This article originally appeared in the February 1, 2019 issue of the San Francisco Business Times and Silicon Valley Business Journal.
Unlike Bitcoin and other cryptocurrencies, initial coin offerings had a pretty good year in 2018. CoinTelegraph, a blockchain news and analysis outlet, reports that ICOs raised a combined $11.7 billion last year, which is 13 percent more than they did in 2017. But just as the cryptocurrency market very rapidly collapsed in early 2018, ICOs appear to be quickly losing their momentum, with November 2018 seeing the lowest ICO investment since May 2017.
One reason ICOs may be attracting less investment is the rise of the security token offering. Unlike ICOs, STOs give investors ownership over a real asset, such as a percentage of a company’s equity or real estate asset. Since the ownership of a security token has intrinsic value, investors can be relatively certain that the coin won’t become worthless overnight.
Effectively, an STO gives investors access to a share of the company, a monthly dividend or a voice in the business decision-making process. Additionally, STOs, like traditional securities, must be registered with the U.S. Securities and Exchange Commission or other respective regulators, which is an attractive feature to investors burned in one of the 80 percent of 2017 ICOs that were probably scams.
With all that going for them, it’s easy to see why there’s so much excitement surrounding STOs. But what does the ascent of the STO mean for businesses looking to raise capital through nontraditional means?
One of the reasons that ICOs were so popular in the first place was precisely because entrepreneurs without any tangible product could raise the money they needed to build their business without going to the bank for a loan and without diluting their control over the company. From that perspective, isn’t the decline of the ICO an unwelcome return to a less democratic system of fundraising for early-stage startups?
Well, yes and no. While it’s true, in theory, that anyone could raise money for any idea, getting ICO investment is never as easy as some crypto-cheerleaders make it seem. Even in the second quarter of 2018 — which turned out to be the height of the ICO — only 7 percent of ICOs secured listings, and 55 percent failed to reach their funding targets.
What’s worse, the utility token market seemed indifferent about what it was actually investing in. For instance, whether or not the entity issuing the coin was a working business — surely something a responsible coin investor would take into consideration — had no predictive power regarding whether the fundraising would be a success.
But perhaps the biggest benefit of STOs over ICOs, at least from the perspective of raising capital, is that they’re likely to attract many more investors than ICOs ever did. Traditional investors are much more likely to invest in SEC-regulated security tokens than the unregulated wild West of a market that ICOs inhabit. At the same time, STOs should also attract crypto investors, many of whom tend to not invest in traditional securities.
Fair enough, you might say, but if security tokens and STOs so strongly resemble stocks and initial public offerings, respectively, why offer STOs in the first place? The answer is simple: the Blockchain. Tokenization of securities brings many of the same benefits as cryptocurrency, including faster processing, increased liquidity, more efficient transactions and automatic compliance. Additionally, security tokens could make listing a company less expensive than the traditional IPO allows for.
There’s no question that the introduction of the ICO was an inflection point in the history of investing. ICOs showed the business community that entrepreneurs don’t need to turn to VC money or Wall Street to raise capital, and we can’t come back from that.
Now, STOs have the potential to fulfill the promise of ICOs to make the investment market more secure, efficient and transparent.
While most firms have historically kept their distance from blockchain technology, BPM has proudly represented these entities for nearly five years across a wide range of sectors. Contact Mark Li at MLi@bpmcpa.com today to learn how we can help.
BPM LLP is one of the 50 largest public accounting and advisory firms in the country. We have deep roots in the blockchain and digital assets ecosystems and are proud to represent nearly 15 percent of the companies on Forbes’ FinTech 50 list.
Mark Li is a partner in BPM's Assurance Practice. With over 15 years’ experience in public accounting, he leads and serves BPM’s Blockchain and Digital Assets Industry Group, overseeing activities including but not limited to exchanges, wallets and custodians, crypto funds, STOs and stablecoins.