A marriage made in Heaven…
While the smell of burning fingers from the 2017 ICO market has barely left our nostrils, the kindling has already been lit for the next big thing – STOs (security token offerings). STOs, or rather the thought of them, is/are quickly becoming the new “hot property” in crypto and, if you believe the masses and listen to the hype, STOs are here to save us all…except they won’t, and they can’t…at least not in the way people imagine.
The coming of the STO…
For me, STOs were always an obvious and natural progression for the token economy in its continued drive to disrupt traditional fund-raising efforts and the transfer of value. A security token differs from a “utility token”, in that a security token is inextricably linked to an underlying asset, commodity or revenue stream and confers ownership or rights in the same to the token holder – this could be in the form of equity, or the output of a production line, or the yield from an asset portfolio, for example. On the other hand, a true utility token plays a functional role within a token ecosystem, and while some utility tokens, such as Ignite’s IGNT platform token, confer entitlement to rewards upon its holders, such entitlements are generally conditional and reliant upon the token holder actually utilising the token in some way. There should be no expectation of “profits” and, similarly, no conferred ownership in, or rights to, any underlying assets of the token issuer.
STOs present an exciting opportunity for businesses to raise funding from third parties in such a way that readily permits backers to sell on, or transfer, their interests in an easy, open and transparent fashion. No need for stock transfer forms, no need for registered charges or liens, no need for broker dealers, no need for expensive IPOs with daunting compliance requirements etc. This could well be the disruption that we have all been waiting for.
Before STOs were able to rise, phoenix-like, from the smouldering ashes of the current bear market, the regulatory environment had to catch up. The main reason being that while an exchange could take a view on whether or not to list a “utility token” that, maybe, toed the line of what may, or may not, amount to a security, there was simply very little appetite for listing an asset that, almost certainly, fell to be regulated in a much more stringent way pursuant to existing regulations. It was much easier for exchanges to continue to print money in the glorious shades of grey offered by the ICO industry, than comply with securities laws. Things are different now though…the markets have matured, the greys are polarising into blacks or whites, ICOs have struggled and the time has come to comply or die.
As more and more exchanges state their intention to offer regulated STO listings, more and more projects are preparing to launch their fundraising campaigns via a STO, and the chances are that they will be very successful; the general consensus being that investments into STOs must be more secure than ICOs (surely…right?). On the one hand, yes, maybe – in conferring whatever rights they do, security tokens may, in turn, provide greater security, or at least comfort; but don’t be fooled into thinking that “ownership” is the be all and end all.
Lovely secure securities
While there is no standard form guide, I would anticipate that many STOs will be structured in such a way as to confer crystallised benefits only upon the fulfilment of certain criteria and/or conditions. Consider, if you will, an offering of tokenised equity – in acquiring your security tokens, you may believe that you own a piece of the underlying company but, in all likelihood, you will not (at least initially). It is much more likely that your tokens will represent beneficial rights in a pool of shares (likely to be non-voting B/C/D shares with full drag-along rights) which have been set aside by the issuing company and which are, probably, held on trust by a law firm or trust company until such time as the crystallisation event, upon which legal ownership is conditional, has actually occurred. Such an event could be an acquisition of the issuing company by another, or an IPO of the issuing company, for example. In the interim, you may be contractually entitled to a share of the dividends that such a trust might receive from the company, but this would require the company to be generating a sufficient profit to have distributable reserves in the first place – which is, obviously, much less likely in the case of a start-up business.
Should a security token issuing company fail to move itself into a profit-making position in the requisite timeframe and need to wind up its operations then you, as a token holder, would find that your investment was no more secure than had you backed an ICO that found itself in a similar position. Yes, security tokens may present rights in assets, including income/dividend-bearing rights, but passive income is probably not sustainable unless being paid from clear profit, and rights in ownership are meaningless if the requisite conditions are not met…and you can bet your last Gwei that no benefit whatsoever will be conferred to token holders who are unwilling/reluctant to submit to, or who fail, KYC and AML checks…
…and this is the main reason that STOs will not be the saviour that everyone is hoping they will be for the “rekt” population at large. Assuming everything is above board and being run properly, an STO should be conducted as a regulated offering to the public, from a jurisdiction with sufficiently robust legislation which, generally speaking, is likely to require that each and every investor undergo stringent KYC/AML checks and, potentially, be required to be recognised as an accredited, or experienced, investor. Simply put, this is not something that everyone can, or will want to, do; and it is likely to get much, much more rigorous as time goes on.
Enter Ignite RATINGS
The Ignite RATINGS project, and subsequent platform, was built from the ground up to enable us to quickly and easily pivot into other asset classes when the time was right – which is why we will be welcoming STOs to the Ignite RATINGS platform with open arms. Having already built out our core technology, Ignite is in the perfect position to take advantage of this renewed interest in the crypto space by introducing its STO ratings service, which we would anticipate going live in the coming weeks. The fundamental design of the Ignite RATINGS platform, and its reward mechanisms, presents an excellent opportunity for those that might otherwise be unable (or unwilling) to participate in STOs directly to still gain exposure to, and benefit from, such offerings.
As a non-US accredited/experienced investor (by most definitions), Ignite will likely be eligible to invest in most, if not all, STO offerings via the Ignite INDEX. This allows our users, whether accredited or not, to gain exposure to the exciting world of STO offerings without risking any of their own capital. STO opportunities will be listed on the Ignite RATINGS platform, alongside ICOs and existing crypto assets, and will be able to be rated and assessed by our community – if a rating is sufficiently high, Ignite will take a financial position in the STO, securing a potential reward stream for those users that participated in the ratings process.
We hope to have some interesting partnerships to announce in the coming days to compliment this move, and we will be proactively reaching out to all STOs, inviting them to take control of their space on the Ignite RATINGS platform and interact directly with our users as they look to rate and assess their projects. Any projects looking to take and maintain control of their Ignite RATINGS listing (whether STO, ICO or crypto), will need to hold a predetermined amount of IGNT, thus helping to drive secondary market demand for IGNX, IGNT’s tradable sister token.
We are excited about the new opportunities that the emerging STO market represents to Ignite, its community of users and the wider blockchain industry. If you are not yet a registered member of Ignite RATINGS, now would be a great time to come and join us.
Also published on Medium.