Could 2020 Be the Year of the Security Token Offering? Let’s Find Out.

Evidence suggests that many initial coin offerings (ICOs) have not followed the proper U.S. Securities and Exchange Commission (SEC) regulations, and there is a strong precedent for continuing investor protections and regulator oversight in this area. Security token offerings (STOs) are a newer and more effective option. We saw some exciting new STO developments around the world and we believe that security token offerings will surpass ICOs in 2020 almost definitely in the United States and increasingly in other parts of the world that recognize STOs as well as ICOs. 

A Few Reasons to Use STO

When using a STO to raise funds, companies offer cryptocurrency tokens and receive investor funding in exchange. STOs may also have assets in the real world to back them up, including real estate and fine art. Interestingly, when you acquire an interest in a STO, you may actually own a fraction of one of these assets or a fraction of a share of stock.

Compared to traditional securities offerings, STO transactions have the potential to be faster, more efficient, and more convenient because they are built on blockchain technology. For instance, rather than waiting days for a trade to complete, investors can trade tokens digitally in a matter of minutes. As compared with ICOs, investors have more legal protections since STOs are actually securities offerings and are regulated by security laws; this means that they fall under existing regulatory oversight and benefit from the SEC’s investor protections.

Consider this: many ICOs may also qualify as securities under the law anyway. SEC chairman Jay Clayton stated in 2017: “Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law.” If an ICO meets the definition of a security but is not registered with the SEC, its issuers could face heavy legal penalties, including fines and/or having to return money to investors.

Many issuers find STO regulation worthwhile because it boosts their credibility and trust among the public. Furthermore, from an investor’s perspective, purchasing security tokens can give you a legitimate stake in a business or a share of its profits. Compared with investors in ICOs, prospective STO investors are far less likely to come across fraudulent deals. Keep in mind that since many STOs use the SEC registration exemption in Rule 506(c) of Regulation D, theseSTOs are available only to accredited investors, even though they may be publicly solicited. In addition, STOs using this exemption require a Form D to be filed with the SEC.

STO Developments Continue to Accelerate

In early 2018, only three STOs were available, according to a CoinDesk article. As 2018 progressed, STOs became more popular.  In response, applications for Alternative Trading System (ATS) licenses increased. These licenses are for systems that allow private security token exchange as a legal alternative to the traditional trading system, the stock market. More specifically, the SEC defines an ATS as “a trading system that meets the definition of “exchange” under federal securities laws but is not required to register as a national securities exchange if the ATS operates under the exemption provided under Exchange Act Rule 3a1-1(a).”

The Tokenist reports that in November 2019, Tokai Tokyo Financial Holdings, a Japanese financial services firm, announced its approximately 500 million yen ($4.58 million) investment in iSTOX, a security token platform currently based in Singapore. Japanese investors have also made a number of other STO-related investments in 2019, and the issuance activity by Japanese companies has certainly increased.  We may anticipate greater adoption of STOs in Japan as a result, and perhaps Japan may adopt a security token exchange of its own down the line.

China is developing a national digital currency called China’s Digital Currency Electronic Payment (DCEP), which uses cryptographic and blockchain technology. The currency is equivalent to the Chinese RenMinBi (RMB). The People’s Bank of China will also be rolling out a legal framework for STOs, according to a Tokenist article. During the recent Financial Finance Technology Summit in Beijing, Weimin Guo, chief scientist of the Bank of China, spoke about the DCEP. He believes it is a significant step in facing the challenges of traditional payment systems across China and that it will also lead to the availability of STOs. Initially, the currency will support retail transactions. As it gains traction, Guo said that other businesses will also begin to utilize it.

Interestingly, Guo’s announcement comes about a year after Huo Xuewen, chief of

Beijing’s Municipal Bureau of Finance, warned that STOs are illegal in Beijing. What a difference one year can make!