Security Token Offerings (STOs) are a novel fundraising mechanism birthed from increased regulatory oversight on Initial Coin Offerings (ICOs).
This document provides: an overview of the problems Security Tokens are attempting to address; an overview of the Security Token ecosystem; select geographies and their developing regulations; a brief breakdown of the Security Token stack; a rough timeline of the STO process; concerns and caveats around Security Tokens and an appendix of select Security Token case studies.
Given that the certainty provided by regulated instruments and their associated rights is a large short-term attraction for investors, Newtown Partners believes STOs will be the preferred capital raising avenue for startups in the blockchain space within the next 12 – 18 months. The majority of these offerings will be structured as a SAFT-E (likely to be favored by investors given the flexibility it provides); with Malta, Gibraltar and Singapore providing acceptable regulatory frameworks to do so.
STOs hold contractually-bound, legally-enforceable obligations backed by the might of the law which will provide a certain degree of comfort for investors who will invest in this space given the familiarity with these policies and structures; however, this comfort does come at the price of increased disclosure requirements. Finally, Security Tokens will not replace utility tokens in providing core functionality to decentralized protocols.
This is primarily because of the large regulatory burden associated with STOs, and thus they are not viable replacements to utility tokens in a decentralized network. However, given their viability as fundraising mechanisms, STOs will be used in bootstrapping the construction of these decentralized protocols (protocols which would be powered by utility tokens); or exist in symbiosis with a utility token in a dual-token architecture.