In this guide, we’re going to help you understand what an STO is, how it’s being used and a few of the advantages and challenges it brings.
So, what is an STO?
A security token offering (STO) is becoming an increasingly powerful and popular way for businesses to raise capital without having to resort to venture capital or private equity funding. Similar to an ICO, investors receive a cryptocurrency token representing the investment they’ve made. The token entitles them to certain financial rights such as dividends, equity or profit shares. Additionally, a security token represents an investment contract into a real, tradable asset such as stocks, bonds or investment funds. STOs are subject to federal regulations and contain ownership information which is recorded on a blockchain.
What’s the difference between an STO and an ICO?
The key difference is that STOs are asset-backed. This can make them more difficult and expensive to launch than an ICO, as the issuing firm will have to do all the necessary compliance work required by the regulator. However, given the number of ICOs that fail to deliver on their promises, security token offerings are becoming much more popular with investors. This alone can make it well worth the extra work firms have to do upfront.
For the most part, aside from the fact that STO’s offer tokens backed by actual assets, the difference between an ICO and an STO is mainly in name only. There are still strict compliance and regulatory requirements that must be complied with regardless of whether a company is conducting an ICO or an STO.
What are the advantages associated with an STO?
A security token offering can be seen as the middle ground between an initial coin offering (ICO) and an initial public offering (IPO), and can bring certain advantages:
- STOs are less reliant on middlemen such as banks, brokers and lawyers than IPOs. That can help to reduce the costs.
- STOs are backed by real-world assets, making it much easier to assess whether the tokens are priced fairly. It’s more difficult to assess the true value of a token issued by an ICO.
What are the challenges associated with STOs?
Of course, while increased regulation is a huge positive for investors, it does present a number of challenges to the firms issuing STOs.
- Depending on the jurisdiction, STOs can place a much larger administrative burden on projects than ICOs. With the middlemen removed from the process, many of the necessary tasks must be performed by the company itself.
- There are also considerable costs involved with STOs to ensure they comply with all the relevant securities laws. However, it is typically cheaper than an IPO.
STO legal advice from a specialist cryptocurrency firm