#ThisMonthInBlockchain – Unraveling Security Token Offerings

BlockSafe Technologies > Blog > #ThisMonthInBlockchain – Unraveling Security Token Offerings

The blockchain industry has come a long way since Bitcoin exploded in 2009. From the Initial Coin Offering (ICO) frenzy to wallet and exchange hacks, it’s been quite a rollercoaster ride. But this wild ride will soon become an easy one with the introduction of the Security Token Offering (STO).

What are STOs?

STOs were introduced by the Securities and Exchange Commission (SEC) to protect investors from ICO scams. Many know of ICOs as an easy way to raise capital or participate in investment projects without any oversight, compliance, or, governance. The first ICO launched in 2013, but they didn’t become popular until 2017, that’s when just about any company or startup could raise money in short periods of time.On one hand, ICOs created an efficient way to carry out financial transactions, on the other, they created an opportunity for scammers to join the bandwagon and swindle investors out of millions of dollars. Fraudulent ICO projects soon became prevalent, luring in investor victims with white papers and websites that appeared to be legitimate.

Enter the STO, which is a token offering on the blockchain which is a security with monetary value. In other words, it is a financial tool representing an asset such as stocks, bonds, profits, or revenues of a company.

A security token operates just like a conventional security, the only difference is that the transaction is taking place on the blockchain. Outlined below are some key attributes of a security token.

  • Howey TestIn addition to the requirement that a security token must be registered with the SEC, the 1946 Supreme Court case, SEC V Howey Co., established the four criteria listed below to determine if a token is a security.
    • It must be an investment of money:
      • With an expectation of profit
      • In a common enterprise
      • With the profit to be generated by a third party
  • Know Your Customer (KYC) – The KYC rule is an ethical requirement and standard form for those dealing with securities.  KYC ensures that investment advisors know everything about their customer’s identity, their investment knowledge and financial position. Customers are protected by having their advisor know what investments will be best and investment advisors are protected by knowing what they can and cannot include in their customer’s portfolio.
  • Anti-money-laundering (AML) – AML refers to regulations designed to stop the practice of generating income through illegal actions, including but not limited to, manipulating of the market, trading illegal goods, and corruption of public finds.

The same KYC/AML applies to STOs because they are governed by the SEC and are treated as traditional investments.

Before the start of an official STO crowdsale, some companies invite investors to participate in a 506B “Friends & Family” round, or, a pre-STO round. The incentive is to get in at a lower price with a special offering.

STOs in 2019

We believe that there will be a strong demand for STOs in 2019. While the blockchain industry is muddled with ICO scams and crypto hacks, STOs hold the potential to reinstate trust in the market.

They will also create stability, which is vital for the growth and adoption of a burgeoning technology such as blockchain.  

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