The euphoria that greeted the revolution that swept through the process of public funding and crowd sales with the entrance of Initial Coin Offering (ICO) and its meteoric rise was a welcomed development. However, it was short-lived because of negative ratings and feedbacks which arose mainly from the underhand practices and absence of regulations. It was imminent that something needed to be done to protect investors’ funds and sanitize the security token landscape.
In the words of Overstock CEO, Patrick M. Byrne, “The ICO craze created a toxic waste dump of financial assets. To me, that world of ICOs is a Superfund site. What we’re developing is a mechanism so that there will be a legal way to go forward and not create any new toxic waste.”
The reason why regulations are in the market is to protect the interest of investors. As a result, a new kind of token offering has been created to ensure that those offering tokens are liable to their actions. This takes us to the next part of this article, which is what is STO?
What is an STO?
One question that newcomers usually ask is what is an STO? Security Token Offering or STO is an upgraded and digitally regulated version of the traditional securities. Security tokens are financial instruments and represent a share of the company or an asset such as a property or investment fund.
With security tokens, it is easy to safeguard tokens from frauds and misuse since the ownership information is displayed on the blockchain. Besides, this ensures a faster and more accessible and cost-effective STO.
Understanding the difference between ICO and STO
For entrepreneurs, STOs are a relatively easy and inexpensive way to raise security. It offers transparent and direct investment in a company.
To fully answer your question on what is an STO, it is important to first look at what an ICO is and its shortcomings. An ICO or Initial Coin Offering takes place when a company sells its cryptographic assets to raise funds or sells tokens to raise funds for a particular project. The token plays a role in the project and lasts for a limited time frame, usually until the money is completely raised.
Tokens are divided into two: Utility Tokens that promise the future use of a product, they are meant to be an investment while Security Tokens represent a tradable financial asset such as shares or bond from a company. It is a form of investment that pays dividend or profits.
ICO started with good intentions; however, greed overtook this, as people cashed in on the opportunity to make quick and easy money.
ICO was largely unregulated and in many cases a pipe dream. Following the not too wholesome transactions and public outcry, regulators stepped in, to ensure that companies behind the sales of tokens met certain requirements. In the US, for instance, the Howey Test is used to decide whether what is being sold could be considered a security or not. It states;
“A transaction is considered a security sale if a person invests his money in a common enterprise and is led to expect profit solely from the efforts of the promoter or a third party.”
Broken down, four questions are raised from this; was there investment money? Was it invested in a common enterprise? Was there an expectation of profit? Are profits the result of a third party?
While one could safely say yes, to the first two questions for ICO, the last two are not quite as straight forward because it will also be no. You can get some ICO updates from ICO Insider, in case you are interested in investing in ICOs.
Classification of Tokens
Token classification is a vital factor to consider when you want to launch your offering because the way the token is treated or regulated by the issuing jurisdiction is based on whether it is debt security or equity.
Just like traditional shares, equity tokens represent the shares issued by a company, but they are recorded on the blockchain. Owners of an equity share are entitled to a share of the company’s profit and voting right.
Debt tokens, on the other hand, are instruments that represent real estate investment and mortgage and corporate bonds. Debt tokens represent capitals raised through debt, and they can be compared to a loan to the issuers. Those who own debt tokens are generally entitled to the repayment of principals and periodic interest.
Tokens that are backed by assets and especially tokens backed by commodity signify the ownership of a particular asset, commodities including gold, oil, or crops, or even real estate.
One reason why STOs are becoming popular with investors is the fact that an STO is an asset-backed token backed by real-life assets which makes it easier to assess their valuations. The blockchain technology is mainly essential for the commodity supply chain because it helps to simplify transactions, reducing fraud and makes it easy to track and monitor the asset ownership.
Benefits of STO
Companies who want to raise money through STO have to comply with regulation and disclose relevant information about their business. To increase accountability, transparency, and minimize risk, they have to publish a prospectus or a private placement memorandum. Smart contracts and blockchain technologies ensure that the processes are transparent, secure, efficient and fast.
STOs make use of lesser numbers of middlemen such as brokers, banks and lawyers. It reduces costs, makes the process more efficient and minimizes the sources of errors. While the institutional manipulations reduces as well as the market is free and open.
STOs allows for more liquidity as they are traded on specialized security exchanges providing investors with a convenient way to liquidate their assets. You may get some pieces of information about STOs on STO Scope.
Risks Associated with an STO
The concept of STO is still in its infancy; security tokens are essentially different medium representing the same conventional financial instruments. However, there is yet to be a fully-developed law to guide it.
For instance, when anyone loses the key to their private wallets, they are also denied access to their asset and will have no other way of recovering their investment. While the presence of fewer or absence of intermediaries might be an advantage, it could be a risk factor when you consider that there is no one to guarantee that investors receive a token.
Staying in touch with the market
If you are a crypto enthusiast or investor looking for opportunities where you can invest your money? Here with Simple Passive Income, you get regular updates about the crypto ecosystem. Hence, helping you easily stay in touch with the recent happenings in the market.
The website is so vast in the knowledge of the crypto environment that you can never miss any update if you are connected. No matter your areas of interest – ICOs, STOs, here are comprehensive, unbiased reviews and information that will help you make an informed decision while investing your hard-earned income.
With this platform you are able to get several other related information, such as the top cryptocurrency exchanges, the best crypto wallets, how to get started with LUNO, and any additional information that will assist you in trading crypto safely.
Conclusion of what is STO
It is important to note that while STOs are a great method to invest, you should always research the companies or projects you want to invest in because the basic risks for investors are still there; if the company fails, the investor also fails.
STO is an ideal way for startup companies to raise capitals instead of relying on expensive venture capital funding. Companies can use STO to easily and securely access the capital market for a fraction of the traditional costs, which means that small investors can quickly invest in startup companies and benefit potentially significant increase in value. Have we answered your question about what is an STO?
Please, drop a comment using our comment section below if you still have any unanswered question.