Initial Coin Offerings (ICOs) became a popular way of crowdfunding money to launch new blockchain platforms, but the ICO industry is coming to an abrupt halt in the United States due to the Securities and Exchange Commission’s (SEC) declaring that ICOs are securities and subject to security regulations. Security Token Offerings (STOs) are similar to ICOs, but more likely to be approved by regulators. It is possible that STOs could replace ICOs in the United States, and could help fuel the crypto and blockchain boom.
ICOs are simply events that occur when a new blockchain platform or company offers their native cryptocurrency in exchange for major cryptocurrencies like Bitcoin or Ethereum, to raise startup funds. This model worked great before regulators stepped in, with USD 5.6 billion raised by ICOs in 2017. Since then the SEC has basically stopped ICOs in the United States. ICOs must be approved by the SEC, but at this time it does not appear that any ICO has been approved by the SEC in the United States.
A problem with ICOs is that they offer a newly launched cryptocurrency, often saying it is guaranteed or expected to have a certain value after launch. However, the free market decides the price of a newly launched ICO crypto, and there have been numerous cases of ICOs pumping and dumping, or never getting listed on an exchange and therefore never gaining value. The latter scenario especially happens in fraudulent ICOs which never come through with their promises to build a blockchain platform, and essentially run away with the crowdfunded money.
STOs offer a new crypto like ICOs, except each unit of this new crypto represents a share in the company conducting the STO. This gives investors a guarantee of equity or dividends, as well as voting rights, whereas ICOs give investors a cryptocurrency that has no guarantees or rights attached to it. Polymath originally came up with the idea for STOs, and has created a platform that guides STOs through the complex legal and technological steps to successfully launch a legal STO, including know your customer (KYC) and anti-money laundering (AML) requirements.
While ICOs and STOs both fall under the SEC’s jurisdiction as securities, STOs are actual financial securities and built in a way that makes them much more likely to be given approval by the SEC, since they are a better fit for security laws framework. Essentially, STOs will give United States blockchain and crypto firms an avenue to crowdfund in a similar way to ICOs, as well as offer better protection for investors, and STOs could replace ICOs in the United States.
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