IPO, ICO, STO - oh my!


These terms keep coming up, and lots of people ask what they mean. Here’s a brief explainer:

Security: a legal term that includes things like company bonds and company stocks as traded on the bond markets and stock markets. It refers to a certificate which says the buyer owns credit (a bond) or owns a fraction of the company (a stock): the certificate “secures” that ownership.

IPO: Initial Public Offering. This refers to the first time shares of stock in a company are offered for sale to the public in order to raise funds for the company. These are, by definition, Securities.

Most governments have strict regulations around Securities, and most of those have to do with registration and honest disclosure of facts about the companies. In addition, many governments (including the United States) have strict laws about who can buy stocks in an IPO - purchasers must be “Accredited Investors.” The stated purpose of these laws is to ensure that the people buying risky investments are either professionals who understand the risks, or else are people who are wealthy enough to lose a large sum of money without becoming destitute.

People who agree with these laws believe they protect consumers from losing money on risky investments. People who disagree with these laws believe they prevent people who aren’t already wealthy from being able to invest their money wherever they want.

ICO: Initial Coin Offering. The refers to the first time a crypto is offered for sale to the public. Some people had the impression that because cryptos are not certificates, like stocks and bonds, that they won’t fall under Securities laws. The regulators have made clear, this year, that cryptos can represent Securities, and that when they do, they are subject to the same Securities laws as everything else.

STO: Security Token Offering: This is a public sale of a crypto token which explicitly says that it is a Security. This implies it will fall under Securities laws and that the offering will comply with those laws and regulations.

Utility Token: A crypto which is used to take advantage of some sort of service (it has Utility) but which does not represent an investment of money owed (a bond) or purcashed company ownership (a stock.) In other words, it’s a useful token which is not a Security.

SAFT: Simple Agreement for Future Tokens. The SAFT is an attempt to create a legal way to raise money by selling a token which is a Security, but which is expected to later become a Utility. The idea is that during the fundraising phase, before there’s an actual project worth a working product, the tokens qualify as Securities and must comply with Securities laws. Later, when there’s a working product, and the public can buy tokens simply to use the product, those tokens are then simple Utility Tokens, and Securities laws would no longer apply. We don’t yet know if authorities will agree with the theoretical SAFT framework.

What about us?

So, where do things like Bitcoin (BTC) and Bitcoin Gold (BTG) fall? We think it’s clear they are pure cryptocurrencies. They can be seen as currencies or commodities, but not securities. You can see a detailed discussion here: