Security tokens may be the next big “talk-of-the-town” in the blockchain revolution. Articles about them have started to spread, but for those who are new to the crypto universe (and to the financial world in general), understanding them might be tricky.
Before we explore security tokens, it is crucial to understand securities first.
What are Securities in the Financial World?
A security, in the financial context, is a certificate or other financial instrument that has monetary value. It can be traded through a medium between exchanges or peer-to-peer. Securities are classified as either equity (e.g., stocks) or debt securities (e.g., bonds and debentures). If we take the example of stocks, you might understand that it means owning a part of a company without taking actual possession of it.
Companies and governments use this method to raise capital market money from various investors. The investors are promised a return program in the form of dividends or interest rates, or a share of the company’s profit in some form or other.
What Are Utility Tokens? How Do They differ?
Before we explain how they differ, let’s discuss what a utility token is and its purpose.
The SEC and FINMA have broken down tokens into two broad categories:
- Utility Tokens
- Security Tokens
Utility Tokens
Since most ICOs are investment opportunities in the company itself, some of these tokens qualify as securities. However, if they don’t qualify according to the Howey test, then they are classified as utility tokens. These tokens simply provide users with a product as well as a service. Think of them as a gateway or app tokens. As Jeremy Epstein, the CEO of Never Stop Marketing, explains, utility tokens can:
- Give holders a right to use the network.
- Give holders a right to exploit the network by voting.
He also says that since there is an upper cap on the maximum token availability, the token value may go up because of the supply-demand equation.
Security Tokens
In simpler terms, security tokens are cryptographic tokens that pay dividends, share profits, pay interest, or invest in other tokens or assets to generate profits for the token holders. This takes care of the liquidity issues.
A crypto token that passes the Howey test is deemed a security token. These usually derive their value from an external, tradable asset. Because the tokens are deemed a security, they are subject to federal securities and regulations. If the ICO doesn’t follow the regulations, then penalties will apply.
However, if partnered with agencies like Crowdcreate, which can help you in crowdfunding, crypto marketing and getting into contact with some of the most influential people in the cryptosphere, STOs will surely be the topic of the day. In fact, they help one of their most successful clients raised 17 million USD and along with it, organically created a community of investors for their project.
Going back, the way it usually works is that tokens or coins are offered by companies for purchase as a form of crowdfunding, however, with Security Token Offerings (STOs) it’s an upgrade whereby tokens can be bought which then you can trade, sell, or hold. However, since security tokens are actual financial securities, your tokens are backed by something tangible like the assets, profits, or revenue of the company.
In the latter half of 2018 and in 2019 we are, therefore, going to see a huge rise in STOs; they may eventually out-duel ICOs, because they offer more security for potential investors and so reduce the chance of fraud.
What Is a Security Token Offering?
In practice, selling security tokens is comparable to ICOs, though the process is termed a security token offering (STO). Much like an initial coin offering, STOs issue coins to investors. However, the similarities usually end there. In an ICO, investors are purchasing tokens to benefit from the possibility of token appreciation or to unlock the ecosystem’s utility. By comparison, STO investors are investing with the expectation of receiving future cash flows, dividends, or voting rights directly tied to the security.
Security tokens are backed by assets, profits, or cash flows, and thus have an intrinsic value from the moment they are issued unlike utility tokens, where the value is largely theoretical until an application is developed. Additionally, STOs are fully compliant with regulatory frameworks, allowing investors from all over the world to participate without violating respective securities laws. This is especially true in countries like the US, which exhibit stricter oversight of securities and investments.
Another key aspect of STOs is that they allow companies to create whitelists and blacklists, which make it easier to comply with know-your-customer (KYC) and anti-money-laundering (AML) reporting requirements. By operating more transparently, STOs can effectively negate some of the bigger issues facing utility token offerings: a lack of corporate accountability, the possibility of fraud, and no recourse in the event of a company failure.
In a sense, many STOs will look more like IPOs than ICOs. Instead of a “wild west” approach to fundraising, whereby companies are simply aiming to raise as much capital without any concern for the source of funds, STOs are subjected to strict regulations. However, this clears the way for institutional participation, which may result in a tidal wave of capital destined for blockchain-based services.
What’s the Difference Between an STO and an ICO?
The most important question is “What makes a token a security?” In the United States, the main focus is the purpose of the investment. The centennial case that addressed this issue is Securities and Exchange Commission v. Howey Co., 328 U.S. 293 (1946). The test addresses four issues:
{a} Whether the investment involves money or assets,
{b} Whether the investment of money or assets are in a common enterprise,
{c} Whether there is an expectation of profits from the investment,
{d} Whether any profit arises from the efforts of a promoter or third party.
If the answer is yes to the above four questions, then the token sale is likely subject to the U.S. securities laws.
The Big Question
With all these information, you probably see the advantages and disadvantages of security tokens. Now, how your company should market it?
Knowing your target audiences. Knowing the right audiences and showing them the potential of security tokens give you a better chance to lead the crypto marathon. Providing them sufficient and relevant topics that you know they care about will increase traffic and ultimately, conversion.
Building your community. It takes time for every business to grow a healthy community. To achieve this, you have to know what they need and want for your project. Building multiple levels of support will be very helpful when things get worse. Creating metrics, whether by week or month, can also motivate your members and investor to participate in the group (you can read more here).
Decent trading platform/exchanges. Having a proper exchange not only gives your token an advantage. It also serves as stealth advertisement to traders and enthusiasts outside your channel. With good exchanges, back with proper crypto marketing services, your project will have a good chance to increase both traffic and awareness.
Monitor audience’s feedback. We regularly check our metrics of our client’s channel and we analyze it to further improve the current process. You can also monitor social listening tools to know what’s happening in the social media and get relevant topics and ideas that can add value to your project.
Make use of SEO wisely. Search Engine Optimization should be the bread and butter of your marketing strategy. Best blockchain marketing agencies use SEO to the fullest to gain traction online. Getting it right makes your potential clients happy, thus, increasing traffic and conversion.
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