How To Evaluate STO: Factors To Consider
By ROKKEX on Altcoin Academy
With the demise of ICOs, startups are exploring new avenues of raising funds. This zest has led to the birth of Security Token Offering (STO) as a way to avoid getting into crosshairs with the SEC. The market has immense advantages: fractional accessibility, increased liquidity, lower issuance fees, deeper penetration to the target audience, and greater market efficiency. There is no wonder that STO is becoming popular globally as an alternative way to raise funds for companies and startups alike.
Being a new phenomenon, most investors are confused about how to choose the right STO and to what factors pay attention. ROKKEX decided to figure out the matter and define the points according to which every STO should be evaluated.
What is STO?
Just a quick reminder. STO (Security Token Offering) intends to issue digital assets in full compliance with the requirements of securities law. You might be interested in 10 FAQ about STO.
There are specific conditions under which tokens are deemed to be a security token. So tokens representing or giving the right to
- equity shares in a company/enterprise;
- a share in profit or ownership in a company;
- a loan or other debt obligations.
The list above is not exhaustive, and what constitutes a security token may differ among jurisdictions.
Factors to Consider When Participating in STO
The main question is whether or not the product will solve a significant problem? It’s incredible how many tokens are useless because the answer to this question is no.
If the answer is yes, then you should evaluate the scale of the problem.
- What are the pain points?
- How big is the addressable market?
- Can a profitable business be built based on the problem?
Formal research methodologies like industry analysis, SWOT analysis, mapping the value chain of the business, Porter’s Five Forces Analysis are helpful here.
Type of Security Token
A security token is deemed security, so the asset is a subject of evaluation as well. Do you remember that not all security tokens are the same?
For simplicity, it’s worth to divide security tokens into two categories:
1. Tokenized security as a token wrapper around existing security.
It’s not a new product but a new distribution channel aimed at enhancing accessibility and liquidity. The regulator already approves such token, and all the necessary information is available.
2. Security token as a new product.
Payable dividends influence the value of these tokens, and they provide with rights associated with shares. Profits, voting features, and other features are programmable into a smart contract. The token holder rights are protected.
Leadership & Governance (Team)
If you thought Team mattered in ICOs, they matter 100 times more in STO. Who are the people conducting STO? What are their present/past credentials? Do they have related blockchain experience?
The Team should be exceptional technically, inclusive, transparent, objective, and capable of fostering a vibrant global community.
Equally important would be ‘governance.’ Being under the close attention of the SEC, by default, calls for some transparency, and it is not something one can evade.
Blockchain-based company is different from traditional companies, where founders build a great product without worrying much about transparency or encouraging a healthy community.
Investors need to carefully assess what they are getting in return for their investments. What company is issuing security tokens? Commonly, a company is registered in low tax offshore jurisdiction and actual operations located elsewhere. Here investor may not have direct ownership of assets.
The blockchain industry is young and evolving, and can’t boast the appraisal by a broad circle of people. That’s why the community around the product plays an essential role. Those are the people who invested and, thus, believe in the product’s necessity. Is there a community developing around the project? Does the founding Team show the eagerness to foster a vibrant community long-term?
Smart Contract Features
A smart contract carries automated compliance for the relevant cases. Thus, it’s worth questioning: «Is a smart contract used in production?» If the answer is no, you’re not advised to get involved and to take such risks.
These are a few tips which do not constitute an exhaustive list. ROKKEX encourages all investors to develop their investment evaluation process and follow it accurately. The security token is an upward trend, and it can replace traditional stock exchanges and OTC market in the next decade.
At ROKKEX, we take security extremely seriously, and our crypto exchange is built on ‘Security First’ principle. We want to share our expertise with the broader public for the world to become happy, safe, and wise :)
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