Can blockchain create its own stock markets?
The Wild West era of Initial Coin Offerings (ICOs) has come and gone. The fundraising strategy will have its place going forward, but it will never again be a ticket to instant success -- and given the number of times ICOs have led to unreleased products, that might not be such a bad thing. But now a new blockchain funding model is coming to prominence, one that could expand the market beyond even what ICOs achieved, and that could provide better long-term outcomes for investors.
That technology is the STO, or Security Token Offering. The most widely accepted way of summarizing the STO is to describe it as the blockchain version of an IPO, or an Initial Public Offering. However, STOs and IPOs are different in some crucial ways, and it’s important to understand those differences before diving into this exciting new market.
What is an IPO
An IPO is the first time a traditional stock is offered for public sale. The stocks purchased count as “securities,” meaning that ownership of them entitles the owner to payouts based on the company’s profits. It’s a highly regulated event, and one that is steeped in many decades of tradition; for the most part, an IPO has to be backed by an investment bank in order to receive regulatory approval. Getting this approval can take over a year in many cases, making an IPO a major undertaking that many companies avoid due to the cost and difficulty.
The IPO is also fairly notorious for being incredibly lucrative for the party going public -- an IPO lets a business owner retain control of their company (if they so wish) while still recouping a large portion of its theoretical worth as cash.
Going by the names, the blockchain equivalent of an Initial Public Offering is an Initial Coin Offering, but this isn’t actually the case with respect to ICOs. The types of coins offered through an ICO are simple assets, just objects with a value that can grow over time, like a US dollar or a baseball card. Buying a coin from EOS does not entitle you to anything from the EOS group beyond the coin itself.
If the product acquired in an ICO did, the token would be a security, and we’d be conducting an STO.
What is an STO
An STO is the real blockchain version of an IPO -- but being based in the blockchain, it is still quite different. Security Token Offerings are just what they sound like: the first open offer to purchase a new token that acts as a security. This means that, just like a share in a company, a security token entitles the holder to ongoing payouts of the token issuer profits.
The exact terms of the security can change from deal to deal, but in general an STO uses the blockchain to thread the needle between an IPO and a traditional private equity sale; with blockchain, equity can have many of the control-related advantages of a private sale while still being as widely available as possible.
The legal obligations when running an STO are still somewhat unclear, but if there is a standard it seems to be: follow at least as strict a set of rules as you would if you were running an IPO. This makes STOs potentially quite legally taxing right now, since not only should you take many of the same steps, but you can’t even be entirely sure that, in doing so, you’ve done enough.
That said, there are some very real advantages to an STO that still make the space enticing to a wide variety of stakeholders.
Potential Benefits of STOs
STOs offer a number of possible advantages over traditional equity sales. They cost vastly less to launch than an IPO, which can often cost in excess of $10 million, and can begin much more quickly after being proposed.
In all, STOs offer many of the same benefits vs IPOs that blockchain services have always offered legacy businesses: transparency, security, and ongoing accessibility. Through tokenization, securities products could become much more diverse as the blockchain allows all new types of products to be turned into securities. The blockchain can allow fractionalization of real-estate products, allowing investors to buy into the world’s most lucrative industry even if they have little overall funding available. It can allow securitization of everything from a business to an asset to an individual event. No such applications are possible with a traditional security.
In other words, it can offer the securities space the first real evolutionary step forward since the invention of the online stock portfolio.
At Vanbex we’re keeping our eyes on the STO space and preparing to help the most promising new entrants achieve everything they want to and put the tokenized security on the map.
Author: Graham Templeton