Security Token Offerings (STO) Definition
Security Token Offerings raise funds by selling crypto tokens backed by the assets or revenue of a given company. Investors can trade, sell or hold their purchased security tokens, while the company raises funds necessary to the success of their project.
Unlike a utility token, the security token is tied to a real and tradable asset, subject to federal trade regulations. Utility tokens are purchased promises for a future product or service, whereas a security token is backed by financial security. In this way, utility tokens are less of a financial investment than a pre-order for a future reward, and present more of a financial risk.
What Are the Benefits of Security Token Offerings?
STOs allow investors to gain capital while complying with securities laws. Since security tokens are real financial securities, they must be compliant with KYC/AML regulations and other relevant laws. ICOs are often carefully watched because of the staggering number of scams in the market. Many projects fear being targeted by financial regulators and ensure that even utility tokens comply with appropriate laws for securities.
Security tokens appeal to younger investors, as STOs are often more financially accessible than shares listed on a traditional stock exchange. STOs have the potential to expand interest in blockchain crowdfunding to include traditional investors who are otherwise skeptical in crypto investment. Security tokens can be seen as a way to legitimize crypto projects to a broader audience.
As the crypto world draws worldwide attention, security token offerings provide a chance for investors to join in a more stable investment opportunity. Investors can then purchase security tokens backed by digital assets, and startups can engage in a more viable funding initiative to ensure future success.
Major companies are projected to use STOs to sell shares of their company in the future, in conjunction with or in replacement of traditional IPOs. Critics predict that STOs will have soon more appeal than traditional ICOs, since there is a slimmer chance of fraud and a more open compliance with financial regulations.