STO

Security Token Offering, or STO, is when an investor is issued with a crypto coin or security token that represents their investment similar to that of an initial coin offering (ICO). However, the difference between STO and ICO is that the security token represents an investment contract into an underlying investment asset, such as shares, bonds, etc. A security can be defined as a “fungible, negotiable financial instrument that holds some type of monetary value.” A security token issued to the investors therefore represents the ownership information of the investment product, which is recorded on a blockchain. Similar to investing in traditional stocks where ownership information is written on a document and a share certificate is issued to the investor, STO process involves recording the transaction on a blockchain and instead of a share certificate, a token is issued. Therefore, an STO is often considered as a mix of the traditional initial public offering (IPO) and an initial coin offering (ICO) which allows company to raise funds through a much more efficient and secured blockchain process.

While the process is the same, STOs are governed by regulations and the security tokens represent a contractual ownership of the asset(s). On the other hand, most ICOs structured their coins as utility tokens that allow holders to use and/or trade them on developed platform, therefore, such platforms are not required to register or comply with the strict governance of regulator bodies as the STOs. The barrier to entry for companies to launch STOs are much higher as they will need to incur a lot of time and cost for upfront compliance related and due diligence work. Furthermore, it is more challenging to launch an STO as the governing securities laws are much stricter and would often involve accredited investors who have themselves passed certain requirements.

Again, the process of an STO is the same as an IPO, except instead of issuing a traditional share certificate, STOs issue tokens on a blockchain. Whereas IPOs are used for private companies that want to go public through the issuance of shares, STOs companies can tokenize company shares or any other assets such as paintings, real estates, investment funds, etc.

Comparing to an ICO, STOs are generally less risky since the regulatory bodies enforce transparency and accountability. A security token is backed by a real-world asset, which make is easier to determine the fair market value of the token, whereas pure utility tokens like those offer in an ICO, the value of the coins is much harder to determine. Comparing to an IPO, STOs are much cheaper as it does not require significant fees to lawyers and advisors, furthermore, the digital documentations also make the process much faster. Unlike both IPOs and ICOs, thanks to the process of tokenization, fractional ownership of assets is possible. For example, investors will be able to own one tenth of a painting or a real estate which normally will not be possible under the other two processes. In addition, the ability to trade 24/7 enhance the liquidity to the market.