March 4, 2019
The year 2017 had been the year for Initial Coin Offerings (ICOs) when a number of mostly, blockchain projects used this channel for raising money from sophisticated and unsophisticated investors alike. Anecdotally, investors ‘invested’ in these projects by signing up for a share of tokens/coins (or digital rights), which were meant to give access to goods and services produced by the project, without giving equity/ownership of the company. ICOs were intended to be like IPOs (initial public offerings) without the paperwork, product, financial or regulatory approvals. Naturally, entrepreneurs were drawn to the hype cycle of ICOs, which are best understood as crowdfunding without regulations. This meant that many projects could raise money from investors even in the conceptualization stage – a remote possibility in the venture capital world. With little or no product developments or MVPs to show for, money raised through ICOs shot up to USD 6 billion in 2017 alone.
Investors were drawn to these projects based on the problems they were trying to solve, mostly involving blockchain, with a promise of moving away from a centralized world to a decentralized one. There was also a chase for a higher return on investment as supporters of the business believed that if the project does well, the market cap of the project would increase automatically. However, most of the ICOs did not turn out to be profitable, with many being unearthed as obvious scams where investors lost a lot of money.
Then came Security Token Offerings, or STOs. These are just like ICOs but with paperwork, regulatory approvals, and ownership (either of assets, revenue or other value). Security tokens are best understood as cryptographic tokens backed by real assets or things that have established value. This that the tokens can keep their price relevant while the companies can represent them as shares and the investor who is holding them will be eligible for ownership (not just access) rights. In 2018, we witnessed the launch of 119 security tokens, with the majority of that in the last quarter of the year. There are a host of factors responsible for this shift with the global crackdown on ICOs and entrepreneurs being the primary drivers, especially in the US. With ‘ownership of an asset’ as the cherry on the pie, STOs are trying to bring back some of the disgruntled investors as well, who had been burnt investing into ICOs.
The first (17) quarter had significantly less number of projects which launched their STOs while the second (22) and third (22) quarters saw a gradual increase in listed STOs. The fourth quarter of 2018 saw roughly half of the total STOs (58) saw the number of STOs being listed, which is around 49% of the total number of STOs in the year 2018. It can also be observed the highest number of projects who launched their security tokens originated from the United States of America followed by the United Kingdom and Switzerland.
Then in 2019, more blockchain projects are choosing STOs for their fundraising over the ICO route, with many unsuccessful ICOs now being ‘converted’ into STOs. Anecdotally, even blockchain conferences have seen a huge surge in this topic, with most interest surrounding identifying helpful jurisdiction(s) for STOs and the likely regulations that would impact them. While we will stop short of calling 2019 the year of STOs, we expect to see a continuation of coin offerings in the form of STOs, albeit at a smaller pace than ICOs grew in 2017. We attribute this slower yet steady growth to a maturing industry, more investor knowledge, and regulatory hurdles posed by STO fundraising. We do expect 2019 to bring more certainty from regulators around STO rules in their jurisdictions, which could spark a lot of interest in this field, leading to more significant projects raising money by offering security tokens to their investors.