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Security Token Offering vs ICO – what are the differences?

ICO, that stands for Initial Coin Offering, has recently been one of the hottest terms in the world of blockchain projects fundraising. This world transforms so rapidly, though, that soon ICO can be replaced with a brand new thing called STO (Security Token Offering). Rumor has it, at least. But is the thing really that new? And will the anticipated replacement actually happen? We answer these (and more) questions below, highlighting the main differences between ICO and STO.

The key to understanding what STO is and how it differs from ICO, is knowing what the ICO is in the first place. So here comes a brief explanation for all those who are somewhat new to the topic (or still happen to be a little confused about it). ICO is, to put it simply, a digital token that can be bought using cryptocurrencies in order to support a project. If the project succeeds, the value of the token increases, so it can be treated as an investment, too.

The whole idea resembles that one of the company stocks except for ‘stocks’ here are shifted to a blockchain-based smart contracts and virtually anyone can either buy or sell tokens of an ICO. There are no middle men involved and a company can get funding without help of e.g. banks and other institutions. All you need is basically an idea, a whitepaper, a website and a code. It may sound like a charm, especially to those young entrepreneurs who raised millions overnight thanks to it, but for the very same reasons ICO isn’t all so sweet in the end.

Security Token Offering as a remedy for the ICO problems

What seemed to be the perfect funding solution due to no regulations soon turned out to be a hotbed for fraudsters who never meant to deliver what they promised in the whitepapers. In 2017 over 80% projects, which of course caused much hesitation among many investors whether to invest in ICOs in the future. But here come Security Token Offerings that are believed to solve to the problem and thus be a real gamechanger.

The core idea remains quite the same, but Security Token Offerrings are in fact regulated, e.g. in the USA filed with the Securities and Exchange Commission (SEC, in the U.S.), they also take advantage of securities privilege such as Reg A+. The number of countries regulating blockchain market increases, with good examples of Switzerland and Liechtenstein. The amount of regulation in the US is immense. There is STO Reg S (for companies operating outside of the US), STO Reg D with its three variations: Rule 506(b) (with unlimited annual offer an withouth general solicitation), Rule 506(c) (with unlimited anual offer and with general solicitation) and  Rule 504 (with $5 mln annual offer limit and general solicitation permited in specified circumstances), Reg A with two tiers: one with $20 mln annual offer limit and the other with $50 mln limit.

STO benefits

The latter are less likely to use a registered company they’re investing in for so called illegal monetary activities. Therefore, the business issuing an STO is protected too, as far as both its image and possible legal trouble are concerned. Although the registration process itself is far more expensive and difficult, it is still not as complicated as the registration process for Initial Public Offers (IPO), while the STO still can be treated as real securities.

And they are, not only in the light of mentioned regulations, but also resembling shares in a way. The tokens issued in STO provide investors some rights to the company they invest in. The investors are entitled for example to be payed interest and dividends (or reinvest the STO into other security tokens) which ICOs only allow if they’re fair to their investors.

source: https://medium.com/recordskeeper/differences-between-ico-and-sto-fa7ef3c975e5

Will Security Token Offering replace ICO?

There are even more benefits of STO, one of them being the possible end of the strife between blockchain community and governments or other regulators that wanted to gain more control over ICO market. Many freedom-loving members of that community, though, argue that being subject to regulations and red-tape, STO are defying the original concept of ICO. The latter may thus remain a valid alternative to STO, as a part of dual token structure of the blockchain market.

It is worth noting, that the market is heading towards increased regulation. There are examples of smart regulation and mindless, bureaucratic regulation. The good example of well thought regulation is Lichtenstein’s “Blockchain Act”. It was widely discussed with various groups of experts and is expected to go live around August this year. This kind of well-thought legislation should be perceived as a herald of safer future for blockchain community with numerous advantages for both the entrepreneurs and their investors.

Of course, some basic rules of reviewing business model are the same for STOs and ICOs – you can check how to review an ICO in my other article.

