Can an STO be Borderless?

April 23, 2019

Starting sometime in 2017 and going until mid to late 2018, Initial Coin Offerings (ICOs) were a really big deal. Over the course of those two years, thousands of startups seeking initial capital raised well over $14 billion to develop their businesses. Then, just as 2018 was coming to a close, the bubble burst.

ICOs originally rose in prominence because people liked the idea of borderless investment. Never before was it possible for just about anybody from just about anywhere to put money into a company located on the other side of the planet. It was an exciting time, and it seemed that a better alternative to VC and private equity funding had been found.

Most ICOs projects sold (and still sell) utility tokens — digital assets issued by blockchain platforms like Ethereum which represent access to a network, or to things like the right to a discount on a company’s products. These digital ‘vouchers,’ can generally circumnavigate regulatory oversight. However, some people thought to use tokens for something much more complex.

Quite early, ICO projects began to try to sell tokens that gave their purchasers the right to company profits (dividends), votes in the company’s direction (governance), and even full-blown equity. These tokens came unequivocally to be interpreted by regulators to be securities. The ICO community eventually understood that security tokens could not be issued following the procedures that they were used to. Gradually, the STO was born.

Security Token Offerings

Security Tokens are regulated financial instruments that are issued using blockchain platforms and that each represent certain rights for the investor. Rights could include those to equity, dividends, or to governance. Security Token Offerings (STOs) are the events during which security tokens are issued and sold.

Unlike other types of tokens, security tokens require a great deal of effort on the part of the issuer to meet regulatory compliance requirements. Security token issuers in the United States, for example, generally seek to carry out Regulation D token sales, only accepting investments from accredited investors and being careful about how they advertise the offering. Overall, STO setup today requires quite a bit of negotiation with regulators and is an expensive and lengthy process.

Not Very Borderless

Unfortunately, owing to this regulatory complexity, STOs are nowhere near as borderless as are ICOs. Today, in mid-2019, the fact that securities are still not even recognized in most jurisdictions stands as a major barrier to making securities investments across borders.

For instance, in Asia, only three countries – Singapore, Malaysia, and Thailand – have stated that they will regulate security tokens as securities. A Japanese or Korean investor in this situation is forced to send his capital to one of those three countries and then to face a confusing tax situation back home. In North America, a Canadian has to seek American accreditation to participate in an STO.

The Future

All this being said, it is still very early days for STOs. In fact, only a few have been carried out and secondary markets (security token exchanges) are rare. We’re just going to have to wait and see what the future will hold.