In our recent blog article, we outlined the SEC’s stance on fintech and blockchain technologies. We will now look into the emerging alternative to ICOs, namely Initial Security Offerings (STOs), the next big trend in crypto, some would argue.

After the wild, unregulated beginnings of ICOs elicited warnings from the SEC and the application of the Howey test to establish whether a product was a security or not, utility tokens have become the next big thing. With the decline of ICO funding, more likely a byproduct of the struggling cryptocurrency market and fraudulent practices than regulatory pressure, a new way of selling securities on blockchain has taken shape. In an STO, users receive a security represented by a token, and a company offering securities falls directly under the SEC’s regulatory purview. This means that registration is mandatory, which gives companies several ways of conducting the sale legally. Registering the offering with the SEC is expensive, but there are some exemptions that are available to companies.



Rule 506 of Regulation D offers a way to sell securities without registration. A company only has to fill out an online form with the SEC after the sale of securities. Exemptions, of course, carry some limitations. In this case, an investor cannot sell their investment for at least six months without registering, and only accredited investors may participate in any offerings.

Another way to perform the offering via exemption is Regulation Crowdfunding. This option enables the issuer to sell securities to non-accredited investors, but the funds collected in this way may not exceed $1,070,000 in a year. This exemption stipulates an even longer period of one year, during which investors cannot sell their securities.

The SEC also provides Regulation A to enable smaller companies to sell securities more cost-effectively with limited disclosure requirements. Many companies find this exemption as a Tier 2 alternative, as this option does not require the offering statement to be qualified by a federal state regulator. An issuer can raise up to $50 million in twelve months and is required to produce annual reports for the SEC.



One interesting thing to observe with the gradual introduction of STOs is the perception of general blockchain development. One can argue that this is an important step in protecting retail investors against fraud and imprudent investments. On the other hand, it can be seen also as an usurpation of the blockchain space by big players, effectively shutting out the “kids in the garage” type of innovators who gave us the early blockchain products we are still using today. Will regulators make an effort and provide options for small companies of limited means to sell their tokens on an even playing field with the big players?

The merging of blockchain technology and financial securities gives traditional institutional players the opportunity to take over the blockchain products market. While there is little doubt that this trend is progressing and securities will eventually be traded as tokens on the blockchain, it is easy to imagine two fields of blockchain innovation coexisting; a regulated blockchain space, where traditional finance dominates the market, and an unregulated “Wild West”, where anonymous coins can provide their services to all those who want to stay off the government radar.

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David Prezelj
David Prezelj

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