An Initial coin offering ICO is a cryptocurrency-focused fundraising method which can be used as a source of capital for startups and companies. However, the Securities and Exchange Commission has cracked down the cryptocurrency industry with accusations of fraud and scams related to ICOs this year.
But Overstock CEO Patrick Byrne said there’s another safer and better way to raise money through cryptocurrency: security token offerings or STO.
“It’s the new term,” Byrne said. “The industry is distinguishing very clearly now between ICOs and STOs,” he added.
This week, Overstock was reported to have invested $2.5 million on three-wheel car start-up Elio Motors. The automaker is also set to launch “ElioCoin” to fund production and clarified in an announcement that it was a “security token offering”. The process is being managed by Jones Trading Institutional Services.
“It is a very clever offering, and could represent a whole new model for American entrepreneurship,” Byrne said.
According to data from the financial research firm Autonomous Next, approximately $9.8 billion has been raised through ICOs since 2016. This huge money flow has caught the attention of the SEC, which has warned the public of pump-and-dump ICO schemes and has shut down and charged some of these startups with fraud.
In an ICO, coins or “tokens” are sold as a form of crowdfunding. These coins or “utility tokens” promise access to a network, platform or service instead of voting rights or dividends for a company share. However, they’re usually backed up by nothing but an abstract idea.
The surge in ICOs has led to the rise of cryptocurrencies like Dogecoin, a Shiba Inu meme-turned-cryptocurrency that has gained a huge following online, especially in Reddit. Other coins like Whoppercoin, Pandacoin, PutinCoin, TrumpCoina also raised money through ICOs.
Likewise, in a security token offering (STO), you can buy coins or tokens. However, unlike ICOs, these tokens have to be backed up by something tangible, like assets, revenue or profits of the company. They work just like a company share but are “programmable” to do certain functions such as conducting proxy voting, since they are built on the blockchain.
“You can program a token, but a static share certificate just sits there and collects dust,” said Trevor Koverko, CEO of Polymath, a program that helps people launch securities tokens.
The Chairman of the Securities and Exchange Commission Jay Clayton clarified in a statement in March that all ICOs constitute securities. But, by using the term “security token offering,” issuers are being more straightforward with regulators that what they are trading are actually securities, Byrne said.
Fraudsters and scammers in the ICO market have held back those who are trying to raise money the legal way, said Byrne.
“The ICO craze of last year created a toxic waste dump of financial assets. To me, that world of ICOs is a Superfund site,” Byrne said. “What we’re developing is a mechanism so that there will be a legal way to go forward and not create any new toxic waste,” he added.
According to Byrne, what some ICOs were doing is “flagrantly illegal”.
Byrne believes the SEC should essentially shut down the utility token world. He added that, “Eventually the security offerings will just be done in lieu of the IPO in lieu of shares.”
Overstock is also under investigation by the SEC. While Byrne refused to comment on the charges, he made it clear that he was cooperating.
Overstock s moving aggressively towards the blockchain space and Byrne says he plans to reorganize or sell the e-commerce business to focus more on blockchain technology. In 2014, Overstock launched its Medici Ventures division to oversee blockchain investments.