Why Business Owners Find Security Token Offerings More Attractive

February 28, 2019exchangeadminSecurity Token OfferingNo Comments

Many people want to run a successful business of their own instead of settling for a regular nine-to-five job. Especially Millennials are swayed by the idea of setting their own work hours and following their passion. But, there is one big obstacle standing in their way called MONEY.

The sad truth is that many unique business models perish for the want of funding. Although many conventional funding sources are available, they often have a higher entry barrier and stringent regulations, making them less attractive.

In recent times, a new trend called Security Token Offering (STO) is emerging in the digital currency space. It is being perceived as a viable investment alternative to traditional investments such as Venture Capital (VC).

Let’s dig a little deeper into what a Security Token Offering is and why business owners will find it more attractive.

A. What Is a Security Token Offering (STO)?

A Security Token Offering consists of security tokens backed by actual assets. By law, a security is an economic instrument that needs to represent a tangible asset such as real estate, shares, stocks or bonds. An STO offers the same functionality of an Initial Coin Offering (ICO), but with better security and legal compliance.

Instead of using a piece of paper to complete the transactions, STO uses blockchain transactions to confirm ownership. STO investors can enjoy the same financial rights and benefits offered by any traditional security including equity, dividends, revenue and profit shares, and even voting rights.

B. The Transition from ICO to STO

The gradual transition from ICO to STO has been the driving force behind the quick rise of the Security Token Offering. An ICO offers or sells a utility token to raise capital. However, unlike a security token, it is not backed by a tangible asset. In other words, it can become worthless anytime after the ICO is over.

According to a recent study by Grey Spark Partners, nearly half of ICOs (890 token sales) failed to raise any funds at all in 2017 and 2018. Although about 40% managed to raise more than $1 million each, many of them have failed to provide a positive return-on-investment as time passed.

Unfortunately, scammers with greed for money exploited this innovative funding alternative leading to plenty of rip-offs, which gave ICO a bad rep. As a result, people are turning away from ICOs.

The Security Token Offering, however, aims to overcome the lack of transparency and security by connecting digital currency to real assets. So, with STOs, the crypto world is moving towards a more reliable fund-raising option.

1.Real Transparency and Legal Regulations

The principal advantage of a Security Token Offering is transparency. The assets that represent a security token exist in the real world. As the value of a security token is directly proportional to the asset it represents, there is no room for hypocrisy. Plus, as all the transactions are carried out using Blockchain, everything is secure, transparent and traceable.

An STO is also better regulated than an ICO. In the USA, security tokens are subject to Regulations D, A+, and S. Similarly, states within the European Union and many other countries including Japan, Singapore, Australia, Mexico, Malta, Gibraltar, and Canada have already set up their own regulatory framework or are working on it. As a result, you can buy, trade or and sell a token over the internet in a compliant fashion.

2.Tapping into Global Capital

Unlike their conventional counterparts, geographic borders do not restrict Security Token Offerings. As the security token standards are reasonably similar in different regions, you can purchase, sell, and trade different STOs easily compared to many traditional financial instruments.

Thus, companies, whether big or small, can tap into the global capital market. This quick access to global capital was one of the reasons that lead to the ICO boom. Now, it is working in favor of the STO. However, owing to better regulations and legal status, attracting global investors by means of an STO is far easier.

3.Better Liquidity Than Conventional Investments

Liquidity on a global scale is perhaps the most attractive characteristic of a Security Token Offering. Traditional financial instruments such as bonds and shares involve a lot of middlemen. You often have to go through a series of central exchange procedures to transfer or liquidate your investment.

On the other hand, you can hold tokenized securities in regulated crypto wallets, and sell or trade them on a security token exchange platform without any delay. Usually, you just need secure access to the internet. The faster execution time and global acceptance lend security tokens more liquidity than conventional investments.

4.More Flexibility Than Conventional VCs

Conventional funding methods can be restrictive for a business owner. For example, in a venture capital investment, you may have to give up some control over your company. You may also have to realign your business goals depending on the investor’s interest.

However, STOs can offer business owners more flexibility. For example, you can sell the common stock instead of preferred stock in an equity-based STO. You can also offer STO without voting rights for the investors. Thus, you can retain more control over your business without falling short of your investment goal.

5.Lower Entry Barrier

Listing your company on the stock exchange before launching an IPO is a time-consuming, tedious, and expensive process. You have to pay legal and exchange fees and take care of tons of paperwork. Security toke offering eliminates this arduous process.

Using an STO, you can tokenize any asset, small or big. But most importantly, you don’t have to pay for legal expenses in a country or territory of the investors. For example, if you are launching an STO in Singapore, you have to comply with the Singaporean security token regulations.

You don’t need to comply with the legalities of the investor’s country. As a result, you don’t have to spend a lot of money on legal fees. This means small organizations with modest assets can also attract global investors by launching an STO.

6.Growing Investor Confidence

Although the Security Token Offering market is still young, it is showing promising growth in the coming years. Last year witnessed a steady growth in the number of STOs.

In January 2018, there were only five STOs. But, that number rose to 22 by October 2018 as per a recent report released by Inwara. The report also states that STOs are going strong with a success rate of 99% so far.

Source – https://www.inwara.com/report/security-token-offerings

All these numbers translate into growing investor confidence. If you are thinking of taking the STO route as a business owner or an investor, now is the right time to jump in.

Just make sure to consult a white label exchange development company to create a platform for launching and trading your STO. You should also consult a legal advisor to make sure your business is ready to take the plunge.

Wrapping Up

Security Token Offering offers a secure, reliable, and legal alternative to traditional capital funding sources. It is transparent and legal, provides access to global investors, has a low entry barrier, offers more liquidity and flexibility, and is witnessing growing investor confidence.

It’s no surprise the global market is slowly, but steadily moving away from ICOs and towards STOs. A word of caution though, before jumping on the STO wagon, be sure it is suitable for your business. Don’t do it just because everyone is going for it. Good luck!