Let’s start from the beginning and do away with all the acronyms and confusing terms that make a lot of people shudder like they do when they hear the word ‘Blockchain’ in a conversation.
An Initial Coin Offering (‘ICO’), put simply, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for an alternative crypto currency such as Bitcoin and Ether. It is somewhat similar to an Initial Public Offering (‘IPO’) in which investors purchase shares of a company.
A Security Token Offering (‘STO’) is a fundraising tool similar to an ICO, but with certain regulations that hold the token issuers accountable for their actions.
The relatively quick success of ICOs has established them as a viable method of crowdfunding. However, while ICOs have helped a lot of start-ups raise a great deal of money, the fundraising method also paved way for a variety of scams as there were little or no regulations involved.
Towards the end of 2018 there was a significant increase in the number of STOs than before. The change from ICOs to STOs has been largely driven by the bottoming out of the retail market (both Bitcoin and Ethereum) and a slower demand from retail investors for ICOs.
In particular, the U.S. Securities and Exchange Commission also increased its oversight of ICOs, clamping down on fraudulence and non-compliance This initiated the shift from ICOs towards STOs, with STOs becoming the popular alternative to ICO’s due to the underlying asset being backed by regulations and compliance in most jurisdictions, as such companies behind them became held accountable and answerable in respect of their projects to their investors.
The industry is now seeing an increasing number of active or upcoming STO’s. Companies intending to raise funds are realising that the interests of sophisticated investors and funds are more inclined towards ‘security’ tokens instead of ‘utility’ tokens, due to the values possessed by the security tokens.
STOs now have the potential to overtake ICOs. They will be legal, regulated and investors are more comfortable that there is a genuine expectation of returns; such returns being not under the influence of the Bitcoin market price but the positive cash flow of a business, which makes for a healthier digital economic ecosystem and therefore likely to become the new normal for 2019.