Security Token Offering (STO)
- "Blockstack garnered headlines when it became the first STO to be granted Reg A+ status by the SEC, opening its sale up to the wider public."
What is an STO?
"Similar to an initial coin offering (ICO), an investor is issued with a crypto coin or token representing their investment. But unlike an ICO, a security token represents an investment contract into an underlying investment asset, such as stocks, bonds, funds and real estate investment trusts (REIT).
A security can be defined as a “fungible, negotiable financial instrument that holds some type of monetary value,” i.e., an investment product that is backed by a real-world asset such as a company or property.
A security token, therefore, represents the ownership information of the investment product, recorded on a blockchain. When you invest in traditional stocks, for example, ownership information is written on a document and issued as a digital certificate (e.g. a PDF). For STOs, it’s the same process, but recorded on a blockchain and issued as a token.
STOs can also be seen as a hybrid approach between cryptocurrency ICOs and the more traditional initial public offering (IPO) because of its overlap with both of these methods of investment fundraising.
How is an STO different from an ICO?
It is the same process, but the token characteristics are different.
STOs are asset-backed and comply with regulatory governance. Most ICOs, on the other hand, position their coins as a utility token that give users access to the native platform or decentralized applications (DApps). The purpose of the coin, they argue, is for usage and not for investment. As a result, ICO platforms circumvent certain legal frameworks and do not have to register or comply with the strict governance of regulatory bodies.
The barrier to entry for companies to launch an ICO is, therefore, much lower, as they do not have to do all the upfront compliance work. They are also able to sell their coins (i.e., raise funds) to the wider public.
It is much more difficult to launch an STO, as the intention is to offer an investment contract under securities law. Therefore, these platforms will have to do the upfront work of making sure they comply with the relevant regulations. They would typically also only be able to raise funds from accredited investors who have themselves passed certain requirements.
How is an STO different from an IPO?
Again, it’s the same process, but STOs issue tokens on a blockchain while IPOs issue share certificates on traditional markets.
Although both are regulated offerings, IPOs are only used in private companies that want to go public. Through the IPO process, they raise funds by issuing shares to accredited investors.
With STOs, tokens that represent a share of an underlying asset are issued on the blockchain to accredited investors. These can be shares of a company but, because of tokenization, can really be of any asset that is expected to turn a profit, including a share in the ownership of a property, fine art, investment funds, etc.
STOs are also more cost-effective than IPOs. With IPOs, the companies would typically pay high brokerage and investment banking fees to get access to a deeper investor base. STOs would still need to pay lawyers and advisors, but they offer more direct access to the investment market and, therefore, typically won’t have to pay large fees to investment banks or brokerages. The post-offering administration for STOs is also less cumbersome and cheaper than with traditional IPOs."
