What is Security Token Offering (STO) : A complete Guide

This article throws light on the inherent nature of security token offering (STO). It would try to explain how they are different from initial coin offerings (ICO) as an instrument of investment. Besides that, we would also try to surmise the future of STOs with the views of experts over it. Security tokens are gaining massive popularity, they are attracting investors and businesses with their salient features. We hope that you’ll be able to fully understand the   essence and purpose of this token after reading it.

Security token offering or commonly know as STO, is a new entrant in the realm of digital fundraising for business. It has drawn attention globally because it offers better prospects than all the other contemporary methods.

Tell Your Investors About STO And Accumulate Assured Funds

The struggle of entrepreneurs for accumulating funds and resources for their startups is a thing of past now. Today, there are crowdfunding mechanisms available which made the entire ordeal of starting business very easy. They have also bought transparency and enhanced the prospects of profits for every investor. Initial Coin Offering made raising funds for the startup extremely easy and raised hopes in millions of business aspirants.

Read More: How to make STO more attractive and credible to investors?

Why are ICOs losing their significance?

The beginning of ICO and its adaptation is truly proverbial. It gained so much popularity that every single entrepreneur and investor was willing to indulge in it. But that was just the beginning, later on, its value started to fade away because investors lost faith in it. Due to some infamous incidents this instrument gained a notorious disposition globally.

It was introduced for crowdfunding purposes and offered investors a digital value with tokens created on blockchain. The project owners distributed tokens among investors and in return they get either fiat or Bitcoin/Ethereum which could use for funding their startup. Most of the companies released these tokens on their own customized network and it also involved processes like registration and KYC. It is actually done very systematically and it also involved risk of losing the money of investors.

Many changes were introduced and markets started adapting new ideas, gradually, ICO tokens become an instrument of investment. It came with high liquidity of tokens and slowly started establishing different markets by letting the token holders sell them on various exchanges. It started a market shift which became wider with time.

However, the negative aspect related to ICO was bigger than any of its benefits. It slowly gave ways to fraudulent activities and investors started avoiding its existence. Many of them  lost their money and it didn’t take very long time for the entire cryptosphere to be aware of it. Also, there were projects that failed to perform and led the investors to believe that it is not a reliable platform. The lack of regulation also played a big role in it and caused raised doubts over this instrument.

What makes STOs better?

Security Token Offering has been recently introduced as a tool for crowdfunding and it is being widely adapted by the entrepreneurs. The biggest change introduced by the STO is that it offers security tokens instead of utility tokens. It is essential for an investor to understand the benefits of STO, before he/she can make use of it.

What is the different between Security Token and Utility Token?

In simple terms, it is a token that holds tradable value in digital sphere. Therefore, these tokens have monetary value just like any other security or commodity. And they are issued under the regulations of Securities and Exchange Commission (SEC). It also involves Howey Test as one of requisites which makes it more trustworthy for any investor.

There is also a factor of more liquidity and transparency which cannot be disregarded as it has the properties same as stocks and bonds. Because of this inherent value, these tokens are more beneficial for investors and also used in more feasible scenarios.

Due to the involvement of security regulations, investors get duly accredited and they get all the benefits even if the project fails to perform in its domain.

As an essential crowdfunding mechanism, Security Token Offering (STO) gives the holding company some exclusive rights. The companies are entitled to sell these tokens in exchange of investors’ money and get the best advantages from markets. And it is all done under the recognition of law and investors are assured of their returns with maximum additional benefits.

In recent years, this instrument of investment has been used by startups as well as established firms. As per the survey conducted by a business news agency, a collective sum of whopping $700M  were raised by various STOs across the globe till February 2019. It only shows how rapidly the entrepreneurs are shifting towards this medium for setting up their business.

Most of the startups which are launching their businesses in the blockchain industry are choosing STO over ICO and making their funding easier for them.

Why the number of companies choosing STO is increasing?

