What Are Security Token Offerings?
Understanding the newest wave in the crypto world.
Security Token Offerings (STOs)
We’ve heard of ICOs, and now there’s a new up-and-coming model for crowd sales — Security Token Offerings. This latest fundraising model offers security tokens in exchange for partial equity of a company. Here are some of the key features of security tokens that are making them increasingly popular in the crypto-space.
Some Properties of Security Tokens
They are Regulated
Like other securities (bonds, stocks etc), security tokens are regulated by competent authorities and are therefore compliant. For investors, this means that there is legal assurance and a secure layer of investment protection as projects issuing securities have more legal clarity and credibility. Legal clarity also ensures that projects can continue their development on stable grounds.
Take note that there is no one universal law that regulates security tokens. Instead, these tokens are regulated by different laws, depending on the jurisdiction they fall under. So, security tokens in America need to adhere the regulatory framework used by the U.S. Securities and Exchange Commission (SEC), security tokens within Malta need to comply with the Virtual Financial Asset Act (VFAA), and so on and so forth.
They Represent Ownership
STOs offer tokens that are backed by tangible assets in exchange for funds for a start-up. They can be considered legal binding investment contracts. Security tokens can be utilised to issue company shares, meaningful voting rights and even profits. The smart contracts powering the security tokens can be programmed to represent different types of rights for the token holder.
They can Improve Investor Confidence
2018 was a brutal year for ICO projects and investors alike. As the market became more saturated and competition increased, profits dwindled. Portfolios went down. And because ICO companies are not legally obliged to account to their investors, unprotected investors suffered the losses acutely. With the added concern of certain regulatory bodies clamping down on ICO companies (where even ICO token holders may be held partially responsible for partaking in token sales), it was inevitable that investors and skeptics grew wary of investing in cryptocurrencies and digital assets.
With the introduction of the STO model, where STOs are legally obliged to do well by their investors and tokens are backed by tangible equity, investor confidence may improve significantly.
They can be Traded
Securities are tradable financial assets, and it goes without saying that security tokens can also be used as an investment vehicle for the holders of the tokens. However, security tokens can only be traded on regulated securities exchanges or exchanges that have been granted the license to facilitate token trading.
They can still have Utility
In the simplest of terms, security tokens are essentially compliant utility tokens. This means that security tokens can not only represent ownership, but also be used as native tokens to power an ecosystem, while accumulating value as their projects grows.
They can Bring High Liquidity to Traditionally Illiquid Assets
With the option of tokenising traditional assets comes the potential to unify traditional asset trading on a single platform. Coupled with the idea of fractionalised ownership, even traditionally illiquid assets like real estate, collectibles like fine art and antiques, as well as certain types of options can all be tokenised, resulting in an extremely liquid market of security tokens.
They can Improve Current Traditional Financial Markets
With the regulatory frameworks and other major players of the space coming together, the infrastructure to support STOs is slowly but surely forming. Once traditional financial markets have adopted STOs, liquidity will not only improve, efficiency will as well. Markets will be open 24/7, across borders, enabling trades to take place anytime, anywhere.
Who Can Launch an STO?
ICO and STO models are often used by start-ups to raise funds for their projects. However, mature companies can also launch an STO as a liquidation event, or to enable fractionalised ownership of their assets.
Conclusion
2017 may have been the year for ICOs, but the collaborative efforts of regulatory bodies, exchanges, projects and other players are setting STOs on a trajectory of their own. Perhaps the unique properties of the STO model can allow projects to truly reach untapped potential of the space. More importantly, STOs allow anyone to be actively involved with the project that they have invested in, while ensuring that investors are not left unprotected.
While participating in an STO is very similar to that of an ICO (investors are offered tokens for funds to support a company in its goal of raising funds), there are definitely differences between the two models. To learn more about the differences between STOs and ICOs, click here.
All the best,
Min
