Crypto Law Insider is the leading legal authority for entrepreneurs and investors in the cryptocurrency and blockchain ecosystem.
This article was originally published in 21Cryptos magazine.
After much anticipation, the SEC has spoken. In recent guidance, the SEC established its definitive stance that ICOs are securities offerings. This means that all token offerings soliciting US persons must be registered with the SEC or fit within a registration exemption.
While many continue to discuss the future of ICOs, the fact is: the debate is over. ICOs in the US are dead. But fear not, 2019 will be the year of the Security Token Offering (STO).
Before you panic, let me clarify that a Security Token Offering (STO) is simply an industry term for a token offering that complies with applicable securities laws.
So how hard is it for an ICO to become an STO?
For starters, it will require registration with the SEC. As those of us with traditional securities experience can attest, proper registration with the SEC is time-consuming, expensive and difficult. Depending on the type of lawyers and accounts used, an Issuer can expect to pay several hundreds of thousands of dollars or more to have a compliant securities offering.
Seem like a lot? Just consider the following cost: an Issuer of a token offering will need audited financials. This process is surprisingly long, painful and expensive. Accountants are nearly as bad as lawyers. No matter how good your QuickBooks accounting is, an audit by a big accounting firm is a painful undertaking.
Not convinced? Here’s another likely hoop the Issuer will need to jump through.
If the Issuer is going to use a traditional broker-dealer to assist with the raise, there is a ridiculous amount of due diligence the broker-dealer must perform on the Issuer. It takes 4 to 6 weeks for highly regulated US entities to pass broker-dealer due diligence. Imagine what the process would be like for a Maltese corporation with no history? Long and painful is what should come to mind.
However, despite the significant burdens and expenses involved, we still believe that 2019 will be the year of the STO for the following 3 reasons:
- Crypto startups still want to raise money
- Institutional money wants to invest in crypto
- A number of STO exchanges and platforms are ready to launch
Read on to learn more…
- Crypto Startups Still Need Capital
For the past two years, the ICO market has allowed projects from around the world to tap into funding like never before. Even though the SEC is clamping down on ICOs, the desire to raise money by crypto-related startups is stronger than ever.
As time-consuming and costly as it may be to register with the SEC, the fact is that companies both on and off the blockchain will always seek to raise capital for their ventures. For decades, companies have raised capital through IPOs and other types of securities offerings, which are fully regulated by the SEC. STOs require no more effort than traditional securities offerings.
The primary businesses that will be hurt by complying with additional regulatory requirements are those that (i) cannot raise early-stage funds, and (ii) are not legitimate businesses. Thus, the added time, costs and difficulty in registering with the SEC will prevent some viable startups from raising money, however they will also help to weed out lower-quality projects.
Given the number of scams we’ve seen in the market over the past two years, this might be a good thing. More credibility will bring along more institutional capital. Which brings me to my next point…
- Institutional Money is Poised to Enter Crypto
Institutional investors have long wanted to participate in the crypto boom. But, for the most part, institutional capital is regulated, which means they have to follow the rules set by different financial regulatory authorities around the world. Obviously, without guidance from those regulators, their participation has been incredibly limited.
However, now that the SEC has given projects a clear path to launching fully-compliant token offerings, US-based institutional investors’ regulatory conundrum has been solved. So as the number of STOs rise, we expect to see an influx of institutional money in response.
That said, while the move to STOs does a great deal to open up the market to institutions, there’s one more key thing that institutional investors need before they can fully dive in…
- STO Infrastructure is almost ready
The last missing ingredient that’s been holding institutional investors back from entering the crypto market has been a lack of institutional-quality investment structures that can accommodate STOs.
So far, there are very few institutional grade crypto exchanges that meet the strict security requirements demanded by regulators and institutional investors, not to mention the technical requirements.
Fortunately, that will soon change as a tremendous amount of institutional capital has already invested in building institutional grade STO exchanges and platforms and several are poised to launch in 2019.
Among the list, we have projects like tZero, Templum, Polymath, and Harbor, all of which are vying to become the leading platforms for STOs and are setting the foundation to tokenize traditional securities offerings.
Although ICOs are dead in the US, you should be ready for an explosion of STOs in 2019 and beyond. The fundamentals are too powerful. Companies need money. Institutions are looking to invest in crypto-related businesses. And the platforms that can make this all happen are nearly ready.
This trend might be disappointing to many crypto old schoolers who are still intellectually tethered to the decentralized, government-resistant benefits offered by traditional ICOs. But the long-arm of the US government is indeed long and wise Issuers are electing to follow the law.
So get ready, the next big wave in crypto is coming this year. Will you be prepared to ride it?
Dean Steinbeck is the Managing Director of Crypto Law Insider, the leading legal authority for entrepreneurs and investors in the cryptocurrency and blockchain ecosystem.
Dean is a US corporate lawyer with a focus on data privacy and technology. With over 15 years of experience representing VC-backed software development companies, Dean has found himself at the center of multiple blockchain projects and is currently recognized as one of the top attorneys in the cryptocurrency space.
Dean currently serves as General Counsel for Horizen (formerly ZenCash), a privacy-oriented cryptocurrency and cutting-edge blockchain platform. Prior to Horizen, Dean was General Counsel at TigerConnect, the leading communication platform in the US healthcare market. His experience gives him an in-depth knowledge of the legal intricacies within blockchain technology, data privacy, intellectual property, venture capital funding and regulatory compliance. Click here to learn more about Crypto Law Insider.