The Morphology Of Acronyms On The Crypto Market
There have recently been ever louder claims that the ICO market is dead. Though the cries are somewhat justified by the recent slump on the crypto market in general, but they do not take into account the fact that the market itself is not in a state of vacuum and is evolving to meet the demands and trials of the times and to cater to an ever growing base of users. The result is the morphing of the ICO into the STO, which is certain to become a new breed of offering on the market in the coming years with great prospects for development and market capitalization attraction.
An STO, or security token offering, is basically issuing and selling company shares in a digital form with full compliance with the law and with the issued shares being backed by the company’s own assets or other resources, unlike ICOs that rest on promises and depend on market whims in exchange rate determination. The STO launch procedure is less expensive and simpler than an IPO, or initial public offering, and acts as a gateway to financial markets for companies of virtually any size. The STO is mainly a tool for providing liquidity by issuing the average shares of companies through the application of blockchain technology with all the added benefits that have been broadly discussed in various sources.
Security tokens issued at STOs are created and issued by companies looking to raise money and are the logical evolution of ICOs after the failure of utility tokens and their applications on the world market. But unlike ICOs, security tokens are backed by real assets. The assets can be anything from equity, debts and loans, real assets, investment funds and many other commodities from gold to oil that a company can provide as backing for its shares. As such, the tokens issued under STOs will be regulated by existing securities laws and regulations. Some successful cases of STOs issued by governments include the Venezuelan Petro, which is backed by the country’s oil reserves.
Naturally, the security and legal requirements in place will require the company to conduct thorough checks of all their customers through the applicable KYC procedures, which have become the standard in the ICO market. It is also important to note that the security component of STOs is ensured by the blockchain technology underlying them and its immutability factor that will allow for tracing any unscrupulous transactions.
A security token’s transactions are recorded on the blockchain via smart contracts and ensure that the prospectus is followed diligently, and automatically. One of the biggest advantages of the STO over the vaguely regulated ICO is the presence of a solid legal framework and solutions for such scenarios where there are many investors from all over the world, thus bypassing the restrictions set by some states on their citizens’ participation in ICOs. Similar to ICO, STO can raise funds from global investors. This is different from a traditional IPO, which is much more difficult to access even via domestic brokers for investors outside the country.
The first good thing backing STOs as a viable alternative for businesses seeking to raise funds is the low entry barrier factor. The Alternative Investment Market(AIM) exchange rate setting that can be achieved through a traditional IPO is a very lengthy and costly process that requires a large number of intermediaries and involves expenses that small businesses simply cannot afford. A study by PWC reports that on average, companies incur an underwriter fee equal to 4-7% of gross proceeds, plus an additional $4.2 million of offering costs directly attributable to the IPO. The same study states that annual costs of being public run as high as $1.9 million. In stark contrast to the IPO, an STO is a means of tokenizing assets or financial instrument with greater ease and making them available for online trading. Since the documentation involved in the process of establishing an STO is becoming standardized, the costs involved are sure to decrease as more protocols and platforms become available.
One of the most promising applications for STOs is the startup market, which is plagued by frequent situations of companies growing to millionaire volumes with their owners being unable to cash out their shares. In the same manner, the biggest advantage of an STO in comparison with an IPO is that the resultant shares have much higher liquidity, which makes them more attractive for investors and instantly translates into higher prices for the shares on the market.
The analysts examining the market are predictingthat in about 10 years, traditional venture financing will be fully replaced by STOs as a result of the mass adaptation, regulation and development of blockchain technologies. The main reason for such a shift is that STOs are much more affordable than IPOs and are suitable for smaller companies that will be able to generate liquidity on a local stock exchange, but would not have been able to reach a global stock exchange otherwise due to the small size of their business.
There are a large number of potential investors in IPOs, starting with large investment funds that have a certain focus alongside industry investors in developing promising technologies. Another significant group interested in IPOs are high net worth individuals and private investors seeking to make a fortune on new concepts and lower tier companies. Finally yet importantly are crypto investors who still see great potential in the crypto market and are eager to embrace its new developments. Given that the STO market is an irrevocable part of the crypto market with an added mix of traditional financial certainty, it is not surprising that the scope of investors seeking to become part of the new phenomenon and seeing promise in it is already quite diverse and is certain to grow.
As much in this world, the end question begging to be answered in the dilemma of STO profitability is the issue of the cost. The cost of launching an STO will depend on how much the company seeks to raise. The legal framework is the first expense that will have to be covered and starts from 50 thousand Euros, depending on the jurisdiction. As in almost every case of seeking out the audience, the marketing aspect will be the next cost, as investors will need to be contacted, provided with information and convinced. The staff, material and database expenses will run into another 50 thousand euros if done properly alongside support services that will cost an additional 150 thousand. On average, an STO will cost about 300 thousand Euros with an estimated return of 5 million euros. Considerably less than the approximate 3 million Euros at the least that it would cost to launch an IPO.
Despite the relatively low entry barrier and promising fundraising capabilities, the STO approach still does have a number of disadvantages. Unlike any ICO, which relies more on the technological aspect to generate the value for its utility tokens, the security tokens derive their value from the business operations of the issuing company and the assets it can provide as backing. In addition, the availability of experienced teams capable of launching STOs successfully is under question, as the phenomenon is still relatively new and the risk factor is high. Though there are specialized platforms catering to the launch of STOs, their services have yet to prove their mettle.
The lack of a platform with a sufficient technological base is another important drawback, as an STO cannot be created by anyone other than the issuing company and the technology used will determine the success of the venture. The creation of a suitable and sufficiently secure platform capable of handling an STO is arduous and will involve a large number of intermediaries. Small-sized businesses will not be able to handle such costs, as the investment may not turn out to be worth the return. But, in general, the value of the security tokens that a company seeks to issue is the main factor in determining its success, as the availability of suitable platforms and teams is only a matter of time. Considering the number of projects already seeking to launch their STOs, supply will soon equal demand and create ripe opportunities for companies to enter the new and promising market.
The STO is an innovative fundraising method that can appropriately be called the affordable IPO for medium-sized businesses. Given the vital need for liquidity that exists for promising and truly potentially profitable companies seeking to grow, the advent of a new instrument such as the STO may well be an important development opening new horizons for both businesses and investors.
By Dr. Victor Michaelson, Memorandum.Capital’ Managing Partner.