Episode 168-What is an ICO and an STO?

Welcome to the end-to-end ICO series where you learn how to launch your own ICO straight from the experts. So without going too much into the details, the exciting thing that happened in 2009, January, is Satoshi Nakamoto rolled out bitcoins based on a data structure called blockchain. Blockchain made it unnecessary to have a bank in the middle. Now fast forward a couple more years, what happens? Who

are the earlier adopters of most technologies? No, other than pirates and terrorists and everybody else. And those are fringe users. Sure, that is always there in no matter what currency you take. But let's ignore them for a moment and say who is very eager in the legitimate world? Those are typically entrepreneurs. Entrepreneurs really want to figure out how to raise money. And that they looked at

this blockchain and said, maybe I don't need an investment bank to do an initial public offering IPO. Maybe I can call this something similar called it initial coin offering. And I can use this blockchain issue tokens to people. So I am an ABC company that gives you loyalty points for movie tickets. So for every nine movies that you come to, every movie attendance gets your token.

At the end of nine movies you have nine tokens. You surrender those tokens to me. I'll give you the 10th movie ticket free. And these tokens are global. You can attend any movie in any theater globally blah blah blah blah. So right there I have just created for you a startup, which is based on the loyalty points for watching movies. It is global because tokens are

not currencies. And I and the mechanics. You can encode that whole process of nine tokens is equal to 10th movie free. Can be recorded into a smart contract. The smart contract is nothing but a piece of code that that's a contract between me, the issuer name, namely the startup company. And you the buyer of the tokens, namely the investor into this startup. Okay. So that is

called an initial coin offering. So I'm able to sell these tokens. And you buy these tokens hoping that there will be a utility value. That is called an initial coin offering. Now there are two kinds of offerings there. There is something called a utility token. And then there is something called a security token. A utility token by definition is for utility. Just like I can. I

gave an example here of when you have nine of these movie tickets or tokens, you get the 10th movie free. Similarly, there might be a frequent flyer mile token. The mile token might say for every 10,000 miles or 100,000 miles you have, you will get a $300 roundtrip ticket free. So now we have created a mile token. Right. That's also utility token. So these are utilities.

They are based on usage. They're not giving you a share of the profits of American Airlines or United Airlines or some of the airline company. However, if you did want to do that, let's say you said, oh, but I was giving out profit share tokens before. I was giving out debt offerings before or some other kind of offerings which are deemed as securities by United States

and countries like that. So those are called security token offerings. Now you're giving me a token that actually reflects maybe a part ownership just like Apple shares or Microsoft shares or Netflix shares. So your issuing tokens, which are called security token offerings. So if I buy that, maybe I own a piece of debt or I own a piece of the company that you're issuing, which means

I have a piece of ownership, which means I can lay claim to a piece of the profits. Okay. Now, United States has actual regulations called reg a reg a plus reg D reg as you can Google all of these and figure out what they mean. And we will also be covering each of these down the road in one of the episodes. So all of these are

ways in which you can legally offer a security token offering. Right. Much of the regulations are regulatory related battles going on with the SEC coming down hard on some companies is they're saying, Hey, you already had regulations that have been laid out. Why don't you follow them? Why do you want to violate them by launching this unknown thing called initial coin offering and most of which

are illegitimate ways of selling ownership in your company. Most of the tokens that are sold, whether you call them a utility token or you call them a security token, the SEC in United States, pretty much deems all of the utility tokens as a security token. Why is that there is this thing called the famous hobby test and I am no lawyer, but from what I understand,

if I am investing money into a company, whether I buy a utility token or a security token does not matter. And those utility tokens, I'm buying them for 10 cents a piece. Why? I'm hoping the price will go up to a dollar next year. So I'm investing with the hope of making profit. That's one of the things. And the second thing is, that profit of increasing

the value from 10 cents to one dollar is based on the effort of a third party. I'm not putting in any sweat equity. I'm not doing any work for that. But the company that I'm investing into is doing all the work to make sure my 10 cents becomes one dollar over the next one year. So those two elements, there might be more, but from what I

understand as a non lawyer, that is not legal advice, by the way. That is the hobby test. So if you make sure that, okay. That is the security according to hobby test. If you have invested into something with the hope of making money based on a third party's effort, that is, you know, a security token, whether you call it a utility or not, SEC does not

care. Okay. So bottom line is, and of course, I see us are legal in some countries, more and more companies in US that are raising money through tokens are going to STO route, the security token offering, rather than initial coin offering. Right. But bottom line is many of the mechanics of how these are built and designed are going to be pretty similar. That's why we're going

to be covering most of this information in bits and pieces, in digestible elements with you over the next 100 to 100 episodes. Okay. So we're going to cover things like what is an initial coin offering. We'll keep delving into greater depth. Maybe we'll cover some of the statistics. How much money has been raised in ICOS? Last year versus this year. And we're also going to cover

maybe what are the top most prominent ICOS that came up? Then we'll figure out, do you need to do an ICU? What kind of an ICU, which country are you in? What are the regulations there? Should you do an ICU or a security token offering? Now that you decided, what is the business plan? Typically called a white paper. You also need a pitch deck. Or do

you need an ICU website? Do you have a management team? Do you have a product in the market? Is the product generating revenues? Has it been tested? Do you have an advisory team? How are you planning to raise the money? What are the stages? Who has experience in doing that? Who can build this block chain and issue the tokens for you? Who can do the marketing

and community building and PR so that you're generating enough interest so people come and buy your tokens? How do you make sure you're successful in your token sale? And what is enough money? How do you determine how much money you want to raise? And what is this soft cap? How do you stay compliant with all the regulations that are happening? How do you choose a law

firm? So what are all the services organizations? How much money do you need to run this ICU and to end? So these are the kinds of topics we want to share with you. Why? Because we did not find one comprehensive place where these are explained in common English in a simple way. Maybe you're driving down the road in your car and listening to this podcast and

low and behold in a few weeks, or a few days or a weekend, like I said, hopefully you're not driving the whole weekend. But you're listening to all these episodes back to back and voila, you got it all down. Pat. So you understand by the end of it, you have a broad idea and hopefully a clear idea about what an ICU is. And I'm hoping this,

this end to end ICU series will help you get there to understanding what an ICU is and should you do an ICU? And if so, how should you do an ICU? How much do you need to spend? How do you plan for it? Who are the service providers you need to engage? So our goal is to answer all of those questions over the next several episodes.

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