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The New Trend on the market of Crypto Currencies - the Security Token Offering #STO.

 

Our vision:

- We can state that 2018 is a turning point from ICO to STO. 

- We expect that SEC will keep improving compliances and regulations for the U.S. cryptocurrencies and securities market. 

- We really believe that sooner or later STO will completely substitute ICO. 

 

Perhaps you've already heard about the Initial Coin Offering Process #ICO. Last year, ICO was a booming trend almost all year. The peak came to the end of the year, so even respectful financial publishers posted at least one article about this subject. Blockchain activists, advocates, startups, and Venture Capital Funds were using Initial Coin Offering as a typical way of funding and sometimes c in a specific idea, platform, or sometimes approach.

There are many frequent questions during these days: 

- What's an ICO?

- How it works?

- Which tokens are risky and why?

- How can I distinguish security tokens from utility tokens?

- How I'll benefit from that?

 
We had this struggling understanding exercises in early 2018 when we've got involved in ICO documentation preparation. Since this very moment, we've defined for us the simple formula "If there is any value, asset, and market behind a specific cryptocurrency or tokens - then there is a chance that the project is real and investments are secured!". But let's get back to the story. 
 
Let's start from the very beginning.
 

Q1: What is ICO?

 
Typically, Initial Coin Offering is a simple way of funding and sometimes crowdfunding for startups starting from the seed stage. This way founders are sharing equities with investors via shares. All operations are recorded in Blockchain. Sometimes, the cryptocurrency and smart-contracts, if there is any, substituting and automating investors' exit and equity brokers.
 
Such a simple and easy process, multiplied by a growing popularity of Bitcoin, Lightcoin, and Ethereum created a thrilling demand on new crypto coins or tokens.
 

Q2: How it works?

All tokens can be separated on utility tokens and security tokens. 
 
A utility token is related to future access for demand on company's product or service. However, such tokens are not securities nor investments. They can rather be considered as a right for the further service subscription or gift-card to buy the future product.
 
A security token instead is backed by external sources, valuable assets, something real. And these assets can be freely accessible or traded. Additionally, such tokens can be used instead of typical shares to secure investors interests. Such shares can be a subject of federal regulations and laws.
 
This way, if utility token holders having coupons for the future service or product, security token holders are getting real ownership rights. 
 

Q3: Which tokens are risky and why?

Unfortunately, utility tokens are secured by nothing except coupons for further sales of product or service. This way, the wave created by real and good projects has also been used the fraud and scamming threats. Sure this factor was constantly impacting the reputation of cryptocurrencies.  These frauds besides good opportunities and real securities forced the U.S. regulators to step in..  
 
On July 25, 2017. The Securities and Exchange Commission (SEC) published press-release "SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities". It defined that some tokens are eligible to be classified as securities and therefore will be a subject of compliance regulation.
 
After this, the appearing and dedication of security tokens became inevitable. 
 

Q4: How I can distinguish security tokens from utility tokens?

 
Besides the brief explanation above, there is very well known for the financial industry Howey Test. Despite the point that it was invented about 100 years ago in 1937. It works amazingly perfectly because it answers the question: can the digital token be used as the security or not?
 
This way, if the token passes Howey Test successfully - that's a security token, otherwise - it is a utility token.
 
Simply speaking the test should be compliant with the following requirements:
R1) User invests his money. The tokens he receives are counting as his shares.
R2) Individual expects to profit from the investment they've made.
R3) These investments are in a 'common enterprise'.
R4) The profit comes from the efforts of a third-party or promoter.
 
Perhaps, this test is too simple and will be constantly improved. However, right now that's the method that SEC will use to categorize cryptocurrencies.
 

Q5: How I'll benefit from that?

We know that higher risks can have higher benefits, but as risk takers, we would like to have some guarantees.
Therefore, we see the main benefit as that Security Tokens Offering or #STO is going strictly according to existing and improving compliances and regulations of SEC. We believe that this way is not only riskless, but it will be more efficient. STO is also a huge leap from the "Wild West" of ICO customized processes to a more industrious and structured approach.
Sure it is also hard to underestimate decreased risks and governmental support and protection to all participants of STO: company, employees, investors, and regulators.
From another perspective any noncompliance to existing regulations will impact STO issuer with the lock-downs and delays, therefore it will be quite hard to invest in a non-compliant company.
 
Finally, according to existing regulations only Accredited Investors can Invest in Private Security Token Offering. To become an Accredited Investor, a company or an individual should meet the one of the following requirements:
1) An annual income should be at least $200K for an individual or $300K for the household. It should be maintained over 2 last years and should be at least the same for the current year.
2) Net assets worth more than $1M, excluding the primary place of residency.
3) An institution with over $5M of assets. E.g. Micro Venture Capital Fund or Trust.
4) An organization made up entirely of accredited investors.
 

Conclusion:

- We can state that 2018 is a turning point from ICO to STO. 

- We expect that SEC will keep improving compliances and regulations for the U.S. cryptocurrencies and securities market. 

- We really believe that sooner or later STO will completely substitute ICO. 

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