As we move forward into the crypto age, many new terms keep emerging and introducing themselves to make things more interesting for us. Security Token Offering is one of the latest of these crypto terms. Let’s find out more about it here.
Security token offerings, or STOs, refer to the process of selling security tokens in exchange for investor funding for a new project.
The security token industry, even though still being in its early phase, is growing at an unprecedented rate. STOs are quickly becoming the business model of choice for businesses looking to raise funds via blockchain-based crowdsales.
However, there are still many questions that both investors and business owners keep trying to find answers to, like how security token offerings work or how they are better than ICOs.
In this article, we try to answer some of these questions while explaining in detail the concepts and the process of STOs. If you want to know the STO development process then you should visit this
Table of Contents
What are Security Tokens?
Security tokens are blockchain-based digital currencies that acquire value from real-world financial assets such as shares, bonds, real estate, etc. By holding security tokens of an issuing company, you’ll essentially be owning a part of the company. STO investors and token holders are also given profits in the company revenue in the form of dividends, interest or value increase.
It is crucial for a security token to pass “Howey’s Test”, which is a special compliance test developed to determine whether a particular digital transaction can qualify as an investment contract. Only the tokens passing the Howey Test are considered security tokens.
What are security token offerings?
A Security Token Offering (STO) is a type of crowdsale held by a private or public company to raise money in exchange for security tokens.
The primary purpose behind an STO or the launch of security tokens is to raise money for a new project or startup. STOs have emerged as an improvement over ICOs, as a more logical, secure and regulated fundraising alternative, providing startups and entrepreneurs with a new source for capital money.
The second and less-common use of security tokens is for the tokenization or digitization of physical assets such as real estate and bonds. This is, in fact, a great potential opportunity for this industry, as the overall value of the world’s physical assets (real estate and equity assets) goes well beyond $300 trillion.
Why Security Tokens?
One of the primary reasons why security tokens are becoming a common choice of both the investors and companies looking for investment is their compliance with the SEC norms, which cannot said for utility tokens which are unregulated by nature. Security tokens are powered by blockchain technology and backed by actual assets, which make them more liquidate than any other type of cryptocurrencies.
Besides being far more liquid as compared to both utility tokens and traditional securities, security tokens are also automated, which means they can be designed to automatically make payments of investors’ dividends using the underlying smart contract.
Being a secure and compliant digital security, these tokens can be used to literally represent any kind of real asset of value. The general adoption of security tokens will remove much of the paperwork involved in the management and trading of physical securities along with the high cost of administering the existing financial systems.
Security token transactions are faster and easier, as all of the compliance terms can be coded into the smart contract itself, which can also ease and speed up the transfer of ownership in case of fractionalization of real assets.
Security tokens employ blockchain’s cryptography along with smart contracts which are very secure by nature. It is virtually impossible to bypass blockchain’s security standards.
These tokens can make the security transfer and exchange process much easier, faster and cost-effective while protecting investors and companies against fraud, increasing the overall efficiency of trading.
Investing in Security Tokens
When someone is looking to buy or invest in security tokens, they have the following two options:
- Invest in a security token offering
- Purchase via a security token exchange
Investing in a Security Token Offering (STO)
An STO is more or less similar to an ICO, except for the type of token being traded. If you are looking to buy security tokens, you can participate in an STO of a credible project/company.
Purchasing security tokens via an STO is rather simple. All you have to do is register for the sale on the official website. Then, you can select the number of tokens you wish to buy and make the payment to confirm the purchase.
In most cases, your tokens will be backed by real-world assets such as the company’s shares or stocks and give holders specific rights such as voting rights and/or profit rights in the issuing company. Make sure to check them out before buying.
Launching A Security Token and STO
If you’re planning to launch your own security token offering, you must be wary of many things, including the regulations and legal requirements of security tokens, the best time to launch an STO, your target customers, the best countries for STO, and the launch process.
Security Token Regulations and Legal Compliance
Different countries may have different laws and regulations regarding security token offerings. Make sure to check the security regulations of your target jurisdiction as the first step. For instance, the US has the following three regulations for security tokens:
- Regulation D
- Regulation A+
- Regulation S
The best time or purpose to launch your STO
Moving on to the next prerequisite, you should analyse whether STO is the best option for your company or startup. For one, your company or project should be big enough and have an expected revenue target of $10 million, if not more.
Some of the best countries for launching your STO are – Malta, Estonia, Canada, Germany and Switzerland.
Issuing your security token
The next step is to create and release your security token which you would be exchanging for investors’ money. The best option is to use any of the registered security offering platforms, such as Harbor, Polymath, etc.
The process of creating a security token via any generic platform will include the following steps:
Step 1: Create an Account
First of all, you will have to create an account on the security token platform through which you want to build your own token.
Step 2: Fund your wallet
Upon signup, verification and sign in, you’ll be asked to link your Ether wallet to your platform account. Once you’ve done that, you need to fund your wallet, according to the rules of the platform.
Step 3: Register your token name & symbol
The next stage is registering a name and symbol for your security token, which you can do from your account dashboard.
Step 4: Select the Partners/Advisories
After you make the payment, you can then select the partners, advisors, legal help and marketing team that you may need for assistance with your STO project.
Step 5: Create your security token
Once you’ve completed the initial stages, you’re all set to build your security token. Don’t worry, you do not have to code or anything. Just enter the additional details such as the STO website address (if any) and click ‘submit’ to create the token.
Step 6: Setting up your STO
Once your token is created, the next step to set up the STO. For this, you need to select details such as the number of tokens you wish to sell, price per token, STO schedule, acceptable cryptocurrencies, etc. Once done, you can confirm and launch your STO.
Creating your own security tokens and launching your security token offering are probably the best things you can do today to raise funds for your startup or new project. The process of building a security token and setting up an STO is quite easy, as explained above. You can seek the help of any of the popular security token platforms for the purpose. Security tokens may not have a very impressive market sharing as of today, but they hold immense potential and will observe a systematic growth in 2019 and years to come, as experts predict. It is the best time to launch your own security token offering.