STO: What does security token mean

 · 1 min read

Initial coin offerings (ICOs) have already raised more than $6.3 billion in 2018. It’s more money in the first quarter of 2018 than the whole 2017 showed, according to the data collected by CoinDesk. Analysts believe that this industry will rapidly grow into a multi-trillion dollar market. Tokensale is an extremely popular way of raising capital when a startup launches its own cryptocurrency based on a blockchain and distributes it among users in exchange for financial support of the project.

Tokens that can be used inside the project or later be resold on crypto-exchanges serve different purposes - from guaranteed access to project services to receiving company shares. Depending on its functionality those tokens might be classified utility or security tokens.

Utility token is a token of the protocol itself. These tokens can be compared to the API keys that are used to access the protocol. This is a way of financing projects of a common infrastructure that previously could not be financed. To allow the creation of such ecosystems, some tokens can be "pre-mined" in addition to being sold at crowdsales.

Security token is any token designed for profit and resale in the future. To determine whether a token falls under the definition of a security, the criteria for the Howey test are applied:

  • Is it an investment of money or assets?
  • Is this an investment of money or assets in a joint venture?
  • Is the return on investment expected?
  • The profit is obtained from the efforts of the initiator or the third party?

If an answer to any of these questions is “yes”, you have a security token and you will have to face with all power of The US Securities and Exchange Commission (SEC) working hard to protect US customers from fraudulent schemes. We will be talking mostly about US regulations in this article as USA is considered the biggest and the most important one and the SEC recommendations are the most discussed question at every industry event or meetup.

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