What is a Security Token Offering (STO)?
A security token offering (STO) is a method of fund raising used by cryptocurrency projects to raise funds by offering investors a security token.
So, in the essence of it, a security token offering is similar to an initial coin offering (ICO) because investors are given a token when they help fund the project during the fundraising period. However, an STO is dissimilar to an ICO because the ICO token represents the project’s token only while the security token has underlying backing within the contract investment. This backing comes in the form of an underlying asset, such as bonds, stocks or real estate investment trust for example.
What is a security?
A security is a fungible (an asset type where each which has the exact same value) asset which holds the same monetary value as that of the asset it’s backing. For example this could be seen in an investment fund or opportunity which is represented by a security that is backed by a property or shares in a fund.
As a result of the way an STO functions, the security token represents the ownership information of the investment, similar to an initial pubic offering (IPO) however it is recorded on the blockchain. The concept is like a digital, blockchain-based version of an IPO. Therefore, it can be seen as a combination of a cryptocurrency ICO with the fundamentals rooted in blockchain and transparency in transaction online and an IPO which other assets supporting the funding.
The difference between an ICO and an STO
As explained, the fundamental process of fundraising through an STO is the same as through an ICO, however there are important characteristics which are inherently different.
An STO is backed by a real-world asset, which makes it easy to guage the token’s value. In an ICO, the value is purely perception based on the possible success of the project. This is then skwered by how legitimate the project might be. With an STO, however, it’s easier to assess the price of the token against the underlying asset.
Security and regulation
An important different between ICOs and STOs lies in the regulation. Most ICOs require no compliance with governing regulations. This is because the project owner often sets the ICO token as a utility token which offers the users nad investors access to the platform. As a result, they argue that the token is created for usage (to gain access to the platform, for example) rather than investment. This means they can slip under regulation and almost anyone can launch an ICO and raise funds.
On the other side of the coin, though, an STO requires much more compliance as the token is purely under the intention of investment. This means that there is more governance involved and the platform or project owner needs to make sure they are compliant with the law and financial regulation before seeking investment. This, while making the platform more of a process to fund, does make the STO a safer option for investors. With governing compliance, there is more accountability involved and investors are less likely going to lose their assets to a possible fraudulent or scam project with the same possibility as an ICO.
The main differences between an STO and an IPO
There are important elements that are shared by STOs and the traditional IPOs. This mainly lies in the regulation.
One of the key differences to note is that an STO is a more affordable process because it alleviates the need for banks and brokerages. Instead of using a centralised entiry like a bank and legal figures, STOs make use of smart contracts to conduct up and uphold the legal framework.
Digital documentation means faster processes
In the same way that cutting out the middle-men makes the process cheaper, relying on smart contracts instead of central entities also speeds up the process.