Security Token Offerings (STOs) are a relatively new form of raising capital through blockchain and cryptocurrency.
STOs are legal and regulated, making them a safe way for companies to acquire funding.
What Is a Security Token Offering?
Security token offerings are a unique blend of digital tokens, security tokens, and conventional equity.
Security token offerings enable any investor to buy into any assetfrom cryptocurrencies to corporate bonds or real estate.
Security token offerings have been growing as more investors realize thebenefits of blockchain technology.
Image Credit: James Donald/Flickr
How Does a Security Token Offering Work?
Security token offerings are issued on the blockchain with proper regulation by appropriate authorities.
Investors in a security token offering receive shares in companies deployed on blockchain technology.
Instead, issuers can build a new business or deploy an already existing one with thehelp of smart contracts.
These smart contracts are self-executing legal agreements between two parties, usually stored on public blockchains.
This reduces the friction involved in transactions, such as price fluctuations, fraud, and regulatory compliance problems.
Security tokens are also used in crypto-fractionalization, where existing real-world assets are secured through tokenization.
Real-world assets such as real estate, capital markets, commodities, and equity funds can all be tokenized.
It’s important to note that security token offerings technically offer the same securities available on traditional investment platforms.
Tokenization does not in any way change these underlying securities.
Rather, STOs provide a new way of approaching investments.
It offers a platform that allows verified investors to participate in securities token offerings.
Security Token Offering (STO) vs. ICOs were designed to raise capital in an unregulated space.
This led to numerous fraudulent ICOs being deployed to fleece unknowing investors.
A 2018 report by ICO advisory firmSatis Groupsaid almost 80% of ICOs were “identified scams.”
STOs were introduced with proper regulatory governance.
STOs are registered with the appropriate regulatory bodies, meet all legal approvals, and are 100% legal.
They require the issuing company to do significant regulatory and compliance work before the token offering.
ICOs have no barrier to entry, while only fully compliant companies can issue security tokens.
STOs are also less prone to speculation and market manipulation than ICOs.
Security tokens are more cost-effective than initial public offerings.
The fractionalization of assets increases accessibility by dividing them into smaller units which more investors can assess.
STOs undergo strict compliance and regulation that slow down the security token process.
Investor regulations in certain countries also limit who can participate in STOs.
This reduces the investor pool for the STO and lowers opportunities that potential investors can assess.
STOs can also be expensive due to the administrative checks needed before the security token can be issued.
The possibilities for investors are endless with the rise of security token exchanges, platforms, and marketplaces.
This provides investors with a vast variety of security tokens readily available globally.
