What is an STO? 
Is it “the new” ICO?
What’s the difference between a security token
 and a utility token? 
Why is it even important?
Well stick around, 
in this episode of Crypto Chiteboard Tuesday
 we’ll answer these questions and more.
Hi, I’m Nate Martin from 99Bitcoins.com 
and welcome to Crypto Whiteboard Tuesday 
where we take complex cryptocurrency topics, 
break them down 
and translate them into plain English.
Before we begin 
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Today’s topic are Security Tokens
 and Security Token Offerings 
or STOs for short.
But before we dive in, 
we first need to understand what ICOs are.
An Initial Coin Offering, or ICO for short,
takes place when a company sells 
cryptographic assets known as tokens 
in order to raise funds for its operations.
The tokens being sold play a role 
in the project 
and those who buy in early 
are getting them at a discount, 
assuming the project succeeds.
The company usually opens the sale of tokens 
for a limited time frame 
until the money they need to raise is reached.
A good analogy for an ICO would be selling 
$1 casino chips at 80 cents a chip 
in order to build the new casino.
If the casino comes to life 
the investors made a wise investment.
A good example of an actual ICO 
would be Ethereum, 
where Ether - 
the token used to power the Ethereum network - 
was sold to investors
 before the network launched, 
in order to fund the project.
Tokens in general 
are divided into two categories - 
utility tokens and security tokens.
Utility tokens are tokens that promise 
the future use of a product or service.
They aren’t meant to be an investment,
 they have a utility.
One  example that might be considered
 a utility token of sorts 
would be a starbucks gift card.
If you buy it at a discount, 
you’re not really expecting to make a profit 
by selling the gift card.
Effectively, you’ve prepaid for, 
and expect at a later date, 
a cup of coffee.
Security tokens on the other hand, 
are tokens that represent
 tradable financial assets, 
for example a share or a bond from a company.
Security tokens are meant as 
a form of investment, 
they pay dividends, share profits 
or pay interest in a way that promises 
future profit.
Put simply, utility tokens promise a product
 or a service 
while security tokens promise profit.
While ICOs started out with good intentions, 
people quickly started seeing 
the opportunity for easy money 
and used this mechanism to fuel their greed.
In 2017 the ICO frenzy reached its peak.
Billions of dollars were invested 
in so called utility tokens 
that had as little as a piece of paper 
describing some obscure future venture.
Of course the overwhelming majority 
of these projects 
never saw the light of day 
and a lot of investors lost their money.
Back then the ICO field
 was completely unregulated 
and quite the number of scams 
and manipulations emerged.
Investors pumped up the price of specific tokens 
just to dump all of their holdings 
once everyone else bought in.
Other cases included companies that just 
completely vanished, along with the money, 
once the ICO ended and the money was raised.
Instead of a creative way to raise capital, 
ICOs quickly became a workaround
 to avoid regulation.
Companies that wanted to avoid the long, 
expensive regulatory path 
toward the traditional 
Initial Public Offering or IPO 
just conducted an ICO instead.
Nobody asks for permission to run an ICO, 
you just set up a website, some tokens 
and start selling them to the general public.
Also, unlike an IPO, 
you’re not giving away any control
 over your company or profits 
since you’re supposedly selling tokens 
that only promise future use 
of your currently non existing product.
As things got out of hand, 
public complaints increased, 
companies like Google and Facebook 
banned all ICO projects from advertising
 on their platforms
and regulators stepped in.
The regulators wanted to investigate 
whether these so called tokens 
shouldn’t be in fact considered as securities.
And if so, are the companies behind them 
meeting the requirements 
to allow them to sell securities.
You see, in the US there’s a simple test called 
the “Howey Test” that is used to decide 
if what someone is selling 
should be considered a security.
It states that a transaction is considered
 a security sale, 
if a person invests his money 
in a common enterprise 
and is led to expect profits solely from 
the efforts of the promoter or a third party.
We can break this long and confusing sentence
 down to four main questions:
One - Was there an investment of money? 
In the case of ICOs the obvious answer is yes.
Two - Was this investment done 
in a common entreprise? 
Since ICOs raise money for a company 
which is considered a common enterprise 
the answer is also yes.
Three - Was there an expectation of profit? 
Well, this is a very interesting question, 
since a company can always claim that
 its tokens were meant for utility only.
However, when you look at the token market 
you can clearly see that people
 are buying tokens in the morning 
and then selling them in the afternoon.
Meaning tokens are bought 
in order to sell them for a profit.
So depending on the specific case 
this could be a yes or a no.
And four - are the profits connected directly
 to efforts of a person or entity 
who are not the investor? 
This question is a bit confusing, 
so here are some other ways to look at it:
“Is there a person, that isn’t the investor,
who is in charge 
of making this venture succeed?” 