STOs are not just better in terms of security, they are more robust in terms of technology compared to any other method of fundraising. Here are some of the salient benefits of using STO as a funding tool:

More Transparent

Blockchain-enabled transactions make this particular method much more trustworthy. They keep the information of transactions transparent by making them public over the network. It helps greatly at the time of verification and makes the whole process very easy.

Speedy Transactions

It is another most notable feature of blockchain that the transactions do not take much time. While in the case of traditional modes of payment, there are middlemen that slow down the speed, in STO, there is no intermediary and you expect the transaction to take place in no time. It eliminates the practice of middlemen and makes the transactions direct for both the parties.

Reliability

Over the past few years, ICO have lost credibility because of their involvement in frauds. And that happened because utility tokens can easily for this purpose. With a robust structure, STO has stopped this and allowed investors to vest their trust into this new method of fundraising which is a lot more secure as an instrument of investment.

Trading anytime, anywhere

A big benefit of using this particular token is, you can do it anytime and anywhere. It is a global activity which involved millions of people around the world. Security tokens take cognizance of the the fact that users may have use it 24/7 in any country and make its system capable of it.

Enhanced Liquidity

Security tokens are catalysts in increasing liquidity as they also are compatible with only licensed token trading platform. It allows the investors to liquidate their token easily and get the best value out of it. They can even change the working of conventional illiquid markets and make them highly liquid.

Reaching Global Investors

STOs have a ubiquitous reach when it comes to letting organizers market their products or services on global platforms. The conventional mechanism always marred the efforts of investors to make their approach global. This particular funding mechanism allows increased liquidity and also lets you drive your project with various underlying assets.

Minimum Cost

As mentioned earlier, this mechanism ousts middlemen and makes transactions faster, it also reduced the amount significantly. There are various other benefits such profitability of investors and lesser complex system, all these attributes together make this token a better option.

Smart Contracts

Like all the other cryptos and altcoins, security tokens also have the functionality of smart contracts which makes the blockchain stronger. It brings automation and more security into the picture, it also reduces the code of transactions with lesser services. It makes all the transactions more reliable and efficient for everyone.

No third-party involvement

These tokens make involvement of third-party resources impossible. This makes all the transactions much more invulnerable and decimates the chances of fraud. In this manner, STOs also lessen the dependency of institutions on human intervention and makes every transactions more efficient for users.

Customizable

These tokens are also very to customize, the core coding can be changed according to the functionality they are going to serve. STOs can be customized for dividends, KYC, transaction limit and much more. They are very easy to use and make every business fluid with their disposition.

What is the future of Security Token Offerings?

After discussing the advantages and features of security tokens, now we try to surmise about  the future of this technology. It is natural for everyone to wonder about its future as it is replacing ICO which also started with bright prospect but met a fateful destiny. Many experts and market researchers have expressed their views about how STOs will perform  in 2019. Here’s the excerpt of their review:

Almost all the experts believe that the flexibility in the framework of security tokens would bring more liquidity into the market and would also give more transparency. This would be beget many opportunities for investors and entrepreneurs alike.

Security Token Offering gives something valuable to every kind of enterprise. It has different outputs for different projects, for example, UCC (United Cancer Centers) is launching its project with STO because they need a channel through which investment contracts could be allocated among different investors following an ideal revenue sharing model. And it could only be achieved through this particular medium.

It is an indispensable advantage that you can offer to your investors and that’s the reason why it is being widely adapted. It enhances the capabilities of startups and enterprises to share their revenue with security. Both the token holders and project owners get benefitted with it.

Upshot

Security tokens are regulated and they are much more controlled feasible for any type of business. It gives everything that promotes fundraising and becomes a favorite option for every investor in the world. The tokenisation of assets brings higher level of liquidity and transparency into the markets. This particular token is going to be the most preferred option for every entity that is involved in the process of crowdfunding. With all these aspects, the future of security token offering only seems bright.

If you want to empower your project with this technology then do it with the best STO development company. Technoloader allows you to hire professional STO developers are who are most skilled and experienced.