The initial coin offering (ICO) is an innovative crowdfunding model that gives a possibility startups to come over traditional early seed investment. However, not all ICOs are created in the same way; in fact, there are only three types of tokens produced through these crowd sales.
Investors often try to understand in which category an ICO token falls into, that is is why Strategic Coin offers educational information and deep ICO research reports to help investors make informed financial decisions. Here in this article, we explain the major categories of crypto tokens:
One of the most perspective applications of smart contracts is the potential for startups to produce stock – or equity tokens – through initial coin offerings. This will benefit startups because the barrier to entry into the financial markets will be much lower than in the past. It makes stock trading more accessible to the average investor and allows shareholders to play a more active role in corporate governance since voting can be conducted transparently through the blockchain.
Because of the current lack of regulatory management, only a few startups tried to conduct equity token sales. However, recently a bill has been passed that gives to companies to maintain a list of shareholder names on a blockchain rather than conventional methods, which will enable blockchain-based stock trading. Consequently, it is will be only a question of time before equity tokens play a central role in the crypto finance industry.
A security is a broad classification that refers to any type of tradable asset. Through ICOs, investors have access to a great variety of securities tokens, beginning from coins redeemable for precious metals to tokens supported by real estate.
In the United States, these token sales and investments are regulated by SEC securities rules. It was established the main rules of financial arrangement included an investment contract. As it was described an agreement is a security if it includes “an investment of money. And a common enterprise. With the expectation of profit, primarily from the benefits from others.”
We can suppose, that most of the tokens are securities because the majority of ICO participants consider crowd sales as investment possibilities. But if a token does not meet the three rules of the Howey test, it may happen to the type of a “utility token”. Utility tokens, which can be called app coins or app tokens, provide users with access to a product or service.
For example, ICO participants received tokens that they can use to purchase storage space from Filecoin as soon as the service has run.
Because the total supply is fixed, utility tokens may be appreciated through the time if an inquiry into the product or service increases. But, investors should be very careful to startups that describe their token as a utility or app coin but also market it as an investment because it is like that regulators will look through the asset a security.
It is necessary to notice that “utility token” is an organizational difference – not a legal one. The SEC has not given official rules on utility tokens, so there are no sure that the industry regulates by securities rules.