IPO or Initial Public Offering – This is a financial tool that allowed various, usually big and successful companies to offer their own shares for sale to a wide range of people. From here and got the word Public. Before this instrument, all transactions for the sale and purchase of shares took place mainly in a closed format – the investor and the company agreed directly with each other. Thanks to the IPO, companies became able to offer their shares to an unlimited number of investors, and investors, in turn, gained access to a wide portfolio of investment opportunities. It was beneficial for everyone. And such a system has existed for a long time and successfully operates to this day. Moreover, this system did not stand still and developed, having gone from paper shares to electronic trading. However, the IPO tool had drawbacks. One of them is the strictest regulation by the US government, making it extremely difficult for companies to offer their shares for sale, and investors needed to receive special statuses of professional investors in order to gain access to investments.
The end of 2017 was the flourishing of cryptocurrency, largely due to the emergence of a new tool – ICO or Initial Coin Offering. In fact, it was an instrument absolutely analogous to IPO, with one difference – there was practically no regulation of any kind. And the main role in this was played by blockchain and cryptocurrencies. With the help of the new technology, people could transfer money to companies in exchange for tokens (coins) bypassing any government bodies directly. And thanks to this, companies did not even need to create a legal entity. In theory, an incredibly handy tool, however, quickly revealed the shortcomings of human nature: in the conditions of complete lack of control, companies attracting money did not bear any responsibilit to investorsy at all. As a result, according to various estimates, 90-99% of all projects that collected funds failed. Sometimes it was just low-quality projects, sometimes outright scammers. People suffered, and the credibility of the tool suffered too.
However, a series of mistakes and failures usually leads to evolution. And in this case, this evolution has quietly matured since the very beginning of ICO. While investors ran headlong to give their money to everyone in the hope of multiple profits, there were also those who immediately warned of the danger and the need for control. And among them was the American Securities Commission. But while all this brought a lot of money, no one, of course, did not think to listen to them. Moreover, all supporters of regulation and control were automatically equated with the enemies of the freedom of the new financial world. But time has shown that without any regulation, everything quickly gets out of control and turns into chaos, in which there are more losers than winners, and those who lose more than earned. So regulation in one form or another is necessary for a civilized market. And here is the time to talk about what actually exist legal tools for carrying out STO.
Firstly, this is the role of the token – in STO, the token represents some rights regarding an object from the real world. This can be the rule of ownership (full or partial), as well as the profit share, voting rights, redemption right etc. This important difference ensures that investors have certain rights in the project, which are fixed in a smart contract.
The second is the actual control and regulation from the outside. In fact, it should be said that the second paragraph is not mandatory – anyone can still issue any tokens without registration by any government agencies. In this article we will not argue that regulators are definitely good or bad.
But you also need to understand that STO is not an IPO. IPO assumes that your company becomes public. This is why it is called public offering. And this imposes various obligations on the issuing company. In particular, it is assumed that the company’s shares after sale become open for public auction – that is, the subsequent sale of the acquired securities to other investors through accredited trading exchanges (NYSE, Nasdaq). In addition, publicity obliges the company to disclose most of the information about its activities, publish financial indicators and statements, and other important information for investors.
In the case of STO, you do not have to make the company public. At the moment, regulation usually does not take place in accordance with the legislation on IPO, but special regulatory exemptions are used that allow you to sell your shares or their equivalents. These exceptions are essentially special simplified methods for issuing and selling stocks that have been in effect before STO. But they turned out to be suitable for the sale of security tokens. On the one hand, the procedure for registering such offers is simplified. But on the other hand, these exceptions have a number of limitations compared to public offerings. These can be restrictions on the maximum amount of investment, restrictions on marketing presales activity, restrictions for investors, and so on. We will tell more about this in the following articles.
In addition, shares sold during IPOs have a strictly fixed set of characteristics, such as Dividends, Profit Share, Interest Right, Voting and so on. And for digital securities, all these characteristics, although desirable, are not required. The issuer has the right to determine by itself what properties Security Tokens will possess. Up to the smallest details.
Anyway it should be said that at the moment both companies and investors have a choice – to attract investments and invest through methods approved by authoritative bodies, or to risk more in unregulated projects. And this is the key point – the right of people to free choice. And what method will be more effective time will tell.