Learn about Security Token Offerings (STO) in under 5 minutes

Security token offerings (STOs) allow you to purchase regulated digital tokens that represent assets such as gold, real estate, and stocks.

Simply put, a crypto token represents a digital asset that resides on the blockchain of another cryptocurrency. These tokens can store value, purchase digital assets, and pay transaction fees.

Initial Coin Offering (ICO) was considered the most preferred option to offer crypto tokens in 2017-2018. However, this unregulated offering process also saw the proliferation of tokens with no real value.

A study by Satis Group LLC claims that almost 80% of ICOs are fraudulent . Since ICOs involve millions of investor funds, regulations on token offerings have become mandatory. As a result, security tokens were issued using a security token offering (STO).

Security tokens are a type of cryptographic token. Let’s understand more about it.

What is a security token?

Security tokens serve as digital representations of investable assets. These assets include real estate, merchandise, art, stocks, bonds, and more.

The main purpose for investors to purchase security tokens is to generate profits. For this reason, buyers tend to choose tokens with a high potential for future growth.

Security tokens are issued using blockchain technology, making the entire process transparent and simple. They also receive dividends, asset ownership, and voting rights.

The Securities and Exchange Commission approves security tokens. Furthermore, only governments or corporations can issue these tokens.

What is a Security Token Offering (STO)?

Security Token Offering (STO) is the process of selling security tokens through specific exchanges. Here the token transaction is verified and stored on the blockchain network.

STOs allow investors and founders to raise digital funds for new projects. Additionally, government regulations must be strictly followed. Additionally, these tokens are not available on regular cryptocurrency exchanges such as Binance, Coinbase, and Kraken.

In 2018, a massive initial coin offering (ICO)-based bubble burst. During the crypto boom from 2012 to 2018, scammers took advantage of this high market demand.

Fake projects began collecting funds from people selling false hopes. As a result, in the first quarter of 2018, ICOs raised $6.88 billion.

However, after a series of fraudulent ICOs, the demand for this coin decreased significantly. Ultimately, at the end of the fourth quarter of 2018, the ICO was only able to raise $340 million.

In the wake of the ICO crash, government regulators have begun providing additional safety and security to investors’ funds. This gave birth to STO, a more regulated version of ICO.

You may be wondering how an STO differs from an ICO. Let’s get started right away.

ICOs are easy to launch and require no regulations to protect investors’ funds. In contrast, STOs are initiated through strict and structured government policies and regulations.

Furthermore, it is not mandatory to have valuable assets to launch a token using an ICO. STOs, on the other hand, issue only asset-backed tokens.

How do security token offerings (STOs) work?

The operation of STO can be divided into six phases. All of these phases must be completed before a project can provide security tokens.

#1. Preparing the project

Project founders and developers create business ideas and plans during this first phase. Additionally, the project will appoint team members and advisors at this stage.

The technical team will create a white paper that explains all the details about the project. These details play an important role when accepting a project’s token offering.

Additionally, this early stage is also used to make important decisions regarding:

• Selection of digital technology and related service providers.
• Developing an investor deck.
• Calculating project capital requirements.
• Identification of target investors.

#2. Design of STO structure

The project will appoint a qualified corporate financial advisor to properly structure the STO. These advisors will work with the founders and other team members to create the structure of the token offering.

Additionally, a legal advisor has been appointed to:

• Evaluate STO regulations.
• Determines the minimum lockup period for the token.
• Analyze investor requirements.
• Understand any applicable exemptions.

At this stage, appropriate jurisdictions are selected that support the project vision. This selection helps projects incorporate and sell token offerings.

#3. Technology selection

STOs leverage blockchain technology, so choosing the right platform is important. At this stage, the project approaches blockchain service providers.

Security tokens are created based on business ideas, vision, and evaluation. Additionally, the project will develop a portal for future investors.

Investors can use this portal to verify anti-money laundering (AML) and know your customer (KYC) instantly. Additionally, you can also connect your cryptocurrency wallet using this platform.

#4. Choosing a financial service provider

The founder will appoint a broker to assist in the sale of security tokens. Additionally, these transfer agents are onboarded to monitor token issuance.

