A bit of history and background
A Security Token Offering (STO) occurs when a token is traded as an investment, because that token is used to represent the value of real-world assets, such as works of art, real estate or intellectual property, and so on. To better understand, let’s say that a token representing these real-world assets can be sold as a security.
“A security is understood as an investment contract, where the buyer gives money to the seller with the expectation of a return on the investment”
Now the return on investment is not directly linked to speculation, but depends on the good work of a third party, such as restoring a valuable work of art to its original condition, developing a real estate project, creating a valuable piece of intellectual property or as in our case, the KHAN token, whose return (and therefore our investors’ return) is linked to the active management of crypto assets, through tailor-made strategies based on market, objectives and risk management. BELOBABA is constantly working to improve and expand this line, in order to provide KHAN with greater represented value, so that the ownership of the token increasingly guarantees the investor that it is diversified and backed by different securities.
Under the law, an STO token is seen as an investment rather than a utility token, as it usually arises from an ICO and its value is based on its utility use, rather than the asset that represents it. A real-world example of this would be for example a security based on whisky barrels. A company can raise money to go through the entire process of making and maintaining those whisky casks for many years before they reach maturity and are suitable for sale. The whisky is the value represented by that STO token and the ownership of the token is the investor’s security. The token represents the value of the whisky at the time of sale, it does not represent the whisky itself, so it cannot be exchanged for whisky.
Security tokens are therefore set to play an important role in the future of the global economy thanks to the adaptive process they bring with them towards a digital and global economy. By providing liquidity to traditionally illiquid assets and giving access to different asset classes, previously unattainable for retail investors, it adds unprecedented prospects as an alternative to the traditional system.
What does Europe say?
In Europe, STOs have gained great popularity in recent years due to their potential to finance projects and expand, attracting investors from all over the world. However, the regulation of STOs in Europe is still quite uncertain and can vary significantly from country to country. For example, some countries such as Switzerland have adopted a more permissive approach towards STOs, while others, such as France and Germany, have adopted a more restrictive approach. Despite this regulatory variability, STOs are expected to continue to gain traction in Europe as more companies seek innovative ways to raise capital.
Although these are evolving issues and without a clear definition by the European institutions and the European authority itself, it can be seen that in Europe the outlook for securities and STOs in the short term is currently promising. From his point of view and as a starting point to be able to put everything in its place, a token that exists within a blockchain is a digital asset, however, not all digital assets are the same. In order to classify digital assets, let’s say that in Europe they start from the answers to questions such as: Does the owner have a right against the issuer? If yes, is it a right in kind or a monetary right? If it is considered a monetary right, is it a profit share, a predetermined right, or another type of indeterminate right. Is it transferable, is it scarce, and how is scarcity regulated, does it give decision-making power over the issuer’s project?
By answering these questions, you can start to apply different EU legislation to different types of digital tokens. It should be noted that both equity and debt-based securities representing an asset would require a prospectus (a legal document that describes first-hand information, such as a company’s main line of business, its finances and shareholding structure, as well as the securities being issued to investors). In the EU, a prospectus is a standard requirement for securities, as it is intended to provide investors with the minimum information necessary to make an investment decision.
Prospects for securities in Europe
The outlook for securities in the EU looks very good, largely due to the introduction of friendlier regulations from 2019. ESMA will allow companies to issue securities of up to €1 million without the need for a prospectus. This is ten times more than the historical cap of €100,000. By raising the limit to €1 million, the EU is making it easier and cheaper for small companies to access capital markets. It will also be possible to increase this limit to EUR 8 million, even without a prospectus. These rules will make it easier than ever for small and medium-sized companies in the EU to issue securities without a prospectus. This means that STOs can become very convenient for both new start-ups and existing SMEs.
And what position are traditional investment firms taking on the potential of STOs?
Many of these firms are already positioning themselves in the burgeoning STO market as regulations become clearer around the world. As regulations differ across jurisdictions, it is important to keep abreast of trends and changes in the blockchain industry. It is normal to start seeing news such as these companies partnering with digital banks or government institutions to facilitate dialogue and information resource sharing with key policy makers to promote policies and businesses that favour the creation of blockchain-based projects. For example, we are witnessing investment banking pivoting towards new investments for their more sophisticated clients, raising capital for expansion through an STO, forming alliances that not only seek to inject money into promising crypto projects, but also seek to have that presence and visibility at events, conferences, embassies and official acts that can so much help the understanding and adoption of blockchain technology (see the example of Y2X and EMURGO).
I encourage you to review our website and subsequently establish a channel for dialogue and consultation, to explore synergies that can secure investment in this new market. According to the investment thesis, the opportunity is now…..