Beyond the Hype of ICOs and STOs
One can hardly read anything these days without at least a passing reference to “blockchain” and how it has the potential to change the world. As a securities lawyer my interest has been focused on how blockchain and cryptocurrency can assist my clients in raising money – the oxygen for entrepreneurs (and that dirty word, capitalism).
As of today the jury is still out. And frankly, most of us, including securities lawyers, remain confused as to how, if at all, blockchain technology will assist clients in raising capital for their businesses.
The bottom line: most emerging businesses will benefit, if at all, only indirectly, from the blockchain/token boom. Using one of the many traditional paths of raising capital, as expanded in 2012 by the enactment of federal legislation, the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), remains the best path.
So called Initial Coin Offerings (ICOs) grabbed worldwide headlines in 2016 and 2017 as a way for blockchain-based businesses to raise capital – in large sums and with no dilution. In hindsight, what fueled these new offerings was simple: circumventing regulatory protections to investors – in the US, developed over the past 80 years – administered by the US Securities and Exchange Commission.
The SEC began to weigh in very publicly on ICOs in the second half of 2017 – cautioning would be issuers of “tokens” or “coins” that these were likely securities. As such they needed to be registered with the SEC or sold under an exemption from registration. So too US exchanges which traded these new instruments.
Trends Emerge in 2018
With the SEC weighing in early and often in 2017, coupled with a host of headlines regarding failed and fraudulent ICOs alike, ICOs quickly became a dirty word – shunned by US financial markets.
What has emerged in 2018, on the coattails of ICOs are “STOs” – securities token offerings. Other than the fact that securities “tokens” are crypto, or digital securities, they bear no resemblance to the ICOs of the past.
Unfortunately, the hyperbole which has surrounded ICOs has carried over to STOs – and with it a great deal of misinformation and confusion.
To be sure, securities issued in digital form will have many potential benefits, as they can be more easily tracked, and controlled – through programming any number of features into the security token, including when the security token can be transferred, and to whom. This is an important feature for regulatory minded issuers who have issued securities under an exemption from registration – and thus with restrictions on transferability.
However, securities token offerings are neither a new type of securities offering nor, in substance, even a new type of security. Rather, they might be best described as old wine in a new bottle. The impact for most developing or mature businesses in the foreseeable future will be no more impactful than converting paper stock certificates to “book entry” ledger entries.
So if you are a computer programmer looking for work, securities tokens will open up a whole new world in fintech. But if you are looking to a Security Token Offering as a new and improved way to raise capital for your business, you are in my opinion, looking in the wrong place.