A custodian has also been appointed for safekeeping. Here the technical team also works with payment providers to implement the fiat payment system.

#5. Fundraising activities

The main steps in raising capital include finding potential investors. The broker will then arrange a meeting with investors and share the offering documents.

In addition to direct contact with investors, online marketing also plays an important role in raising funds for an STO. Active social media campaigns are now a common process to promote token offerings.

#6. List of security tokens

The final phase involves selecting an exchange for the STO. Government regulatory bodies must approve these exchanges.

Finally, the security token will be available for sale. They are also required to work with platforms and regulators to regularly update project developments.

Security Token Offerings (STOs) and Initial Public Offerings (IPOs)

An STO can be thought of as a combination of an ICO and an IPO. The main differences between STO and IPO are:

• The process behind an initial public offering (IPO) is expensive and time-consuming. Security token offerings (STOs), on the other hand, are relatively economical and require less processing time.
• The major difference between an STO and an IPO is the investment type. In the case of an STO, security tokens are issued, but in the case of an IPO, shares are issued.
• An IPO is limited to the public offering of shares of a privately held company. In contrast, ICOs have the flexibility to represent security tokens for multiple assets.
• IPO participants receive a digital document confirming ownership of company shares. In contrast, STOs provide digital tokens as proof of ownership.

Different types of security tokens

Security tokens are further classified into three types:

#1. asset backed token

Asset-backed security tokens represent ownership of real-world assets such as real estate, commodities, and precious metals. These tokens can be traded based on the price of the underlying asset.

Investors can choose asset types depending on their risk appetite. For example, if you believe in the stability of gold, you can invest in gold-backed security tokens.

#2. stock token

Stock tokens represent shares of publicly traded companies. When you purchase this token, your ownership information is stored directly on the blockchain network.

In addition, stock token holders also receive all the benefits offered to the company’s shareholders. For example, you will receive the same capital gains, dividends, and voting rights.

#3. debt token

Debt tokens act like loans that investors give to trusted companies. As a result, this security token holder receives interest in return. The interest rate here varies depending on the company.

There are two types of debt tokens.

1. Stable Debt Token: This debt token rewards you with a fixed interest rate. Additionally, you can calculate your overall profit before purchasing tokens.
2. Floating debt tokens: Unlike stable debt tokens, floating debt tokens do not come with a stable interest rate. The interest rates here vary based on the company’s interest rate policy.

Top STO Platform

The STO platform was developed to simplify the token generation process and make it more accessible. Next, let’s take a look at some of the major platforms that offer STOs.

#1. polymath

Founded in 2017, Polymath is one of the most preferred platforms for STOs. This platform operates completely based on security token regulations and guidelines.

Polymath uses four core layers to help developers create security tokens and provide liquidity. The four layers consist of the application layer, protocol layer, exchange layer, and legal layer.

#2. Securitization

Securitize provides end-to-end tools that allow businesses and individuals to create security tokens. Additionally, the platform provides users with backend assistance to speed up the token offering process.

Additionally, this STO platform can be used to incorporate Ethereum-based DApps. Additionally, Securitize’s Digital Securities Protocol (DSP) allows you to trade security tokens across different markets.

#3. security

Developed by blockchain experts in 2015, Securrency provides a secure tool for issuing security tokens. The platform allows users to convert assets into various formats such as securities, tokens, and fiat currencies.

Security can also be used to trade security tokens on multiple blockchain networks. Additionally, you will also receive technical support after providing your tokens.

#4. flock

Unlike the other platforms mentioned above, Swarm offers a wide range of solutions regarding STO. Features offered include token creation, funding, configuration, token issuance, and more.

Swarm supports small businesses in implementing the entire STO procedure. Additionally, the platform also supports post-issuance activities such as asset governance, dividend issuance, and reporting.

#5. token software

Tokensoft provides tools to create security tokens on popular blockchain networks. Supported networks include Arbitrum, Ethereum, Polygon, Celo, Avalanche, and Optimism.

Additionally, the platform provides KYC/AML compliance for over 50 jurisdictions. In addition to that, Tokensoft provides distribution support, token trading, and token issuance capabilities.

