There has been a lot of buzz and discussion in cryptocurrency around the emergence of Security Token Offerings (STOs). Security token offerings are being called the next step in token evolution. But why? What is it, and what are the benefits?
What Is An STO?
STO stands for security token offering. It is a process similar to an initial coin offering (ICO) where an investor exchanges money for coins or tokens representing their investment. When you buy tokens in an ICO, it gives you access to a specific network, platform, or service. However, unlike ICOs, STOs take it a step further and distribute tokens that are actual financial securities. Meaning, your tokens are backed by something tangible like the assets, profits, or revenue of the company.
Essentially, you’re taking something that today you have on paper, and you’re putting an electronic wrapper around it. The value of this electronic wrapper is that it makes security tokens easier to trade in a way that is fully compliant with the U.S. Securities and Exchange Commission (SEC) regulations.
What Are The Benefits Of An STO?
Security token offerings are beneficial for both the investor and issuer. They are a regulatory compliant alternative to regular token sales, aiming to correct inequalities on the investor side. And, on the issuer side, they help define stakeholder obligations such as token distribution, issuance procedures, and secondary trades.
Other advantages that come with regulated STOs are:
The ICO space is a little rocky, to the say the least. Numerous projects did not deliver what they promised and many people were scammed due to the lack of formal regulation. Unlike their ICO counterparts, STOs eliminate instances of fraud because they are treated like securities the moment they are created. This makes it much easier to evaluate projects you are considering investing in knowing they have been approved by the SEC, and are backed by real-world assets.
Fast & Cost Effective
Security token offerings remove the need for middlemen such as banks and brokerages, making them much more cost effective than traditional financial transactions. Smart contracts reduce the reliance on lawyers, while the blockchain reduces the need for paperwork, making the whole process not only cheaper but also faster. The process of buying and selling security tokens to accredited investors also tends to be a little bit fast thanks to automation of KYC and AML checks.
Security tokens are programmable by nature and enforced by smart contracts. STO issuers can set their own restrictions to the offering. For example, they may limit investments to regions where the STO is registered and compliant (like in the European Union). Moreover, investment lock-up periods, transfer restrictions, geographical boundaries, and more can all be programmed into the security token itself, eliminating the need for various intermediaries.
Borders or local regulations do not limit security tokens. Anyone with an internet connection and the desire to become an investor could participate. Companies can market their offerings in foreign markets, which helps them enter deeper funding pools and helps to increase brand awareness. The global nature of tokens also means a broader marketplace of buyers and sellers can interact post-STO, which can translate into higher market liquidity.
Large Number of Investors
Since issuers can now offer their deals to anyone on the internet, the investor base increases exponentially – a tremendous incentive for issuers.
Security tokens make it possible for you to divide underlying assets into smaller units, enabling fractional ownership. Fractional ownership can make it more affordable for some investors to contribute to your Security Token offering. It can also make the token easier to transfer on the secondary market. With fractional ownership, assets may achieve greater liquidity, potentially eliminating the need to discount when selling, and naturally increase the value of previously illiquid assets.
Security tokens will trade on specialized security exchanges so investors will have a convenient way to liquidate their assets.
The Bottom Line
Overall, security tokens are generally considered an improvement over ICOs. They address the fundamental flaws surrounding utility token sales and have the potential to improve traditional securities. The emergence of STOs are bringing more benefits to the investor – It’s more accessible, cost-effective, and a more secure way to invest. The ability to tokenize real-world assets is revolutionary and has the potential to change traditional and non-traditional markets. There’s no doubt the STO funding avenue offers an alluring alternative to private equity and venture capital funding. While there are many advantages to an STO, it is essential that this strategy makes sense for your business if you are considering a security token offering.
CrowdEngine offers an easy way for you to start utilizing crowdfunding portals as a way to launch a security token offering. Issuers that are creating an STO can use our white label or private label solution to create offerings such as a Reg S, Reg D, or Reg A+. With our white label or private label solutions, you can manage investors, track investments, track returns, and even disperse earnings. Contact us to learn more!
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Disclaimer: This information is provided to our clients and other friends for educational purposes only. CrowdEngine is not guaranteeing any information as reliable or accurate, and that it’s subject to change at any time. It should not be construed or relied upon as legal advice. Please contact your lawyer with respect to any of the matters discussed here.
This post was written by Lanli Pham