Previously, crowdfunding was the best way to raise business capital. Later Initial Coin Offerings (ICOs) came in and were a hybrid form of crowdfunding. However, ICOs were plagued with scams because of a lack of proper regulation. This led to massive losses of investors’ money. Although the ICO system allowed trading of utility and security tokens, there were just too many flaws.
This is when Security Token Offering(STO) came into the picture. It allows for trusted, safer, faster, and more reliable ways to raise capital for businesses. STOs have now become a hot topic in the securities world. But what new does it do, and what new does it offer? Are investors assured of protection when investing in STOs?
Well, if you’re one of those people with a particular interest in blockchain technology, STOs will interest you as well. However, it’s not a new phenomenon. It has been around for a decade. It’s just that there’s more awareness about it now, and more people are embracing blockchain technology.
This article shares helpful information in STOs to help you decide how to move ahead with your business, project, or investment.
What is Security Token Offering?
This is a new way to raise capital more efficiently, cost-effectively, and transparently than through an ICO or Initial Public Offering (IPO). It also offers a protective cover to investors against scams and fraud by ensuring that everyone meets specific criteria for investing in the STO. Security tokens are created to provide long-term value to investors rather than short-term. In a nutshell, it’s security-based crowdfunding only that it uses tokens.
In the context of ICOs, security is a financial instrument that can be used to represent ownership and control of an asset or assets such as bonds and stocks. If you invest in security tokens, you’re entitled to dividends, profits, and other benefits that come with owning a security.
Types of Security Tokens
As stated in the previous section, security tokens are security-based investments, and secondly, they represent ownership of a group of assets or an asset. They are mainly three types as follows:
This is the most common security token and may represent an ownership stake in the issuing company or business. Basically, equity securities represent shares in ownership. You’ll be entitled to voting rights and dividends from the profits generated by the security. The gains may consist of revenue share and profit distribution between the investors. Recent years have seen an increase in this type of crowdfunding campaign with great success.
Equity-based security tokens are also increasingly used to regulate the interests and rights of startup companies with growth potential. However, this type of security token is regulated by securities authorities. You may need to talk to a legal professional about the implications this may have on your investment.
These security tokens represent a loan offered at an interest. They portray a creditor’s relationship with a company or business. As an investor, you’ll be funding a business or asset in part or as a whole in exchange for interest such as mortgages, corporate bonds, and real estate.
They’re the preferred choice for businesses that need project funding but can’t afford equity, and they believe their projects have growth potential. The use of smart contracts enables automatic distribution with less human interaction completing contracts on pre-defined terms and schedules.
This type of security token can represent an ownership stake backed by an asset such as carbon credits, commodities, or real estate. That means they represent ownership in virtually anything, including digital assets.
Benefits of Security Token Offering
STOs are crowdfunding platforms where ICOs and IPOs merge. The records of investment and ownership are stored on a blockchain. This means that your investment and the crowd sale are protected with cryptography, making the STOs quite secure. Here are other benefits to that end.
- Liquidity and fair access: STOs provide liquidity to the market by enabling fractional ownership that significantly lowers minimum investment. Also, the securities market is anyone with access to the internet, hence allowing fair access.
- Transparency: Because STOs are built on the blockchain, weak points of online use are eliminated so that passwords and identities remain hidden. Payment is also transparent and secure with things like credit card tokenization, as STO has a uniform method of verifying data.
- Provision of real value: security tokens, unlike utility tokens, provide real value that makes them a credible financial tool for designated assets. Security tokens can grant rights in profit sharing, physical and virtual asset ownership, dividend payment, and indirect or direct participation.
- Convenience: Financial markets typically operate for a fixed period during the day for specific days. But blockchain marketplaces are active anytime, all the time, irrespective of the time or the day.
You should seek to gain more information from financial and legal experts well-versed with STOs to protect yourself from scams. However, the regulations by securities authorities continue to make it a safer option than other crowdfunding options available.