In recent months, there has been a noticeable shift by token issuers away from initial coin offerings (ICOs) towards security token offerings (STOs) largely driven in part to a recent bottoming out of the retail market (including Bitcoin and Ethereum) and softening demand from retail investors for ICOs.
This trend appears to have resulted from retail investors having come to realize the inherent limitations that ICOs possess, namely the fact that tokens issued in connection with an ICO generally only have “utility” and not much inherent value. Additionally, we are now also starting to see more interest from sophisticated and/or accredited investors and funds, who also tend to prefer “security” tokens instead of “utility tokens” when looking to make an investment, due to the inherent value that the former possess.
Associated consequences resulting from the shift requires STO issuers to consider and resolve additional regulatory issues. In particular, an issuer undertaking an STO needs to, as a first step, consider and comply with securities laws in the various jurisdictions where the security token is being offered.
In Singapore, the regulators have previously clarified that they recognize the distinction between a “utility” token which has no inherent value, and a “security” token which does. The regulators also added that tokens which qualify as securities under Singapore law will need to comply with the requirements imposed by Singaporean securities law if the said token is being offered in Singapore. Of course, a security token issuer can still structure its offer to rely on applicable exemptions to the securities laws.
Due to this recent trend, we have had a number of clients who were previously undertaking ICOs halt their projects and subsequently try to convert their ICOs into STOs. Similarly, a number of our online cryptocurrency exchanges who have noticed the recent developments are now seeking to establish online exchanges for the secondary trading of security tokens.
In the future, we are likely to witness an increasing number of STOs, a more advanced regulatory framework in place, and online exchanges which list STOs.