Advantages of STO

#1. low risk

STOs are regulated using government laws and regulations. This strict governance procedure restricts token offerings by fraudulent projects.

Additionally, issued security tokens have underlying assets that are unlikely to lose all of their value. Additionally, token buyers can also choose low-volatility assets to protect their investment.

#2. Existence of real-world assets

STOs allow you to own shares in a company or physical assets such as oil, silver, or gold.

Security tokens can also be valued based on the real-world asset price of the token. This pricing ensures that you receive a fair market value for your investment.

#3. High liquidity

STOs allow you to buy a piece of an expensive asset. For example, let’s say a popular piece of real estate in New York costs $100 million and is distributed as 1 million tokens. In this case, you can buy tokens for $100 and take partial ownership.

This tokenization of assets increases the liquidity of security tokens by making them more affordable to more people. As a result, you will always find a buyer to sell your tokens.

Also Read: Real Estate Tokenization Explained in 5 Minutes or Less

#4. High efficiency

Purchasing assets from traditional investment markets is complex and very time-consuming. In contrast, STOs leverage the efficiency of blockchain technology to simplify the entire security market.

Security tokens automate verification procedures such as KYC and AML and simplify audit and accounting procedures. Furthermore, the abolition of banks reduces transaction speed and costs.

Disadvantages of STO

In addition to the advantages mentioned above, STO also has some disadvantages.

• High volatility: The high liquidity cited as an advantage can also result in very high market volatility. In this case, the price of the token can change rapidly over time.
• New technology : Blockchain technology is in its infancy. As a result, traditional businesses may find it difficult to adopt this new technology.
• Limited investor participation: Regulations and policies limit the number of potential investors who can issue security tokens.

Do you want to know more about STO? If so, I would like to recommend you a great book!

learning resources

#1. Assets on blockchain

In the book Assets on Blockchain, Max Kops teaches about tokenizing and digitizing assets to create security tokens.

preview	product	evaluation	price
	Assets on the Blockchain: Security Token Offerings and Securities Tokenization		$29.99	Buy on Amazon

This book also covers:

• Revolutionize traditional assets with security tokens.
• The importance of tokens, blockchain, and STOs in transforming the financial industry.
• Detailed process involved in STO.
• Information about security tokens and related laws.
• Advantages and disadvantages of blockchain-based assets.
• Comparison of IPO and STO.
• Tokenized finance and its relevance to investment bankers, investors, corporations and asset managers.
• An overview of different regulatory positions around the world.
• Practical and simple case studies.

#2. STO – Security Token Offering for Beginners

“STO – Security Token Offerings for Beginners” by Alex Anderson answers all the questions beginners have about security tokens, STOs, ICOs, and IPOs.

preview	product	evaluation	price
	STO – Security Token Offerings for Beginners: The Ultimate Guide to Security Tokens, Security Tokens…		$8.99	Buy on Amazon

Additionally, you will learn about topics such as:

• How STO works.
• Steps to consider before investing in STO.
• Different types of asset-based security tokens.
• Tax and regulatory aspects.
• The process of evaluating the best STO.

#3. STO Financial Revolution

STO Financial Revolution, written by Alex Nascimento, aims to provide detailed information about security tokens and their offering process.

preview	product	evaluation	price
	STO Financial Revolution: How Security Tokens Will Change Business Forever – Third Edition		$30.26	Buy on Amazon

The main target audience for this book includes entrepreneurs, investors, financial professionals, and blockchain enthusiasts.

The main features of this STO-based book are:

• STO application for businesses.
• Steps to tokenize assets using blockchain technology.
• Principles for organizing, managing, and planning security tokens.
• Case study of STO.

last word

Security Token Offerings (STOs) are important to weed out fraudulent projects that were prevalent during the ICO period. Security tokens allow you to own digital tokens of real-world assets.

STO solves most of the issues related to regulation and project validation. However, security tokens also come with risks based on their underlying assets. Therefore, it is always wise to do proper research before investing in tokens.

You may also be interested in our top cryptocurrency trading courses.