Security Token Offering
Security token offering (STO) is a type of fundraising that is performed with a company offering tokenized securities. The defining feature of security token offerings is in its definition. When ICOs are conducted with cryptocoins and IPOs with securities, STO is a combination of both.
When a company needs to gather either initial funding or some additional funding to perform a costly project, its team can choose one of the several paths. All those paths have their advantages and limitations.
For example, a company can issue its securities on the primary market to offer the assets to investors. In this way, the company will gain strong legal protection and positive public perception which will positively affect its investing climate. On the other hand, legal securities are simultaneously hard to develop and to list both from a legal and financial point of view. Financial markets are hard to access for small businesses even when such business have an experienced legal department.
Other options are also not ideal. Fundraising can be extremely unreliable and is not very useful for projects that have a narrow market niche. It also can’t provide a way to offer investors some constant and straightforward encouragement for their money.
Due to the flaws of the mentioned reasons, companies (especially startups) were anxious to find a new way to gain funding. ICO gained huge popularity when it first showed its utility. ICOs are easy to perform; they are efficient and can provide investors with a profit. Blockchain community often describes security tokens as a next step in the direction of an easy-to-do but technologically advanced way to gather initial funding.
Security Token Offering Process
A company needs to issue its security token to perform an STO. The services of developing and maintaining those tokens are offered by various companies, blockchain platforms, and even private developers.
Main article: Security token
Essentially, a security token is a cryptocurrency-based asset that derives its value from some other asset that it represents. For example, security tokens can represent real estate or gold but, most importantly, they can represent shares and securities or their alternative.
Similarly to the financial securities the tokens are fungible and negotiable instruments that have monetary value. It can represent an ownership position, a creditor relationship with either government or corporation or rights to ownership. It can also entitle investors to have various dividends, interests and voting rights.
Security tokens differ from classic securities in many ways.
Security token offering services
Multiple companies provide security token issuance. Some of the most popular are:
- The Pac Blockchain advisory company
- The Blockchain App Factory company
Some of the blockchain Security Token Offering platforms are:
STO is also possible to perform with some more popular and less specific blockchain platforms that support token issuance, like, for example, Ethereum, EOS, NEO, Cardano, and some others. However, this approach will require some more advanced technical work as those platforms are not as focused on STO as the previously mentioned ones.
A company can move in two directions when developing a brand new asset for the security token offering. The first way is to issue real-life securities and tokenize them via various platforms by using the distributed network as a repository for all the transactions.
Blockchain won’t allow the info about securities to become misleading and will provide it with secure and high-speed operating.
In this way, securities will be more manageable to provide to the initial investors and to offer its secure exchange. Besides, the potential investors will be sure that the company is firm in its plan and has some assurance in its future success. On the other hand, this approach still requires some prominent juridical work in order to develop the securities.
The other way is to issue such tokens that are securities by nature but not in the real-life representation. It means that for such assets, the value is in the encoded rules that those tokens abide by. Such STO tokens don’t require any legal work but need significant work on the technical side of development as all the rules should be defined precisely and correctly.
Anyway, both paths will provide the business issuing such securities with an efficient way to gather funding. The tokens will be likely listed on various exchanges and sold during the security token offering of the company. Investors will have a robust and stable way to both store and transfer their ownership rights over the assets.
STO vs ICO
STO and ICO differ in several ways, but the most important one comes from the assets generated within the process.
STO vs. ICO provides a different type of asset to invest in. ICO uses cryptocurrency coins – blockchain-based minable or stakable assets that are useless outside the blockchain and have their value in the precise technology behind the blockchain.
STOs, on the other hand, offer security-like assets that are either placed entirely within the legal framework or have hardcoded value by the predetermined terms. Some STOs are registered with the Securities and Exchange Commission (SEC), meaning 100% legal nature of the process. Additionally, STOs don’t require specific blockchain to be active, the ledger of any given STO can be moved from one network to another.
Another significant difference is in the financial behaviour of the issued assets. ICO’s coins are exchanged within the highly volatile and unpredictable cryptocurrency market when investors traded STO’s various platforms and hand-to-hand between the investors (and also on the crypto exchanges).
Mentioned differences simultaneously mean that ICO vs. STO offers more promising assets that can grow in price tenfold when security tokens are more stable and secure choice. While the law protects some STOs, the possibility of new government regulations is endangering the future of many ICOs.
STO lists are provided by such services as, for example, ICOmarks and STOscope.
Some of the famous STOs were performed by:
- Neufund – asset tokenization platform powered by its inherent Neumark cryptocurrency.
- The real estate project called Aspen Digital
- The Blockchain Capital venture capital firm.
- The Elio Motors manufacturing firm
- World’s Most Affordable STO Development Solution Provider
- Coinsutra: Sudhir Khatwani – A Look At The Top 5 Security Token Issuance Platforms
- Investopedia.com: Howey Test
- Sera Akinci: ICO vs. STO
- Cryptodigestnews.com: Security Tokens vs. Utility Tokens — How different are they?
- Blockgeeks.com: What are security tokens?
- Medium.com: Argon Group – 8 Important Things To Know About Security Tokens / Token Regulation