Why rebranding as an STO won't be enough to win back trust

Many large institutions and individuals are interested in the benefits that Security Token Offerings (STOs) could bring to Asia. These offerings give investors and companies alike a more formal and regulated framework for blockchain fundraising.

Take the Singapore Stock Exchange for example, which has made significant investments in the security token sector and the underlying blockchain technology. Thailand and Hong Kong are also leading the way, with Thailand’s Securities and Exchange Commission (SEC) approving the country’s first Initial Coin Offering (ICO) portal in 2019.

However, it hasn’t all been plain sailing. The uptick for STOs is still slow compared to the ICO boom in 2017. With an estimated 83 STOs in 2019, they comprise less than 1% of all offerings including both IPOs and ICOs. Unfortunately, it seems that simply switching to the STO model won’t be enough to win back investor trust. The association between blockchain-based fundraising and the high-profile scandals remains a difficult perception to change. So, what can companies do to change investors’ minds?

Looking beyond the whitepaper

The initial coin offering (ICO) boom and bust left many wary of businesses raising money via the blockchain. This mistrust is understandable. Many investors were burned by the fraudulent ICOs which appeared on the scene in 2017 - such as Benebit which was able to raise $2.7m before its creators mysteriously vanished. In the face of this mistrust, token founders can often experience an uphill struggle when it comes to reputation.

The landscape is a far cry from the heady days of 2017, where any project with an interesting whitepaper could grab investor attention. Investors have been burned before, so will need more than a good idea presented in a whitepaper. Companies need to show that they’re in it for the long run.

Volatility and regulatory instability

The instability of the cryptocurrency market also doesn’t help the case for businesses launching STOs. With funds being raised in crypto, investors will be keen to know whether founders plan to risk converting their crypto into fiat, only to see prices rocket; or worse still, to leave their funds in crypto, only to see its value plummet whilst their competitors may be better positioned to thrive.

Furthermore, regulators have yet to reach a global consensus on what constitutes an STO. This means that in some jurisdictions, the terms STO and ICO are being used interchangeably. Whilst this may only be a few bad actors, this kind of behavior can be enough to cast the practices of those acting honorably into question.

Taking this into account, it’s clear that businesses hoping to launch a token offering need to do more than just relabel as an STO.

Whilst this may seem initially intimidating, it is mostly a case of planning ahead. For businesses, this involves assuring investors that they have well-considered financial plans for the capital they raise. With a plan in place which can be presented to investors, STOs have an opportunity to project an image of legitimacy before they launch. Not only does this reassure those who have been burnt in the past, but it could also encourage involvement from traditional financial institutions, with professional investors recognizing similarly mature plans to those of businesses going down the traditional IPO route.

As crypto volatility caused many investors to lose cash in 2018, how businesses manage that volatility is likely to be front of mind for them. As a result, an STO whitepaper with a strategy that takes crypto volatility into account is essential to establish a token's legitimacy. Having this in place could also encourage further investment from a more confident investor base - at the end of the day, investors are more likely to pay attention to experienced founders that demonstrate their ability to plan for known issues like cryptocurrency volatility over ventures that seem unaware or downplay the risks.

Digital fundraising’s problems are unlikely to disappear overnight; it’s still a long road to either global regulatory consensus or a less volatile crypto landscape. As a result, founders need to show investors that they have a strict and well-thought out business plan, and ensure they stick to it once they have raised the capital.

Getting this right will not only stand you head and shoulders above the competition when it comes to attracting investment, but also allows you to make sure that you have enough capital in the long term to realize your business goals.