When it comes to ICOs, 2018 was off to a great start but the increase in regulatory attention has caused the industry to slow down over the last couple of months. This has resulted in many investors and issuers to reconsider their position and to opt for the issuance of compliant security tokens instead.
Back in 2017 when the ICO market really found its feet, issuers paid little to no attention to the regulatory status of their product, it had lasted until the SEC became aware of what was going on. From there, they and other national regulatory bodies started to issue stern warnings on compliance and the protection of investors.
The rise of the utility token
As ICO startups began to become aware that their product may be in breach of local securities laws. They began to insist that they were actually ‘utility tokens’ as a way of trying to circumvent the law. By creating elaborate token use cases, they hoped that their product would be distanced from regulatory scrutiny. This was then swiftly tackled by the Chairman of the SEC, Jay Clayton who stated in December 2017:
“Certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security. Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law.”
For ICOs that have since chosen to persevere with the utility route, the consequences of being found to have a token that can be retrospectively classified as a security by the SEC are severe. They include large fines, orders to return all funds raised, and finally, criminal prosecution.
Fully compliant platform
Due to this, many serious startups are looking to do things the proper way and are doing so through a fully compliant security token platform.
For now, it is expected that the issuance of security tokens will be limited to wholesale and accredited investors as the compliance costs that are associated with extending the offer to retail investors are too high for many to bear. To offer securities to accredited investors is much cheaper, as well as being exempted from many registration requirements laid out in the US Securities Act.
Furthermore, the benefits to issuers of Security Tokens are vast. They include:
- Investors having a right to the share of profits;
- Investors having the right to vote;
- Investors having the right to liquidation proceeds;
- A 24/7 365 marketplace — online exchanges providing around-the-clock liquidity;
- Fractional ownership — attracting a deeper pool of investors in secondary markets;
- Faster transactions — settlements in seconds instead of days;
- Lower cost of liquidity — fewer middlemen equating to lower fees and operating costs;
- Dynamic updates — Security Tokens are update-able and smart;
- The potential to tokenize multiple organizational assets — offer a range of tokens to better align with investor strategies. For example, growth, stable return, conservative or aggressive.
Whilst it is unlikely that Security Tokens will replace listed equity markets anytime soon, they are likely to become an option for issuers who are looking for a greater level of international exposure in an ever-growing market.
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