudulent trading practices like pump and dump to occur. There will be less room for artificial inflation, and people are less likely to lose their money to dishonest practices.
These processes and more make an STO more time-consuming and costlier than an ICO. There are a lot of people involved from lawyers to accountants to financial analysts to STO advisors. The SEC needs to know more about compliance, transparency and investor protection. The launching of an STO is a long process that ensures legal compliance. It is not like an ICO that almost anyone can launch. These are what make an STO more trustworthy than an ICO.
Fiat currency has been kept largely secured and safe for investors thanks to regulatory bodies. These regulatory bodies will provide the same services for STOs. As STOs are more trustworthy than ICOs, they are allowed to advertise on websites where ICOs have been banned from advertising.
ICOs were a presale of a token. They were a mechanism for making tokens more popular and expanding the network upon which the tokens were based. But in the actual sense of it, ICOs were built on something that doesn’t exist yet. There is no decentralization in an ICO as the decentralized protocol does not exist yet. The money was majorly going to individuals or businesses. The use cases for tokens in an ICO were theoretical or on paper alone. There is no guarantee that the tokens were ever going to be used in the future or even exist again after the ICOs.
ICOs were basically a risk that allowed a lot of scammers to get rich. It is estimated that the top three scam ICOs made away with over $1 billion of investors money each.
Some people invested in ICOs just to make money. They could buy a token for $2 and sell it for $3.5 as the value increased later. It became a form of investment or gambling to make some money. There was a lot of scam, frauds and underground deals. There were even cases of some people being offered tokens at a far lower price than what others were offered the tokens. SO, there was no protection for investors.
But thanks to STOs, investors are now protected, and they will be assured that they will hardly be scammed of their hard-earned money. One of the primary purposes of the SEC is to protect investors, and they have several federal security laws backing them up.
The future of STOs
STOs are still largely unknown. But as more organizations get more knowledge about them, they should become mainstream. More people will understand what block-chain securities are and security-based tokens will become integral components of the world’s financial system. These STOs will comply with the strict regulations set by regulators.
Investors in these STOs will benefit from them, and their investment will be better protected. Thanks to how secured and regulated STOs are, they could become popular retirement investment schemes like stocks and shares.