What is STO?
What it is?
STO stands for Security Token Offering. The security tokens are based on blockchain like ethereum ERC20 but essentially financial securities,therefore, they are backed by tangible assets, profits, or company revenue. STO should compliance with securities law of the country where the investor is located.
Why do they matter?
SEC is attacking ICO:
“SEC announced its first civil penalties on Friday against crypto founders who failed to register new coin offerings, part of a bigger regulatory and legal crackdown aimed at abuses and outright fraud in the growing digital currency industry.”
“Colorado’s Department of Regulatory Agencies (DORA) has signed four orders against initial coin offerings (ICOs) which offer allegedly fraudulent sales to Colorado residents. The orders entail an immediate cease and desist of operations.”
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Fundraising by ICO is getting harder, because the tightening regulations and lots of fraudulent projects. STOs, when they comply with regulatory requirements, are certainly more attractive to sophisticated investors due to reduced risks, efficiency, transparency of the ledger, and an enhanced level of protection for all parties involved in the transaction.
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Based on blockchain-based technology, security token’s issuance is more convenient, trading unit is smaller and could be traded around the clock. KYC/AML can be automatically conducted by using smart contracts, which greatly improves efficiency.
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Allows any company to tokenize its equity and is not just limited to blockchain companies （e.g. lottery.com）
Regulation problems
STO has two options for legal regulation:
One is through SEC registration. Another is to comply with one or more relevant regulations, such as Reg A +, Reg D 506(c), Reg S, and Reg CF, which are exempted from registration.
| Solution | Description |
|---|---|
| Regulation D 506(c) | fast, simple and efficient; Restrict the issuance to accredited investors (including US and non-US residents); No ceiling on financing; Fill out form D. “Qualified investor” : minimal $200,000 annual salary for the last two years or net worth over $1,000,000 (excluding real estate). 1 year lockup period |
| Regulation S | stocks and bonds can be issued under this Regulation; allowing non-us investors to invest in US companies; There are no restrictions on the wealth of investors. |
| Regulation A+ | there are two levels: the first level is to raise up to $20,000,000 , and requires SEC and intercontinental level review, but there is no continuous reporting requirements; The second level is only subject to SEC review, with a maximum financing of $50,000,000 , a two-year financial review period and continuous reporting requirements. The investor is limited to over 18 years old; Unqualified investors are allowed. |
| Reg CF（Crowdfunding） | the fastest, cheapest way to Crowdfunding; The investor is limited to over 18 years old; Up to $1,000,000 can be raised from qualified and non-qualified investors; |
Securities Token has two possible directions for compliance:
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Relying on centralized regional exchanges, such as tZERO and Open Finance which are regulated by the SEC. The whole process from initial issuance to trading in secondary market is under the supervision of regulations
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Embedding supervisory layer in token, e.g. Polymath and Harbor. The token owners should pass KYC, AML, accredited investors checks etc.
Take Polymath for example: during the initial release process, only investors who have been added to the contract whitelist can purchase tokens and all subsequent transfers need to be verified for compliance. The above verifications are completed through smart contracts.
The Polymath Process
Who uses STO?
STO cases:
most of them are venture capitals and real estate enterprises.
How does it differ from ICO?
Securities tokens’ issuance and trading should comply with local securities laws. Securities tokens give their holders equity/debt position, profit sharing, dividends, voting rights, and other benefits in the company.
Compare To IPO and ICO
Q: As an investor, what is the next step for taking advantage of STO?
For now, we should keep watching for companies that provide STO solutions like polymath, harbor and exchanges for security token, like tZero, Open Finance. And companies of the same type are emerging quickly
For long term, we should pay attention to the innovation of traditional asset securitization relying on blockchain technology. It will lead to great changes in traditional finance. According to statistics, there are about 70 trillion us dollars of stock assets, 100 trillion us dollars of bond assets and 230 trillion us dollars of real estate assets in the world. All kinds of assets above can be securitized to improve financing efficiency and reduce financing cost.
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