A security token offering (also known as an Initial Coin Offering, or simply ICO) is an emerging method of raising capital that is rapidly becoming a viable alternative to more traditional methods like venture capital and bank loans.
ICOs are also referred to as token sales because they generally involve the sale of digital tokens or coins. Within the crypto ecosystem, these digital tokens are part of a blockchain project called a security token and can be traded just like other cryptocurrencies.
In this blog post, we will explore what is a security token offering and how it differs from an ICO.
What is a Security Token Offering?
A security token offering (STO) is a form of crowdfunding that involves the issuance of security tokens, which can be considered financial instruments. Unlike an equity-token offering (also known as a token sale), the tokens sold in an STO are issued as security and are regulated as such under applicable law.
In other words, the tokens are designed to represent ownership or stakes in the project, much like traditional securities. And as with any form of investing, there are benefits and risks involved in an STO.
Let’s explore what security tokens are and how they work. Security tokens are digital assets that simulate traditional investments such as stocks and bonds. They are often developed and managed by specific corporate entities and operate as an extension of a blockchain-based platform.
For example, a blockchain-based platform for a music-streaming service may issue tokens that function as membership tokens. The platform would then use the tokens to facilitate the transfer of various types of rights between users, such as the right to stream music or access premium content. Security tokens can be issued as either equity-based tokens or debt tokens.
Equity tokens represent ownership in the project and are usually issued as equity tokens and traded on a secondary market like an exchange. Debt tokens can be considered debt tokens because they are backed by the project’s future revenue streams and usually function as utility tokens.
How Does an STO Work?
Whether equity or debt, tokens represent any asset or right. Now, take a look at how an STO works. First, corporate entities issue their tokens as security tokens on a regulated exchange.
The tokens are listed on the exchange under specific trading symbols, much like stocks are listed on an exchange. Second, investors purchase these tokens from the exchanges and store them in wallets similar to how they store fiat money.
They can then transfer the tokens to the project’s blockchain-based platform where the tokens are used for various purposes like access to content, streaming music, or other resources on the platform.
Third, the project’s blockchain system manages the circulation of the tokens and tracks how the assets flow between users and the company. When the tokens are traded on the secondary market, they are usually listed under a security token ticker like EOS or Polymath.
Key differences between ICO and STO
Now that you know what a security token offering is, let’s take a look at some key differences between an ICO and a security token offering. ICOs constitute an unregulated method of fundraising and trading cryptocurrencies.
This means that you don’t know who is behind the project or how they are planning to achieve their goals.
STOs are regulated financial instruments that are issued under specific regulations. This means that you know who is behind the project and what the project aims to achieve.
The tokens in an ICO are not backed by any assets or rights, whereas the tokens in a security token offering are backed by assets. The investment amount in an ICO is usually much higher than a security token offering
This means that most investors in an ICO are looking for short-term profits, whereas most investors in a security token offering are looking for long-term investment. The trading price of an ICO token can fluctuate wildly between the moment of listing and the moment when the ICO ends.
This means that you can even lose money by investing in an ICO. The trading price of an ICO can also be affected by external factors like Bitcoin’s price fluctuations. This means that the investment decision in an ICO is highly dependent on external factors and can be subject to extreme risks.
Pros of an STO
Regulation of security tokens – Most experts believe that there is huge potential in the security token market and expect it to reach $1 trillion by 2022. The market is currently not very mature and is only gaining traction as more and more investors explore the market.
Most experts believe that the regulation of security tokens will increase the adoption of these tokens as investors will prefer to invest in compliant projects that are properly regulated. This means that the regulation of security tokens will facilitate the mainstream adoption of these tokens.
Transparency in the token sale – The blockchain technology that underlies security tokens allows for complete transparency in the token sale. This means that you can see who is funding the project, how much money is being contributed, and how many people have contributed.
This level of transparency is not possible in conventional markets like the stock market or venture markets where you are not able to know who is funding the project, how much money is being contributed, or how many people are contributing.
Trustworthy projects – The projects that choose to issue their tokens as security tokens are generally trustworthy and reliable projects that have achieved significant milestones like raising funds through equity or debt offerings.
This means that you can trust these projects as they have proven themselves and have sufficient resources to execute their business vision without raising funds through an ICO.
Disputes in the market – Most experts believe that the growth of the security token market will be fueled by the growth of the trust market. The market is currently not very mature and there are many disputes in the market.
This means that the law is not properly established, which can lead to many disputes in the market. This can be solved when more and more investors buy into the market and regulation is properly established.
Cons of an STO
High-risk investments – Since the investment amount in an STO is usually much higher than in an ICO, most investors are looking for long-term investments. This means that they are willing to invest a lot of money in high-risk investments.
This high-risk investment can be very risky if the project fails to execute its business vision. This means that you have to be very careful before investing a lot of money in an STO.
High investment amount – Because the investment amount in an STO is much higher than in an ICO, most investors prefer to invest in a limited number of projects in an ICO. This means that you have to be very strategic in choosing the projects in an STO. In an ICO, you can invest in many projects and choose the best ones. This means that you have time to do thorough research.
Funding is distributed – In an ICO, the tokens are usually provided to a large number of investors via crowdfunding on an exchange. This means that the tokens are distributed among a large number of investors.
Most experts believe that the majority of the funds raised in an STO will be contributed by venture capital funds that control a small number of investment decisions. This means that the funds will be concentrated and distributed among a small number of decision-makers.
Final Words
Taking advantage of the power of blockchain technology, security tokens offer investors a new and exciting way of investing in projects and companies. While ICOs represent a new way of funding projects without the need for regulation, security tokens are regulated financial instruments that are issued under specific regulations.
The advantages of an STO include regulation, transparency, trust, and the distribution of funds. In essence, these are the most important advantages of an STO. And when properly executed, an STO can be a win-win scenario for both investors and issuers.
With a rise in the number of security token offerings, we expect to see more investors entering the space and will likely see increased demand for regulatory compliance from these issuers.
