During the ICO era, a countless number of projects managed to rapidly raise capital in a short period of time. You probably know about those that managed to raise capital and just disappeared, never building a product promised to investors while their utility tokens became a burden for investors. It’s hard to admit but there is nothing you can do to change the historical outcome.
But what about those that fulfilled their promises, launched the product and built a working business? Well, in their case everything is not exactly fruitful as well:
- Token holders are not treated as investors from the legal point of view, therefore there are still no investor protection mechanisms in place;
- Companies face complications while attracting new investors and business partners;
- There is a high risk of regulatory oversight which might include penalties and fines;
- Token price keeps sinking or stays lower than the initial lowering price due to the stigma of ICO while business is growing.
To solve the problems indicated above, there is a solution that will benefit both companies and investors — Utility-to-Security Swap.
What is U2S
The name is self-explanatory, the swap allows companies to convert previously issued utility tokens into tokenized assets (securities, equities), providing the required level of compliance to both companies and investors. Along with that, the price of tokenized assets is tied strictly to the key financial indicators of the company and does not depend on crypto market fluctuations.
So far, the framework of ICOs has proven to be more beneficial for companies than for investors. While the main idea of the swap lies in restoring the balance of interests. Investors become full-fledged beneficiaries of the company, while the company is able to build a compliant “company-shareholder" relationship model, strengthens its reputation in the market and helps raise new capital both from institutional and retail investors.
As token holders become full-fledged beneficiaries of the company, they may be provided with a wide range of corporate rights including profit-sharing rights, voting rights, rights to sue for wrongful acts and much more.
The same goes for the project’s obligations before the investors, as they transform and become precise and understandable while the regulatory risks associated with utility tokens are eliminated.
The First Real U2S Case
The first client that has opted to go with the Swap on was Karma SME Loans Exchange. They've managed to build working business after their ICO, however, the token price kept sinking.
Karma business is growing 40% each month for 10 months in a row. We’re on our path to self-sustainability and operational profitability. However, due to the major fall of the crypto market, the price of an asset offered during the ICO has significantly decreased.
There is a paradoxical situation: the business is growing at a tremendous pace, while investors can’t benefit from our growth. To heal this situation, we’ve decided to perform a utility-to-security swap.
— George Goognin, Founder and Board Member of Karma.
After the Swap, Karma will be able to build the “company-shareholder” model providing a clear and understandable legal ground for their business, hence lowering the risk of government interference and excessive regulatory oversight.
Along with that, it helps companies to increase reputation, since they are no longer hidden in the shadows. A massive benefit since there is no chance that assets will be terminated.
Simultaneously with increased credibility, the trust of current token holders (you can call them investors now) is expected to rise rapidly. They no longer need to blindly trust the project, since their relations are now regulated by agreement.
Right now companies that previously raised capital via ICO are unable to attract additional funding. After the swap, the situation changes drastically, as companies complete a legal framework for additional growth, funding, possible exit strategies or M&A interest.
Outside of the benefits indicated above, there is one more significant benefit. Unlike utility tokens, tokenized securities don’t require the development of special use cases for their implementation.
So, any ICO project can just convert their utility tokens to securities?
Unfortunately not, no. As mentioned at the beginning of the article, it is not every project that can overcome the downfall of ICOs. Outside of having a successful ICO in the past:
1) a project must have a working business or business model that projects to bring revenue in the future;
2) a project must have a community of active token holders;
3) a token can’t be used as a fuel on the public blockchain.
2) a project must have a community of active token holders;
3) a token can’t be used as a fuel on the public blockchain.
Have a great read and leave your thoughts about the Utility-to-Security model.