ICO review – 5 mistakes investors make

ICO review – 5 mistakes investors make

Before we’ll plunge into the subject and analyse good (and bad) practices of ICO investment assessment, we need some clarification, what ICO review is. This article is not about ICO gambling. It is not about investment meant as day trading etc. We’ll focus our interest on ICO review – how to avoid mistakes, that most of the time turn out to be very costly.

source: https://www.freepik.com/free-photos-vectors/business

To start with, I suggest setting up an introductory rule. There are some basic laws of physics and there are some basic laws of investing. In general, it is safe to assume they work the same for most of the instances. It would be weird to think an apple of new variety is going to levitate or ascend instead of falling down. But it seems to be the case for some of the investors when it comes to making ICO review. So let’s bear in mind that most of the rudiments of investing in general apply to blockchain investing. Having the disclaimer above made, we can proceed to the most common ICO review mistakes. We’ll work them backwards – from rules to mistakes.

ICO review = reality check

“Extraordinary claims require extraordinary evidence.” 

That quote from the great advocate of rationality, Carl Sagan, applies to investments to. Great number of whitepapers contain extraordinary claims. Few provide extraordinary evidence. It is very easy to say one’s solution is going to revolutionize the market, shatter status quo, bring a bright future to its customers. It is not that easy to deliver the promise though. “Disruption” added to whitepapers make them sound better, but a buzz word will not enchant the reality.

So be critical. Don’t look for opportunities, sniff for inconsistencies. Be suspicious. Ask yourself, if what you read is true. Check, whether ICO’s claims are justified. Is their narrative the only possible scenario? Is their strategy based on reasonable foundations?

Ask a lot of “why” questions. Especially why would anyone use / pay for the service. Demand much more of the answer then “it’s awesome and revolutionary”.

Be warned, it is going to be difficult, because…

Rating ICOs based on wishful thinking is a recipe for disaster

“I want to believe” vs Never trust your gut against the fact.

Yes. You want to believe. People do. And we have a great, sophisticated apparatus to help us believe crap. We are able to contract some absolutely preposterous beliefs. And in to many instances, we allow them to infect us, because we want very hard a claim to be true. Noble prize winner, Daniel Kahneman, in his excellent book “Thinking fast and slow” names and explains number of heuristics and biases our mind is prone to. As I have indicated, it is very difficult to defend yourself against the most dangerous opponent – your own mind.

But there is hope, repetitive schemes and familiar situations may come to your aid. Reading whitepaper and making ICO review could be one of them. Just train yourself to be super-cautious every single time you are about to do it. Remind yourself to get restrained from giving in to temptation of wishful thinking.

Who’s behind the ICO?

“Whoever you are, I have always depended on the professionalism of strangers.”

We have covered so far some of what and why questions. Another important W-question is who. Even if claims seem legit and a whitepaper did not set off any alerts, don’t be hasty yet. Who is the person behind your future huge-profit-generating idea? Does the builder (or anyone on the team) have any experience in the relevant area? Or is that a gardener promising to build the space shuttle? Surely that is possible and we love unlikely heroes – but what are the odds? You may still want to make a bet. But it is not investing anymore, it’s gambling.

Is the ICO original idea?

Always check for similar solutions. Great number of them were already implemented. If the predecessor has succeeded, are you sure there is a room for another player? If it was a failure, why assume the ICO reviewed would not share that fate. Better be too suspicious than too credulous.

Do the math – check ICO’s numbers.

More tempting the bait, sharper the hook.

Great freebies, lifetime opportunities, but only hours to make up your mind? Smell harder and you’ll feel metallic aroma of steel hidden inside that sweet, juicy piece of offer. More of the emotion-based attractors, lower the chance to avoid the scam.
Never omit to verify, if numbers presented by ICO make any sense. Are they based in any way on market prices? Are services or products offered for price lower than production cost? Is there any proof business model is valid or are numbers of customers or partners pulled out of thin air?

To summarize, ICOs taste best cold. Use your criticism and verify, don’t take their word for it.

Soon we’ll review biggest ICO scams and failures, stay tuned.