Security Token Offerings (STOs)
Isle of Man Advantages

Cryptocurrency on the Isle of Man
Security Token Offerings (STOs)

Are Security Token Offerings (STOs)
The New Initial Coin Offerings (ICOs)?

Launching ICO

Funding a brilliant idea and turning it into a viable start-up isn’t an easy task. Some people ask friends and family for a contribution, while others might initiate a crowdfunding campaign or look for angel investors or VC’s to inject some much-needed capital into their business. Over the past three years however a new method of funding has emerged, and various entities have successfully raised funds, sometimes even only based on a whitepaper. What did they do? The answer is: they launched an ICO.

What is an ICO?

Launching an Initial Coin Offering (ICO) or Token Generation Event (TGE) is a way to raise funds for a blockchain based start-up in exchange for supplying tokens to investors. Participating in an ICO that issues utility tokens as an investor does not mean you generate equity or any other kind of asset from the company. Tokens issued are intended as an IOU or coupons which allows owners to exchange for future products or services.

Problems with ICOs

Financial Authority is issuing a warning regarding serious risks associated with Initial Coin Offerings (ICOs). While the IOMFSC recognises the potential of blockchain technology for financial services, ICOs are currently vulnerable to misrepresentation, fraud and manipulation.

ICOs may also be structured in such a way that they are not subject to supervision by the IOMFSC. In addition, due to their unregulated status and the anonymous nature of the transactions involved, ICOs are attractive for the laundering of money obtained by criminal means. The current hype surrounding cryptos and ICOs may blind investors to these risks. Because of these risks, there is a strong possibility that investors will lose their entire investment.

Security Token Offering

A Security Token Offering (STO) is a relatively new way of raising funds for a start-up. It has some similarities to a traditional business that is going public through an Initial Public Offering (IPO). In an STO a company issues security tokens to investors. Security tokens can be described as asset-backed IOUs and they can be considered legally binding investment contracts that give investors access to a share of the company, a monthly dividend or a voice in the business decision-making process.

Security tokens are tokens which have attributes of a security. Generally, the following can be considered as a security token:

  • Tokens representing or giving the right to equity shares in a company/enterprise;
  • Tokens representing the right to share in profit or ownership in a Company;
  • Tokens representing a loan or any other debt obligation;
  • Tokens which are backed by real assets like real estate;
  • Tokens representing a unit of a mutual fund or collective investment scheme;
  • Pre-functional utility tokens in the United States.

The above list is not exhaustive, as what constitutes a security differs from jurisdiction to jurisdiction. What may be considered a security in one jurisdiction may not be a security in another jurisdiction.

Security Tokens are Well Regulated
STO as a Sustainable Solution for
Blockchain Companies to Raise Capital

Since security tokens are considered securities, they need to follow local securities laws which are very well established in most jurisdictions. This means that if you are conducting a public sale of security tokens, you will need to register your STO with the local securities regulator and provide very detailed disclosures as required for an Initial Public Offering (IPO).

If you are not taking the public route, then you need to follow the private placement route. Which means that you can raise funding only from Professional/Accredited Investors. Also, in some jurisdictions, the security tokens may be subject to restrictions on transfers such as minimum holding period or the need to transfer only to another Professional/Accredited Investor.

While ICO investors at utility token offerings do not acquire any rights or shares from the company they invest in, STO investors have more rights and can own shares similar to a regular business initiating an IPO.

Benefits of launching an STO compared to an ICO are:

  • Investors receive an asset-backed token because it basically is a share in the company.
  • The business is more sustainable as it is scalable.
  • It eliminates scam projects because it requires government compliance.

Lately, more and more companies are leaning towards launching an STO.

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