Security Tokens, otherwise known as Digital Securities, Programmable Securities, Smart Securities or Cryptosecurities, are regulated financial securities offered to investors through a Security Token Offering (commonly known as STOs) or Digital Security Offering (DSOs).

Security Token Offerings are a novel fundraising mechanism birthed from increased regulatory oversight on Initial Coin Offerings (ICOs). Given that the certainty provided by regulated instruments and their associated rights is a large short-term attraction for investors, Newtown Partners believes STOs will be the preferred capital raising avenue for startups in the blockchain space within the next 12 – 18 months. The majority of these offerings will be structured as a SAFT-E (likely to be favored by investors given the flexibility it provides); with Malta, Gibraltar and Singapore providing acceptable regulatory frameworks to do so. Security tokens can take the form of a number of types of financial securities as shown below:

Non-hierarchical overview of financial products enabled by the embedded logic in Security Tokens. (Adapted from Security Tokens: A General Understanding – Joel Camacho)

Because Newtown Partners believe that STOs will be the preferred capital raising avenue for blockchain startups, our team have written a full Primer, aimed at educating and sharing our knowledge with potential investors, startups and the community as a whole. The Primer provides: an overview of the problems Security Tokens are attempting to address; an overview of the Security Token ecosystem; select geographies and their developing regulations; a brief breakdown of the Security Token stack; a rough timeline of the STO process; concerns and caveats around Security Tokens and an appendix of select Security Token case studies.

Newtown Partners predicts that STOs will become an increasingly important part of the blockchain ecosystem, and so it’s imperative that we can unpack and consider their full advantages, disadvantages, and possibilities. STOs hold contractually-bound, legally-enforceable obligations backed by the might of the law which will provide a certain degree of comfort for investors who will invest in this space given the familiarity with these policies and structures; however, this comfort does come at the price of increased disclosure requirements.

It’s important to note that Newtown Partners do not believe that Security Tokens will replace utility tokens in providing core functionality to decentralized protocols. This is primarily because of the large regulatory burden associated with STOs, and thus they are not viable replacements to utility tokens in a decentralized network. However, given their viability as fundraising mechanisms, STOs will be used in bootstrapping the construction of these decentralized protocols (protocols which would be powered by utility tokens); or exist in symbiosis with a utility token in a dual-token architecture.

Thanks must be given to the various luminaries in the space, whose writings have been collated and consolidated into the Security Token Primer, including Howard Marks (CEO of StartEngine, co-founder of Activision), Antonio Pompliano (Morgan Creek Capital), Tatiana Koffman (Four Blocks Ventures), Bruce Fenton (Atlantic Financial). Particular mention must go to Steve McKeon (University of Oregon), and Jesus Rodriguez (Invector Labs) who have collaborated on various sections in the Primer. Any omissions or errors are of our own.

You can download the full STO Primer here, let us know if you have any questions or feedback.