Looking at the token market, most of the tokens claim not to be securities or investment vehicles – mainly because they fear regulatory consequences. STOs, on the other hand, might be a solution for companies that want to raise capital without facing issues with financial authorities.
What is an STO?
Initial Coin Offerings in refer to the general term of initially selling tokens on the market – Security Token Offerings (STOs) are a special kind of an ICO. They also offer tokens, with the difference of being a security with the purpose of offering people an investment with e.g. dividends or a buyback mechanism.
Just claiming that an issued token is a utility token does not make it to be considered as such by regulators. Therefore, there are many ICOs out there promising to sell a utility token, which can later be considered as securities. Executing an STO means to treat it like a security from the very beginning.
The advantages of an STO compared to ICOs
STOs are not disrupting the ICO sphere. For a Blockchain project that needs to be developed, a utility token might be perfect since it can create a self-running ecosystem (take Ethereum as an example). Nevertheless, STOs are revolutionary as a method of capital raising when it comes to Non-Blockchain companies. The process is more efficient when it comes to the issuance of tokens and the trading on secondary markets afterwards.
Compared to calssical ICOs, STOs are usually referred to as such since they offer a revenue share. This is easier to understand and usually easier to calculate than the inner value of a token that may evolve due to the demand and offer on the market.
Furthermore, launching a financial product, which is officially treated as one by the law, gives investors a better feeling about their investment safety. The argument of ICOs issuing useless tokens is not valid anymore.
What is the difference between an ICO and an STO?
One might say that STOs are nothing than a digitalized IPO on the stock market. This is true to some extent, but leveraging the advantages of an asset stored on the Blockchain is the mayor difference. It offers a higher liquidity, more efficient settlements and higher transparency.
Right now, it might occur that executing an ICO causes higher costs than an IPO with a bank since many teams with an idea are conducting the process on their own. Collaborating with an ICO Agency, comparable to an Investment Banker for an IPO, can strongly enhance the process.
If a project is clearly stated as a STO and fulfills the requirements for an IPO, it still leverages the advantages of tokens instead of stocks mentioned above.