You could also ask 
“Is this a passive process for the investor?”
In most cases the answer to these 
would be a solid “Yes” 
as the investor’s involvement 
in the project ends 
usually once he or she invested funds 
and got tokens in return.
Bitcoin, for example, 
doesn’t fall under this category 
since there’s no one person
 making the decisions.
Many open source projects 
can have the benefit of the doubt 
since you can’t say that there is one person
 calling the shots, 
it’s more of a group effort 
and that disqualifies them 
from the fourth question.
So while most companies classified their token
 as utility tokens 
in order to avoid security regulations, 
when they were reviewed by the authorities, 
almost all of them were said 
to be selling securities.
As a result many ICO companies
 were subject to legal actions 
including hefty fines and even jail time.
Today, most ICOs aren’t open to the public 
because of the fear of regulators 
and are privately funded
 by small groups of investors.
So there you have it, 
on the one hand we have ICOs - 
A completely unregulated form of raising money 
from all around the world, 
that’s fast and easy to execute 
and is filled with scams, frauds 
and just plain negligence.
And on the other hand IPOs - 
A long, expensive, exhausting road 
of raising money from investors 
by vetted, legit companies.
But today, 
there’s a new type of offering called 
a Security Token Offering or STO.
A kind of middle ground between an ICO
 and an IPO.
Let me explain.
An STO is the process of selling 
security tokens to the public 
while avoiding the long exhausting process
 of an IPO.
There are no utility tokens in STOs 
and everyone participating is considered 
an investor.
STOs are intended to be compliant with 
Anti Money Laundering requirements 
and securities laws.
You might be wondering how are STOs possible? 
How can you sell securities 
without regulatory oversight? 
The answer is through exemption.
In the US for example, 
you’re exempt from registering with the SEC
 if you fall into one of three regulations.
Regulation D, 
Regulation Crowdfunding or regulation A.
Regulation D means that STOs are exempt 
from registering with the SEC 
if they raise money only 
from accredited investors, 
meaning anyone with a net worth 
of $1 million or more 
or with an annual income of $200,000 or more 
in the last two years.
The company can raise
 an unlimited amount of money 
in this manner.
Regulation Crowdfunding states both accredited
 and non-accredited investors 
can participate in the offering, 
but there is an annual limit 
to how much an STO can raise -  
and that's $1,070,000
Both regulation D and regulation CrowdFunding
 have a one year lockup limit.
This means that investors need to wait
 for one whole year 
before selling their security.
This is done to prevent pump and dump schemes
 and protect other investors.
Regulation A+ means the offering
 must be qualified by the SEC, 
sort of a mini IPO.
Once it is approved, 
everyone can participate in the STO,
 which is limited to $50,000,000.
There is no lock up period 
for a Regulation A+ exemption.
You could buy and sell your tokens 
in the same day 
just like you currently can 
with cryptocurrencies.
So, once a company falls into 
any one of these regulations, 
it can sell security tokens as part of an STO, 
with no threat from the SEC coming down on it 
to shut it down 
and throw the proprietors into jail.
So are STOs a good thing?
STOs have a lot of advantages.
For starters, 
they remove the threat of scams 
through the implementation of regulation
 and oversight.
While ICOs were traded on shady
 and unregulated exchanges, 
STOs are traded on verified exchanges.
Also, STOs open up bigger markets for investors 
since almost every asset class type
 can be tokenized.
From the fundraiser’s perspective, 
a wider audience of investors can be reached, 
as digital securities are easily marketed 
and transferred across borders.
Of course many people think STOs are a bad thing
 since in some cases,
regulation D for example, 
they offer the investment 
to accredited investors only.
This seemingly excludes 
the Main Street investor 
while allowing only the rich to benefit.
On top of that, 
the lockup period and cost of compliance 
may deter many investors and companies
 from participating in STOs.
In the end, STOs have various pros and cons.
I believe that at this point in time, 
they are more suited for early adopters, 
who are looking to invest 
in something new and exciting 
while still subject to some oversight, 
which offers a certain degree 
of investor protection.
These are just the early days of STOs 
and as we move forward, 
more and more companies, 
not just crypto related, 
are thinking about how they can 
“tokenize” their assets 
in order to raise funds.
Well, that’s it for today’s episode of 
Crypto Whiteboard Tuesday.
Hopefully by now you understand 
what Security Tokens and STOs are  - 
A way to tokenize tradable financial assets 
and offer them to the public 
in a responsible regulated process.
You may still have some questions.
If so, just leave them 
in the comment section below.
And if you’re watching this video on YouTube, 
and enjoy what you’ve seen, 
don’t forget to hit the like button.
Then make sure to subscribe to the channel 
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Thanks for joining me here at the Whiteboard.
For 99bitcoins.com, 
I’m Nate Martin, 
and I’ll see you… in a bit.
