In the US, we’ve been hearing a lot of talk about a move toward STOs. Why? Because the SEC is making it clear that all ICOs will be treated as securities. If that’s the case, registered US blockchain companies need to make use of existing securities exemption laws to raise funds. But is there another way? What is the rest of the world doing?
We usually consider three types of tokens when we talk about ICOs. Utility tokens, Security tokens, and Equity tokens. While the US begins to tar all ICOs with the same brush, in other jurisdictions, that’s not the case.
In Germany, for example, the government along with fundraising platforms are making use of existing legislation to allow companies to hold ICOs in a compliant way. They do this by issuing equity tokens. This is possible because German law has two different definitions of a security–it can either be a stock or a share (investment asset).
This distinction allows companies to create equity tokens to hold Equity Token Offerings (ETOs) since they qualify as investment assets.
Equity tokens are essentially the shares of a company by which investors are able to receive voting rights as well as become part owners of the organization.
These tokens are so important because they allow any type of company to tokenize their assets in order to raise funds on the blockchain–including off-chain ones.
As a result of this, an ICO offering is no longer limited to a blockchain company but serves as a regular startup looking to raise some funds. Instead of having to issue a utility token and cryptocurrency that has no real use and doesn’t suit their business model, companies can raise funds through Equity Token Offerings (ETOs).
Equity Token Offerings (ETOs)
Equity token offerings can be issued by public and private companies that are registered and can issue shares. So, unlike an ICO, the ETO is completely compliant since the company must be registered (aka adhere to KYC and AML practices) and operate within a legal framework.
The possibilities of ETOs are huge. Until now, we’ve only seen blockchain companies issuing ICOs but now this fundraising mechanism can become available to businesses of all types.
In many cases, startup companies, for example, may have a value in the millions yet their owner is trying to get by on a startup salary. Through ETOs, they can tokenize shares in the company on the blockchain and gain access to liquidity.
Moving Forward, ETOs will most likely become a preferred form of fundraising since they dodge the “security” bullet in many parts of the world. While ETO’s may be a long way off in the States, countries in Europe are beginning to embrace them far more rapidly.