STO (Security Token Offering) is a token offering that is similar to an ICO (Initial Coin Offering), but the main difference is that STOs are regulated. STOs have become so popular because over the past four years, approximately, pretty much every ICO failed to maintain at least one of the five promises that I call success criteria.
1. Most ICOs failed to attract enough investment.
2. The majority of ICOs failed to maintain a stable price of the coin or to increase the value of the coin, and so it dropped dramatically.
3. Some of ICOs failed to return the money to the investors.
4. Many ICOs failed to be able to produce the software technology or the ecosystem that they were promising during fundraising.
5. Almost all of them eventually failed to be profitable.
If you take into consideration all the success criteria, in four years, I would bet that no ICO has ever managed to achieve the five points altogether. That is the reason why the STO hope is given a more stringent requirement in the fundraising and backing the value of the token with physical assets, shares or profits could increase the likelihood of success.
The crude reality of ICO is that basically the fundraising exercise was simply designed to sell tokens (as borderline securities) to non-qualified investors, without a license to do so. That was all that ICO was about. Basically, those startups that fail to connect with venture capitalists started looking in other directions, i.e. the community. When the community worked, it was because the value of Ethereum was growing so dramatically that it transformed ordinary citizens into millionaires. They were happy to make investments in companies when they didn’t understand exactly how they would have made money.
However, when the community failed to back most projects and when the cryptocurrency stopped growing, startups went back to venture capitals and funds, asking them to invest in their ICO or startup. That is because eventually, even until today, whoever is running an ICO still wants to have an investor, a large investor precisely, to come in and gobble up as many tokens as possible.
Startups have always been looking for investors for the purpose of growing and developing business. And those that are currently planning to launch an STO understand that ICO is finished, despite the fact that going with STO will require much more regulation. But in terms of costs, it will probably be similar to ICO. Because running an ICO is very expensive from a marketing perspective, while running an STO could be quite expensive from a regulatory perspective, the cost might be comparable in the end.
For those who are doing an STO, it is crucial to take a close look at the current and future regulations. Startuppers should be guided by professional lawyers, accountants, and advisors. It is no longer a ‘cowboy’ type of market where anyone can launch an ICO and attract the community to invest in their projects. Nowadays, it is back to the ‘big boys’ market. So everyone will need a lawyer, a banker, tax advisors, and compliance advisors to explain to them what they need to do in order to be compliant and to stand a chance of success in fundraising through an STO.
What will happen in the future?
After all, STO sounds like the new thing to do, it might go out of fashion quite quickly, probably by March or June 2019. They will start slowing down, and then by September, it could be completely out of fashion. I would compare ICO to vinyl discs, and STO to music cassettes. After the music cassettes, there were CDs and DVDs then the MP3, then Spotify.
We don’t know yet what will come next yet. The industry is still the same, it was music then, and now, similarly, the medium that is used for fundraising has changed and will further evolve, as in the current transition between ICO and STO.
The next transition will be between STO and something else. My current prediction is that there will be fundraising with two ecosystems. One is for fundraising (a financial ecosystem) and the other one for onboarding community, like a point system, and I call it a lifestyle ecosystem, fueled by NTUTs or non-tradable utility tokens. I think this is going to be the next big trend. It is a token that can never be exchanged on an exchange for monetary value but just used as a pure utility to onboard new potential STO investors.
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