STO is an acronym for Security Token Offering. It is like an ICO (Initial Coin Offering) wherein investors exchange money for coins or tokens in place of their investment. Be as that may, STOs are different in the sense that they take it further and distribute digital assets under the securities status category. They are connected to subliminal investment assets in a way likable to stocks or real estate investment trust (REIT). That way, token offerings distribute securities.
The tokens are fungible, negotiable instruments of financing with money values. They are very much like a part of a real estate property or firm. One thing about security tokens is that they are not bought, sold, or bartered on regular token exchanges. Platforms that want to deal with them must completely adhere to regulations, such as extensive investigations into token listings. Other criteria are looking into their data sharing and onboarding procedures. As such, security tokens trade only on specialized exchanges.
What Are The Benefits Of STOs?
STO is an attempt made by founders who want to issue a token offering that is compliant with legislation. That is dependent on the particular geographies from which the investment is being taken. This could translate into registering the STO with local regulators, doing so as a securities offering. During the ICO mania of between 2017 and 2018, many token issuers collected money for their tokens without any economic rights. They also did not need value or had to regard established securities laws.
STOs are designed to be a regulatory compliant alternative to regular token sales. Their purpose is to correct perceived inequalities on the side of the investor. This includes granting security token holder rights to dividends as well as other revenue streams that have been predefined. To the issuers, STOs are as well of great benefit. This is because there isn’t any need to proclaim that the tokens do not have intrinsic economic value.
Also, they ordinarily have clearly defined stakeholder obligations concerning the token distribution, secondary trades, and issuance procedure. However, the most important thing is that security tokens and STOs enable organizations to formulate a fresh set of stakeholders with novel debt permutations, contributors, or equity roles. So doing, the tokens are considered an upgrade over ICOs. They address the basic rules governing utility token sales and can improve conventional securities.
STOs are good for blockchain adoption, especially in the long run. Because they are legally compliant, they are perceived to be less or a risk, hereby encouraging institutional investors to come on board. And, when these investors start to invest more, the market becomes less susceptible to volatility, the further of which will allow the adoption of blockchain to grow.
Difference Between ICO And STO
Well, the process observed in both is the same. However, token characteristics are not. Asset-backed STOs dance to the tune of regulatory governance. But a good number of ICOs position their coins as utility tokens that offer users access to the traditional platform or decentralized apps (DApps). As the arguments have it, the purpose of the coin is for usage, not for investment.
As such, ICO platforms circumvent certain legal systems and do not need to go through a registration process or play by the rules of hard-faced governance of regulatory organizations. Therefore, the stopper to entry for firms to launch their ICO is much lower. This is because they need not stress themselves with the entirety of upfront compliance tasks. Through the same process, they are as well able to sell their coins - raising funds - to the general public.
Read a comprehensive evaluation of STOs and ICOs
Difference With IPO
IPOs and STOs have the same process, but the latter issues token in a blockchain while the former deals with share certificates on traditional markets. Both are regulated offerings, but IPOs are only used for private firms that want to go public. Through the process, they raise funds from accredited investors. In the case of STOS, tokens that represent a share of an underlying asset are issued on the blockchain to accredited investors, Well, they can be company shares, but due to tokenization, they can be any asset expected to bring profit.
Speaking in terms of effectiveness, STOs surpass IPOs. With the latter, businesses typically pay higher brokerage and investment banking fees in order to enter deeper investors’ bases. STOs yet involve paying lawyers and advisors; however, they offer more straightforward access to the investment market. Therefore, they typically will not have to pay huge fees to investment banks or brokerages alike. STOs’ post-offering administration is as well less cumbersome and more affordable compared to conventional IPOs.
Challenges Of STO
To a very large extent, the biggest drawback faced by STO platforms is increased regulation. Firstly, this places a heavier administrative burden on their chests. Secondly, the processes must be set up for tracking ownership, custodianship, exchange approvals, AML, and KYC (Know Your Customer), among others. These are to make sure they comply with the essential securities laws. Despite the fact that the process is more affordable compared to IPOs, the additional upfront work actually makes it more costly. This also raises the entry barrier when compared to utility ICOs.
Also, by eliminating some of the middlemen such as brokerages, lawyers, and even banks, the company now has to take the responsibility of performing these functions. This further increases the burden of administration. In some jurisdictions, there are certain regulations whose nature or degree might limit who gets to invest in the STO. By calling such shots, the overall investor pool for the company will be reduced, and that is so not good news for anyone.
In the U.S, STOs are made for only accredited investors. In spite of that, if you live outside America, the accredited investor rule will not apply to you. That means you can participate in a variety of STOs, most of them. Be as that may, more specific restrictions could exist, so a business or investor needs to be sure to find out what their local jurisdiction demands before eyeing the big prize.