From ICO to STO

An Appalling Proportion of ICOs are Scams or Failures

Often Times, Things Don't Add Up

The numbers speak for themselves. According to a widely-cited report by ICO legal advisory firm Satis Group LLP, an estimated 81% of ICOs are assessed to be scams. These are defined as projects that “had no intention of fulfilling project development duties with the funds” they raised through their ICO.

A further 11% of ICOs succeeded to raise funding but were subsequently abandoned before their tokens were listed on an exchange. In these cases, it can be difficult to even ascertain the difference between a scam and a failed project.


11% of ICO Succeed to Raise Funding


8% of ICO’s Make it Onto an Exchange

Only 8% of ICO tokens actually make it on an exchange for secondary trading. While this is a promising milestone, it is only the beginning of a treacherous fight for life. These tokens must survive being surged and slammed by market manipulators and investors who want to dump them before they become a fraction of their initial worth.

Not to mention, since the ICO projects raised funds in ETH, they have to safely offload into a fiat currency. In the current crypto bear market, many projects were left with mere fractions of their original raise because of perishing ETH to USD prices.

ICOs Must Face Hard Realities: Regulation as Securities

Will the regulators come knocking on the doors of past ICO's?

It is no wonder that regulatory agencies such as the SEC are seeking to engender corrections in this industry by mandating that ICOs abide by US securities laws.

Generally, ICO projects attempt to avoid being labeled by the SEC as a security at all costs. This occurs for a multitude of reasons, as we discuss in this analysis piece. One major concern for ICOs is that a securities designation will require them to meet stringent financial and business reporting requirements.

For the 81% of scam ICOs out there, this is an issue because such reporting often requires 3rd party audits, making it much more difficult to defraud investors. For the 19% of non-scam ICOs out there, reporting is an issue because there is very little to report. Far more often than not, there are absolutely no fundamentals behind ICO fundraising campaigns: No revenue, no users, no traction.

Just paper partnerships and the deep blue skies. For proof of how difficult it is to assess the fundamentals of an ICO, just look at any ICO rating website. Almost every single rating follows the basic formula: “The whitepaper is [good/bad]. The team is [strong/weak]. The vision is [great/lacking].”

Despite cries against regulations, it is more than likely that the vast majority of ICOs will be designated as securities by the SEC, as we analyze in this piece. In fact in a Congressional hearing, SEC Chairman Jay Clayton went so far as to assert “every ICO I’ve seen is a security.”

The ICO Model is Built on Profound Conflicts of Interest

Conflict 1: Investor vs. Company

Ideally, the ICO project (Company) wants to raise seed money by selling tokens to future consumers who will use these tokens to redeem services from a platform. Consumers may also sell these tokens to other consumers who need the service more and are willing to pay a good rate on the secondary token market.

“Investors” however, are often simply speculators who want to purchase large lots of these tokens at heavily discounted prices. As soon as the tokens list on an exchange and token lock-up periods are over, these speculators seek to sell off their tokens for impressive returns.

The result? The token prices crash and immense volatility ensues as a result of speculators and market manipulators. This seriously challenges the longevity of the project, and underlines this conflict of interest. Investors are not concerned with the company’s long term growth. They are concerned with short term token liquidity. This puts the health of the company at risk and threatens to leave consumers with worthless tokens.

Conflict 2: Company vs. Investor

Before we begin feeling bad for ICOs, remember that an estimated 81% of them are scams and almost all ICOs avoid obligations to report their financial and business conditions. It is hard to see what the value investor receives for their contribution.

If investors are not being outright defrauded, then they are not being given the information that they need to make an informed decision. Recall that this is exactly what US securities legislation is meant to prevent.

Conflict 3: Company vs. Customer 

It is hard to imagine that any ICO would have real customers because the very fact that a company is launching an ICO means they are unable to deliver any services through the platform that the token is native to. Theoretically, if customers do end up purchasing tokens in an ICO, then they are purchasing the right to transact on a platform that in all likelihood will probably never come to fruition.

Remember, ICOs cannot claim that customers are purchasing tokens at their own risk. If ICOs made this claim, they would be admitting their tokens are securities. If a customer is promised a service in exchange for money, the service must be delivered as advertised.

The Bottom Line

ICOs mislead the public to varying degrees because it is easier to do so when they are not regulated as securities. Only rarely do people invest: most speculate. There are no customers – why would there be? Buying a utility token is like buying Monopoly money…before the makers of Monopoly even begin creating the game.

STO's Can Resolve This

Security token offerings can resolve these conflicts of interest, bring in more scrupulous actors, and align all parties.

Setting Principles

Utility tokens should not be used to fundraise. They are intended to be the transaction medium for services on a platform.

Investors should not buy utility tokens that they never had any intention to redeem for platform services.

Companies should not be selling services (through utility tokens) that may or may not exist in the future.

Aligning Companies and Investors 

The value of a security token is the value of the company it represents. Though the price of any security will not always accurately reflect its value.

As regulated securities, STOs require companies to report veritable information that is necessary for investors to make informed decisions.

When companies supply such information, investors are empowered to make long term bets on companies and their underlying business fundamentals.

When investors invest in the long term, the interests of both the company and the investor are aligned. Both want only what is best for the company, though sometimes they may differ in opinion on how to achieve certain goals.

Aligning Companies and Customers 

Why should customers have to buy a service and then pray that one day the service will actually be rendered?

Would it not be more sustainable for a company to offer a service once it is ready to render it?

Executing an STO can be similar to raising a seed round for a company to build a product.

If the company is able to execute its STO successfully, it can begin building out an MVP, testing its platform with early adopters, and iterating based on feedback.

When the platform is refined and ready to scale, the company can issue an ICO or even an airdrop to encourage customers to use its platform.

This is advantageous for both the company and the customer.

The company builds a real business and the customer is able to obtain a valuable service.

In addition, since companies will have an actual product and not be under massive fundraising pressure, they can execute an ICO without intentionally misleading the public either through omission of fact.

Ultimate Security Token Guide - Series One

Ultimate Security Token Guide - The Full Series