Are STOs the new IPOs?

I want to ask entrepreneurs to estimate how much time, energy, mindspace you have spent raising capital. Have you tracked your efforts? Not by how much capital you have raised, but by the number of hours spent raising capital or thinking about it. The US sees 8,000-10,000 yearly VC deals. If these are anything like the ones in my network, founders expect to spend around 200 hours in the fundraising process per successful round – that’s almost 2 million hours each year!

I don’t want to talk about determination, patience, the feelings of getting rejected, or share a list of top 5 ways to raise capital – plenty of articles exist on these topics. Let’s talk about improving your BATNA (Best Alternative To a Negotiated Agreement) instead. More specifically, let’s talk about how fundraising for startups may change with STOs.

Before we start: my comments on STOs are in no way linked to my current role as CEO at Go Moment. STOs piqued my interest because of the number of times it surfaced in my conversations with other entrepreneurs. I’m also not a lawyer, doctor, or financial advisor, nor do I play one on IGTV.

STOs & IPOs

Raising capital doesn't have to lead you to Wall St.
Raising capital doesn’t have to lead you to Wall St. (Photo by Rick Tap on Unsplash)

Are Security Token Offerings (STOs) an alternative to IPOs? They might just be! I’m early my discovery process and am looking for advice/opinions. If you’re looking for a primer on STOs, I like this article by Blockgeeks.

Here is what I know.

ICO = non starter

ICOs (Initial Coin Offerings) are mostly dead. The SEC stepped in at the end of 2018 with much needed regulatory clarity. SEC reframed ICOs as security offerings. They said that ICOs either needed to be registered with the SEC or fall under an exemption. In many ways, it marked the end of their run.

From the ICO launch in July 2013 (Mastercoin announced the first ICO ever in July 2013 – AFAIK) till the SEC stepped in, ICOs could be traded instantly, anonymously, without fees and across global borders. In my opinion, these were the reasons why ICOs were marked by as many scams and frauds as we saw. I read one report that said that 10% of $3.7 billion raised in ICOs in 2017 had been stolen.

And yet, for what it’s worth, if you are considering launching an ICO (and are sure it falls under the SEC exemption), here is a list of successful ICOs for inspiration.

STO: Launch and beyond

STOs are the newer avatars of ICOs or in Dean Steinbeck’s words, “an SEC compliant ICO”. To launch an STO now, it’s required to register with the SEC or otherwise show that the offering fits within a registration exemption.

Any lawyer, entrepreneur – or indeed anyone you read or speak with about this – will tell you that STO registration involves long, expensive compliance checks, due diligence audits and procedures. Unless we qualify for exemptions, there are restrictions in place on the investment size and the investors’ profiles.

To me, all of this makes launching an STO very similar to an IPO process – long, expensive, and includes compliance checks.

Here’s the twist: the compliance checks and procedures don’t stop with launching an STO. It’s a continuous process of assessing investors. But this is perhaps where STOs score advantages over IPOs. Compliance can be hardcoded to restrict investors based on stringent KYC policies.

Advantage: STO

There are other advantages to STOs (when compared to IPOs):

  • Fractional ownership is possible. In real terms, this means that you can attract investors with lower sums of money. A bigger pool of potential investors.
  • An STO is not limited to an exchange. We can potentially attract investors globally without being restricted to an exchange.
  • The downside is that, while we do away with exchanges to launch STOs, we still need a platform to issue tokens. Most people I know opt to outsource this. Developing a platform from scratch is expensive right now due to the lack of widely available expertise. There are several developers that I came across: Tokeny, TokenGet, or TokenizEU. I haven’t checked out any in great depth and don’t endorse any of these. Would love to hear recommendations.

We are still early in the STO world. 2019 is flagged as the year that STOs gain serious traction. One analyst pegged the market to hit $1 billion this year). I think though we have a long way to go before we see figures anywhere close to that.

The US apparently leads the total number of STOs that have been launched. Are you following any? What are your thoughts on STOs?

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