The Beginner’s Guide to Security Token Offerings

To understand security token offerings better, let’s define what a security is. In the simplest words, a security is a financial instrument that a company or startup can issue to raise capital. You can get profit share, dividends, and voting rights, among other things in exchange for investing in a security.

Security tokens also serve the same purpose, but with higher efficiency, transparency, and security. They represent a tangible asset such as real estate, company shares or equity. In the US, any crypto token that passes the Howey Test is considered a security token, and you can offer it through an STO. As they are treated as securities, STOs are subject to federal regulations.

Just like an ICO, an STO also sells crypto tokens through a public sale. However, the underlying asset must be converted into a token first.

Let’s say you want to invest in a $200,000 condo but you have only $2000. This is where tokenization comes in. Using blockchain technology, you can convert the rights to the condo into security tokens.

If you convert the condo into 200,000 security tokens, each token will offer investors $1 worth of rights or 0.0005% of stake in the property. You can buy as many security tokens as you like through smart contracts. In other words, you can become a stakeholder in the condo with as little as $2000.

As the value of the underlying asset increases, investors can make a profit. In this case, if the condo’s value becomes $400,000 over time, your $1 investment turns into $2 fetching $1 or 100% profit.

Just like buying, selling your share of the rights in the condo is also easier. Tokenization allows you to fractionalize the ownership of the underlying asset. Being a public ledger that is immutable, blockchain allows you to sell-buy assets with speed, security, and accountability.

Thus, STOs can provide startups and business owners with liquidity and access to global capital. Owing to their high liquidity, you can trade security tokens globally through a security token exchange platform.

While investing in an STO may seem tempting, there are a few things you will need to remember from an investor’s point of view.

• You must understand that you are investing in the underlying asset being represented. The security token itself has no value and is irrelevant to how much profit you will make. So, make sure to check the value of the actual asset before investing.
• Although you can trade security tokens, they are not cryptocurrencies. They don’t offer the benefits of a cryptocurrency such as online shopping or currency exchange.
• A security token offering platform works on the principles of blockchain technology. As every transaction occurring on a blockchain-based platform is immutable, traceable, and public, there is no need to establish trust between the two parties. Hence, this is considered a “trustless” system.
• Unlike ICOs, STOs are meant to offer a long-term profit. If you are looking to make a quick buck, this is not the right investment option for you.
• An STO has to comply with SEC regulations (in the US) or equivalent laws in their country of origin. The STO development company also has to follow strict KYC (Know Your Customer) and AML (Anti Money Laundering Laws) checks.

STOs bring a few distinct benefits to business owners, startups, and entrepreneurs.

• STOs offer a more efficient and accurate way to raise capital as blockchain removes the middlemen required to complete a transaction. By eliminating lawyers, custodians, transfer agents, accountants, and tons of paperwork, you save time and money.
• You can also code the security tokens to manage a cap limit automatically. Thus, you will be able to execute transactions such as profit distributions, stock splits, conferring a voting right, and making buy-backs instantaneously.
• As an STO development company can float your STO on the web, you can get access to global investors. Traditional securities, on the other hand, confine you to local investors mostly. In short, you can raise more money in less time without compromising your capital funding goals.
• STOs require lower entry costs to raise capital compared to traditional IPOs. As a result, small companies and startups can also take advantage of it.

Like most upcoming technologies, security token offerings also come with a few challenges. The lack of infrastructure and regulations are two pressing concerns right now.

STO’s require a secure platform for selling, buying, and trading security tokens. Owing to fewer exchange platforms available out there, you can set it up your own. However, currently, not many companies are offering A-Z security token offering services under one roof either.

Some countries such as Lithuania and Malta have set up legal frameworks to incorporate STOs, but several others haven’t. However, various nations have shown a positive outlook in this regard. The STO market will overcome these challenges eventually.