Companies and startups want to have their projects funded with minimal bureaucracy and glitches. They often turn to people looking for a profitable investment to fund their projects. Cryptocurrency and blockchain technology are breaking the barriers between investors and companies through innovations like STOs. Understanding STOs will help you invest more effectively.
A security token offering, or STO, is a fungible scheme where an investor acquires a crypto token that represents their investment. The investment is recorded securely on blockchain technology.
Put simply, an STO is similar to an investment in traditional stocks, like an initial public offering (IPO). However, rather than storing your ownership information in a PDF, the documentation is recorded on a blockchain and issued as a token.
A security token offering is also comparable to an initial coin offering (ICO). But STO tokens actually denote an investment contract into a project or investment asset — bonds, funds, stocks, real estate investment trusts (REIT), or others. In contrast, with an ICO, you are buying into the company’s coin and hoping that it will go up in value.
STOs may provide a middle ground between initial public offerings (IPO) and initial coin offerings (ICO) as they combine some features of each. This article will explain what security token offerings are and compare IPOs vs. STOs vs. ICOs.
Security tokens aim to generate money for startups or companies to execute a project. Although both ICOs and IPOs also work to generate funds for companies or startups, STOs extend additional opportunities for companies to raise funds. Wall Street, venture capitalists, and Silicon Valley cannot raise enough funds for the over 650,000 companies established yearly in the United States alone. Hence, startups are looking beyond those means to raise funds.
With an STO, you can invest in a regulated fundraising scheme by purchasing stocks and shares with little to no risk of falling prey to swindlers. Thus, in the next few years, STOs may become a prime method for companies to secure investors and raise capital.
Companies also use STOs to secure existing traditional or physical assets. Tokenizing real-world assets, also known as crypto-fractionalization, is another possible use for security tokens with a lot of potential.
STO vs. ICO: What’s the Difference?
Security token offerings (STO) and initial coin offerings (ICO) are similar ways to generate funds. Both models distribute coins or tokens that represent a project or investment. However, ICOs are primarily used to raise funds for tech projects while STOs are used chiefly for financial services. Another difference is the features of the tokens.
ICOs are utility tokens that grant you access to decentralized apps where the tokens are intended to be used. STOs, on the other hand, are backed by specific assets and in compliance with the government’s regulations.
Because they follow government regulations, STOs require particular investment contracts, which make them more complicated for companies and investors to use. In contrast, investing in ICOs has little to no barrier because the general public can participate.
The process for creating ICOs is straightforward. Startups simply develop the ICO and create a campaign to attract investors. ICOs are short-term investments with specific deadlines for investors to buy the coins. The ICO tokens are bought and distributed to investors via automated smart contracts. The startup team can then use the funds acquired as they choose to advance their project.
The STO process is more complicated. Before a company makes a campaign for an STO, they should have a scalable business; this makes an STO less risky for investors. Regulatory bodies thoroughly assess the projects before the tokenization of the assets and involvement is limited to certain accredited investors.
Of course, the added steps and regulations in the STO process also make it a more secure investment. This is another factor to consider when comparing a security token offering vs. initial coin offering.
IPO vs. STO: What’s the Difference?
Again, an IPO is similar to an STO. Traditional companies use IPOs to go public and give shares to investors. The primary difference is that IPOs issue digitized certificates like PDFs while STOs deliver tokens on blockchain technology.
Another important difference is that IPOs cost more to execute than STOs. IPO companies pay an exorbitant fee for brokerage and investment banking to reach influential investors. STOs only require funds for lawyers and advisors. There are no extra expenses to enter the investment market. The post offering of STOs is also straightforward compared to IPOs.
Despite these advantages of STOs, IPOs remain the more popular investment. In 2017, ICOs and STOs generated a combined total of $5.6 billion while IPOs generated $36 billion in the same time frame. While ICOs and STOs are not going to replace IPOs, they are viable alternatives. STOs, which are regulated and compliant with legislation, are becoming a go-to choice for startups.
More Advantages and Disadvantages of STOs
- STOs are fundraising schemes with lower risks than ICOs and IPOs because they are regulated and backed by real-world assets.
- Unlike IPOs, which involve middlemen such as brokerages and banks, STOs eliminate the need for mediators.
- Instead of paying an exorbitant fee to hire lawyers, the smart contracts used by STOs reduce the need for lawyers.
- You can trade STO tokens at any time of the day. Thus, there is much flexibility.
- Non-accredited investors cannot participate in STOs. To become an accredited investor in the U.S., you must have a minimum of $1 million in the bank or earn $200,000 per year. Thus, only wealthy investors can access STOs.
- Due to the government’s regulations, utility tokens are cheaper than STOs.
- Unlike other coins with no secondary market trading restrictions, STOs can be restricted.
- Security tokens are only traded between accredited investors for a specified period once the STO is running. It has a time-lock mechanism.
How Can I Invest in an STO?
Accredited investors find investing in STOs relatively easy. Getting accredited is the first step. To participate in STOs, you need to take the following steps:
- Decide on the STO to invest in
- Find the company and the regulatory platform offering the STO
- Sign-up and verify your identity on the STO platform provided by the company
- The regulatory platform may check your AML and KYC
- You need a wallet compatible with the STO platform to make purchases
- Once your account is verified, you can make your purchase
Regulation of STOs
As mentioned, STOs are more regulated than many other investments. Governments of some countries have regulated or are about to control STOs. For instance, the Securities and Exchange Commission in the United States regulated STOs and categorized them under the Decentralized Autonomous Organization (DOA) in 2017.
The United Kingdom’s Financial Conduct Authority (FCA) listed STOs under its FCA’s regulations and released its Guidance on Crypto Assets. So, the FCA’s guidance on cryptoassets now applies to STOs. Switzerland’s Financial Market Supervisory Authority (FINMA) has a similar guideline. Several other countries are on the brink of regulating STOs.
The Top Security Offerings
Numerous STO tokens are available, and the US is leading in the STO niche with SPiCE Vc, Protos, Blockchain Capital, Lottery.com, and 22x Fund. Upcoming STOs include Sygnum from Switzerland and numerous others coming to launch in 2022. The StormGain platform enables you to track these STOs.
STOs are regulated fundraising schemes with tokens that represent real-world assets. STOs combine many of the features of ICOs and IPOs and have some additional benefits. Due to their regulation, there is less risk of encountering fraud when investing in STOs. Investing in STOs is easy once you are an accredited investor.
However, there are also some drawbacks to STOs. ICO tokens are cheaper than STO tokens because of the government regulation of the latter. STOs are also far less common than IPOs. However, platforms including Polymath, Securitize, Swarm, Securrency, and Harbor have hosted and issued STOs. Understanding STOs and their benefits and drawbacks will help you invest in the best possible manner.
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