Article by: David Gosselin
Not too long ago, as I sat on the 405 Freeway in traffic, the song “Video Killed the Radio Star” came on, a classic 80’s hit. While I really thought nothing of it at the time, the next day someone asked me what I thought was holding the Reg A+ industry back? I thought of that song immediately, because just as video killed the radio star in the 80’s, in 2018 I felt as ICO’s had killed the Reg A+ Star.
Reg A+ could use some minor improvements (a whole other topic), but there isn’t necessarily anything wrong with it other than it needs to be used by the right kind of company in the right kind of way to extract the most value from both the company and shareholder perspective. However, what I did realize and say, was that since the beginning of 2018, the biggest issue facing Reg A+ were Initial Coin Offerings (“ICO”s) which morphed into Security Token Offerings (“STO”s). Everyone wanted to do an STO, nobody has got one through the SEC as of yet, and what value do they really provide with current technology and regulatory regime? The ecosystem for STOs is still being created because it needs to be done with the blessing of regulators, rather than in the shadows.
Let me explain. Just when Reg A+ was starting to pick up momentum at the end of 2017, ICOs got hot because of the Bitcoin and Ether craze, and everyone said Reg A+, Reg CF and Reg D’s (506c) were perfect ways to raise an ICO in a legal manner. Hence the introduction of the STO, a replacement for the potentially illegal ICO. But to be realistic, really good companies usually don’t need ICOs or STOs to raise money. Just like in the early stages of Reg A+, the wrong kind of companies were using Reg A+ in the wrong way, or many of those companies were going to try to do an STO just to do an STO and not for any other reason. It was a buzzword that could get you funded. To make matters worse, the SEC has not shown a willingness to bless these offerings (ultimately probably a good thing), and even if they did, what is on the other side for STOs? The promise of alternative trading exchanges, liquidity, and tokens in circulation being used by every John or Jane is currently all pipe dreams and pixy dust. The regulators simply have not allowed these mechanisms to be used or approved as of yet.
Can STOs eventually be successful and useful…yes, absolutely. The ability to tokenize an asset or equity for potential liquidity in a private market does have usefulness. Ability to prove out ownership of a private security does provide usefulness, maybe even the biggest benefit of all. So many people talk about private offerings and the inability to get liquidity for 5-7 years, and the inability to deposit non-national exchange stocks into their brokerage account. This could potentially solve this issue assuming there is a liquid market (again a whole other topic) and an uncompromised blockchain stock ledger.
So just like in the 80’s when MTV and video killed the radio star, in 2018, ICOs/STOs have killed the Reg A+ star. Luckily, history tends to repeat itself. While video killed the radio star during the 80’s, 90’s and early 2000’s, with everyone watching video after video on MTV, here in 2018 video stars don’t really exist like they used to. In fact, while video is more popular than ever as a medium, most of us consume music solely through Spotify, Apple Music, Pandora, Sirius XM radio or plain old FM radio, never even seeing the associated video…if one exists. Music videos are still made, but are consumed more on YouTube than MTV, which means people have to seek them out rather than being presented with the new video of the day. In fact, MTV doesn’t even play videos much anymore. In the 2010’s radio has killed the video star.
So, if history repeats itself, the STO star will fade or morph into something that is more widely accepted and the Reg A+ star will once again reign supreme. Will it be 2019…who knows, but one of three things need to happen: either STOs need to go away (not likely), STOs need to be legitimized with regulation (more likely), or good companies need to see the value and power Reg A+ has to create and retain an affinity group thereby drowning out the noise of the STO. Either way, it should be an interesting ride.