The Issuances
Utility tokens
This section focuses on the issuance of utility and security tokens, which differ in how they are issued, due to underlying regulatory and legal requirements.
A utility token provides access to a blockchain protocol, dApp, and/or can be exchanged for another type of product or service. These methodologies can differ depending on the accessibility to the public.
Initial Coin Offering (ICO)
An initial coin offering (ICO) is the cryptocurrency industry’s equivalent to an initial public offering (IPO). Where the purchase and sale of tokens is completed directly between issuer and buyer. A company looking to raise money to create a new coin, app, or service launches an ICO as a way to raise funds. Interested investors can buy into the offering and receive a new cryptocurrency token issued by the company. This token may have some utility in using the product or service the company is offering, or it may just represent a stake in the company or project.
ICOs also retain at least two important structural differences from IPOs. First, ICOs are largely unregulated, meaning that government organizations like the Securities and Exchange Commission (SEC)do not oversee them. Secondly, due to their decentralization and lack of regulation, ICOs are much freer in terms of structure than IPOs.
ICOs can be structured in a variety of ways. In some cases, a company sets a specific goal or limit for its funding, which means that each token sold in the ICO has a pre-set price and that the total token supply is static. In other cases, there is a static supply of ICO tokens but a dynamic funding goal—this means that the distribution of tokens to investors will be dependent upon the funds received (i.e. the more total funds received in the ICO, the higher the overall token price).
Still, others have a dynamic token supply which is determined according to the amount of funding received. In these cases, the price of a token is static, but there is no limit to the number of total tokens (save for parameters like ICO length).
Initial Exchange Offering (IEO)
When issued via a centralized exchange, which places the tokens for sale for buyers to acquire, this is known as an Initial Exchange Offering (IEO). IEOs are a recent development in the rapidly evolving digital asset space. IEOs are similar to ICOs in that they are initial offerings of digital assets (e.g., coins or tokens) to raise capital. However, IEOs are touted as an innovation on ICOs because they are offered directly by online trading platforms on behalf of companies—usually for a fee—to provide immediate trading opportunities for digital assets.
Initial Dex Offering (IDO)
If the public issuance is created through a decentralized exchange, the issuer has no control on the result of the issuance, this is therefore classified as an Initial Dex (decentralized exchange) Offering (IDO).
An IDO is a new type of decentralized and permissionless Initial Coin Offering, which opens up a new method of fundraising in the Cryptoverse.
This type of decentralized asset depends on liquidity pools where traders and investors can swap tokens such as USDC/PPX.
IDOs are generally referred to as the successor to other funding models. Offering better liquidity at all price levels due to its mechanics.
Unlike other fundraising methods, IDOs are generally considered a fair way to launch a project by avoiding issues such as pre-mines, which is an issuance system that favors project founders and community members.
Security tokens
Before understanding what a security token is, we must first understand the characteristics of a traditional security. A security token is a representation of a security, which is a fungible, negotiable financial instrument that holds characteristics such as monetary value.
There are primarily three types of securities:
An equity security represents ownership held by shareholders in a legal entity (a company, partnership, or trust), realized in the form of share capital, which includes shares of both common and preferred stock.
A debt security represents borrowed money that must be repaid. Characteristics are size, yield (interest rate), maturity and renewal (redemption) date.
Hybrid securities, combine characteristics of both debt and equity securities, e.g., equity warrants, convertible bonds, among others.
Securities have been in existence for hundreds of years, for example the first company ever incorporated was Kongo Gumi in Japan, in the year 578. Nonetheless, innovation and optimization in the last century has made it possible for the transfer of securities to evolve, going from a pure paper format, to a digital one, making it now even possible to issue securities on-chain.
A Security Token Offering is issued to the public, and since it is a form of representation of securities, it must be compliant with the regulatory and legal framework of securities in the jurisdiction in which they are issued. For instance, this means that if a company is issuing security tokens in Germany, the issuance will have to comply with the same legislation as the issuance of traditional securities in Germany. This complicates matters as not all countries have a homogeneous regulatory framework.
Ultimately, Security Token Offerings (STOs) follow the same guidelines as the issuance of any security, and this makes the issuance of this type of tokens incredibly cumbersome, heavily regulated, with high barriers to entry due to the know-how needed to perform them from a regulatory, legislation and technological perspective. Nevertheless, STOs offer unique characteristics similar to traditional capital markets.
The added benefit of using blockchain technology for asset tokenization, is that it also retains the characteristics of the native blockchain. These include immutability, transparency, auditability, and traceability in a network which is live 24 hours a day, 7 days a week, 365 days a year.
Generally speaking, a token is basically the representation of something else; every token represents a proportional part of a digitized asset. This also means that the owner of the token possesses the associated ownership rights and/or other types of economic rights established by the individual company performing the asset tokenization.
The procedure which determines whether an issuance meets the requirements of securities law generally refers to the SEC’s (Securities & Exchange Commission) Howey Test. Whilst the Howey analysis is specific to US legislation, it is a globally recognized standard for determining whether a transaction qualifies as an investment contract. A consequence of qualifying as a security, means that the underlying asset must to adhere to the Securities Act of 1933 and the Securities Exchange Act of 1934 (if you were an asset domiciled in the US). Under the Howey Test, an investment contract exists if there is an
“investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others”
In summary:
An investment of money.
In a common enterprise.
With the expectation of profit.
To be derived from the efforts of others.
PassiveSphere intends to provide the platform that will allow individuals and businesses to facilitate Security Token Offerings (STO’s) whilst being able to comply with local laws and regulations in the jurisdiction where the underlying asset is domiciled. An individual or business will have to comply with said regulations in order to use the platform.
Last updated