New to the crypto space and wondering what is a security token offering? It can be quite simple, yet complex to those who do not understand blockchain technology, so we’ve taken the liberty to give you a bit of insight.
In short, Security token offerings – or STOs – provide a different way for companies to raise additional capital. It is a regulated version of a token sale, offering peace of mind to investors. Despite the current outlook, the industry has its own set of challenges to address.
What exactly is a security token offering?
A security token offering or STO is a public offering where tokenized digital securities are sold to investors. These tokens are eventually traded on either cryptocurrency exchanges or security token exchanges.
Security tokens can be used to trade real-world financial assets – including, but not limited to, equities and fixed income – by leveraging blockchain technology to store and validate ownership of tokens.
As the term “security” is in the name, this form of raising capital is subject to regulation. For investors, this introduces an extra layer of safety and security. Currently, STOs are slowly starting to gain traction among smaller and mid-sized companies looking to secure additional financing.
A Brief History of STOs
To this date, there have been multiple ways of combining blockchain technology with token sales to raise capital. The security token offering model is the first instance where distributed ledger technology and regulated securities markets come together. It is a business model aimed at facilitating broader access to finance and investment vehicles.
Using blockchain technology has proven to be beneficial for STOs. It introduces disclosure, fairness, and market integrity while still supporting innovation and efficiency. Numerous companies and projects have explored this option so far, as can be seen on STO Market, which is a tool that keeps tabs on STOs on the market today.
Due to the many issues – financially and otherwise – incurred by the ICO business model, regulators and governments began to hone in on the role of cryptocurrencies for corporate funding. The International Organization of Securities Commissions has worked tirelessly to create a global cooperation on regulatory and supervisory approaches.
Compared to a few years ago regulators are more at ease where blockchain is concerned. As such, the STO business model was born; as it offers the benefits of blockchain within a regulated environment. As this concept gains more traction, it may prove to be a much bigger industry than any other form of blockchain-based capital raising has ever been.
What is the Difference between an STO and an IPO
On the surface, it is not difficult to see a certain correlation between an STO and an IPO. Both are public offerings, but that is where most of the similarities end.
An IPO – Initial Public Offering – revolves around shares of private corporations being offered to the public in a new stock issuance. This allows companies to raise capital, and is subject to very strict regulatory requirements by the SEC, or other similar agencies in different countries.
Moreover, there is a lot of work involved prior to organizing an IPO. Firms need to gauge demand, set an IPO price, and actively market their upcoming sale. This applies to an STO as well, but due to that process taking place online in full, it is far more accessible than a regular IPO.
A security token offering is open to the broader public. It does not require one to be a wealthy or institutional investor to participate. Attracting these retail investors has proven to be a powerful aspect of the STO industry. This is different from an IPO, where only institutional investors and banks make up the target audience.
How is an STO different from an ICO
Comparing an ICO with an STO is akin to comparing an orange to seawater. Both are incredibly different from one another. Their only common aspects include the use of blockchain technology, and creating a new digital token.
An STO is a token of value tied to a specific company. With an ICO, users were primarily buying the hype and hoping anonymous developers would build something amazing. In most cases, that never happened, resulting in an alarmingly high number of ICO scams. Initial Coin Offerings were never regulated either, whereas STOs are vetted thoroughly before a dime changes hands.
How is an STO Different from an IEO
The concept of an Initial Exchange Offering – or IEO – applies to sell cryptocurrency tokens on an exchange platform. That platform puts its reputation on the line by facilitating the sale and trading of these new tokens. Exchanges are, officially, tasked with checking credentials and determining if the project’s business model is viable.
In terms of public appeal and accessibility, the IEO model may offer some advantages over an STO. It is much easier to trust a reputable cryptocurrency exchange than seek out platforms specializing in the sale of security tokens. Convenience is a key point of focus, but it should not be overestimated either.
Obtaining access to a security token requires going through strict KYC and AML procedures. Most exchange partaking in IEOs require similar measures, but there will always be some minor differences in approach. With an STO, there is no guarantee of the token being listed on any exchange in the near future.
How are STOs regulated
As is always the case when making investments, regulatory measures will greatly differ from region to region. In Japan, new STO regulations were introduced a few months ago. In the European Union, there are still some uncertainties as to how all of this will be approached. Until an EU-wide regulation is put in place, the rules may differ from one country to the next.
Surprisingly, the United States is seemingly keeping close tabs on the regularization of STOs. The US Commodity Futures Trading Commission and US Securities and Exchange Commission are tasked with this process.
Key regulatory requirements to take into account for STOs include:
- Reg S
- Reg D
- Reg A+
- Reg CF
Different states may have some extra requirements, but that is somewhat to be expected.
What are the benefits of an STO
Compared to traditional securities the STO business model offers some interesting benefits. These can often be divided into the following categories:
- Better liquidity and no trading hours
- Broader accessibility (both geographically and in terms of investors)
- Embedded compliance coupled with blockchain technology
- Fractional ownership to boost portfolio diversification
Although all of the benefits above are all intriguing, the STO industry is not without its challenges. The complexity of tokenizing assets on a blockchain to meet regulatory requirements remains a key hurdle for a lot of companies.
Secondly, there are also the exchanges and their participation. Without secondary markets where STOs are traded, accessing the tokens will be difficult. Exchanges facilitating the trading of these assets need to adhere to very strict guidelines as well. For now, it seems unlikely that most existing crypto platforms will go the extra mile to provide exposure to security token offerings. That situation will, hopefully, change in the future.
Levolution marries the latest blockchain technology with a groundbreaking token offering platform. Overall, our mission is to aid blockchain startup companies in breaking through various barriers to entry. Relying on social incubation and the team’s core internal competencies, the Levolution platform aims to help companies attack these barriers almost effortlessly. This is done by sourcing innovative strategies from community members and token offering participants.
Through the Levolution platform, we will help those who want to leverage the value of token offerings, regardless of their experience. Levolution helps you build, develop, market, launch, and optimize your token offering project. Yes, every single step can be done on our platform.
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