ICOs were all the rage in 2017 and early 2018. Since then, regulatory agencies have cracked down on them because of the many that were scams.
With the regulators favoring security token offerings (STOs), startups are now beginning to adopt them as a means of raising funds for their projects. According to the Financial Times, startups are now boycotting ICOs and choosing to go with regulated STOs. And it’s not just in the US.
Startups all over the world are opting for regulated offerings, particularly in Asia where there’s been a significant crackdown on ICOs. In fact, countries like Hong Kong and China have explicitly forbidden ICOs.
In the past, blockchain and crypto startups did everything they could to ensure that their offerings weren’t similar to traditional securities. Unfortunately, those days are long gone. Most firms are now seeking out regulated options for their coin offerings, with many activities going the route of STOs.
Security Token Offerings (STOs) are different from ICOs in the sense that it affords investors the opportunity to directly invest in the company. STOs are essentially like IPOs, only it’s for the blockchain industry.
This is in direct contrast to ICOs which mostly gave investors stakes in products. Which means their returns were largely tied to the product’s performance. So, a failed product often meant the loss of investment, even if the company was afloat. Lena Ng, Partner at Clifford Chance puts it succinctly:
“With ICOs, we saw people trying very hard to fall outside of the regulated space… STOs are clearly subject to regulation.”
Because of the crackdown, therefore, the industry has seen a significant increase in the number of STO inquiries in 2019, with many of those companies actively considering launching theirs.
Unfortunately, STOs aren’t as cheap to launch as ICOs. Which makes them a tough thing to do for startups with very limited budgets. The beauty of ICOs was the significant lack of costs, speed of execution (ICOs can be launched within days) and ease of fundraising.
But, with STOs, startups need a sizable legal team to help them navigate the landscape. And even then, the process could still take time.
As a result, STOs may not be an option for startups with low budgets for now. However, with time, and streamlined processes, STOs are likely to become the industry standard.
Till then, startups looking to raise funds will have to brave the waters and pony up the costs or seek funding elsewhere.