Defining Security Token Offering (STO)
A security token offering, or STO, is quite similar to an initial coin offering (ICO). This is where an investor acquires a crypto coin and token representing their investment. However, the difference is that a security token represents an investment contracts into an underlying investment asset, like bonds, stocks, real estate investment trusts, and funds.
In other words, a security token gives you the ownership information of the investment product and records in on a blockchain.
You can consider STOs as a hybrid between cryptocurrency ICOs and the more traditional IPO, or initial public offering, since it is similar in some degrees to these two methods of investment fundraising.
Differences from ICO
For one, STOs are backed by assets and they comply with regulatory rules.
On the flipside, most ICOs issue utility tokens that give investors access to the native platform or decentralized applications (DApps). Most of the time, the purpose of these coins are for usage and not investment. Thus, most ICO platforms are free of certain legal frameworks and they don’t have to register or comply with regulatory bodies.
Launching an STO is more difficult since you will be offering an investment contract under the securities law. Because of that, the platforms will have to do the upfront work of ensuring that they comply with the relevant regulations and would typically be able to raise funds only from accredited investors.
Differences from IPO
IPOs and STOs are both regulated offerings. However, IPOs are used in private companies that are poised to go public. Launching an IPO helps them raise funds by issuing shares to accredited investors.
With STOs, tokens that represent shares of an underlying security are given on the blockchain to accredited investors. These assets can be shares of a company. However, because of its tokenization, the asset can really be anything that is expected to provide profits.
On top of that, STOs are considered to be more cost-efficient when compared to IPOs. In the case of IPOs, the companies will have to pay high brokerage and investment banking fees to access a deeper investor base.
STOs will have to pay lawyers and advisors, but they also offer a more direct access to the investment market. Thus, they won’t have to pay large fees to investment banks or brokerages.
Regulations for STOs
When it comes to regulations, the United States’ Securities and Exchange Commissions (SEC) is the most vocal on the issue of how a security token should be classified as such. They also decide whether some certain utility tokens are actually security tokens that should be regulated.
Meanwhile, the United Kingdom’s Financial Conduct Authority (FCA) released a paper entitled “Guidance on Cryptoassets,” distinguishing three different types of tokens.
Meanwhile, in Switzerland, the Financial Market Supervisory Authority released an ICO guideline last year in February. It stated that each case must be decided according to its individual merits. It also categorized tokens into three groups: payment tokens, utility tokens, and asset tokens.