What is Security Token Offering and could it be the future of fundraising?

Introduction:

In any line of business, crowdfunding plays a major part in elevating those businesses to another level. The same formula applies for cryptocurrency related businesses also. In fact, crowdfunding in crypto-related businesses plays a vital factor in the success of any project. Crowdfunding can be interpreted as the usage of a small amount of funds that are gathered from multiple investors. Crowdfunding involves the accessibility of a huge network of people through several social media as well as crowdfunding websites.

The impact of crowdfunding gathers the investors and entrepreneurs together, with a vision of increasing entrepreneurship through expanding the investors’ pool. Such extension of investors is implemented in order to take the project beyond the conventional pool of owners, investors as well as venture capitalists. Crowdfunding has managed to help out numerous entrepreneurs to raise hundreds of thousands of dollars from anyone willing to invest money. Crowdfunding provides opportunity to anyone possessing an idea and wanting to pitch it in front of waiting investors.

On the other hand, a cryptocurrency crowdfunding is the same fundraising process where digital currencies are used instead of conventional fiat currencies. There are multiple types of fundraising methods associated with cryptocurrencies. Some of the common types of crypto crowdfunding are ICO, STO and IEO. However, ICOs are, for the most part, highly unregulated. IEO, on the other hand, is purely subjected to the registered cryptocurrency exchange. However, one would always prefer a certain degree of security while dealing with financial sectors. In that regard, STO is regarded as the safest approach compared with all methods.

What is an STO?

STO is defined as Security Token Offering and Security tokens commonly represent investment contracts into an underlying investment asset like stocks, bonds, funds as well as unit trusts. A security can be interpreted more or less as a fungible, negotiable financial tool that holds a certain amount of monetary value. These tokens are by default backed by a real-world asset like a company or a property. A security token by default, is a negotiable digital instrument that represents an ownership title which is recorded on a blockchain.

As opposed to the conventional investments involving traditional stocks where the ownership information is entered on a document or recorded in a custodian account, the information recorded during STOs are recorded on the blockchain in the form of a token. STO(security token offerings) can also be considered as a hybrid approach underlying cryptocurrency and token offerings. This can be regarded as a mixture of both conventional investment and investment involving cryptocurrencies.

Security Token Offering assets are, by default, asset-backed and comply with certain regulatory governance. However, launching cryptocurrency tokens using STO event requires some degree of work than the other methods. As a result, the issuing platform is obliged to do some upfront work to make sure they comply with the necessary regulations. The platform would only be able to raise funds from accredited investors who have passed a few requirements themselves before proceeding with the issuance. Having said all these, there are certain benefits that come along with STO services.

Benefits of Security Token Offering:

There are numerous stakeholders associated with a security token. They include the issuer, buyer, exchanges and regulators. Commonly, getting your hands on public markets in the name of funding source was only possible for some of the biggest companies. However, with the arrival of STO, even smaller companies can also target the public market in order to fund. STOs offer investors tools that are way beyond any speculation along with providing transparency for regulators and offering them fresh business models for cryptocurrency exchanges. One way or the other, there are certain notable benefits that come with STO platform when compared to conventional securities:

Programmable: The primary advantage of security tokens when compared with conventional financial securities is that they are easily programmable. This simply means that you can integrate some rules inside the security token which comes into effect automatically. These applied rules can be related to dividend releases, voting rights or any other privileges. Such rules can then be considered as an effective way to incentivise ownership as well as ensure price stability.

Liquidity: The presently available securities can be only traded from conventional working hours and only on weekdays. In addition to that, they also require a few days of time before they can settle in. In the case of STOs, where blockchain technology is implemented, tokens can be settled rapidly or within minutes. In regard to that, utility tokens can be settled a lot quicker than conventional securities. When a subsidiary market is available for exchanging utility tokens, it is capable of offering investors with overwhelming liquidity over their assets. This is considered as an immense benefit when compared with conventional investments.

Wide market accessibility: Whenever a company decides to launch an Initial Public Offering, it is obligated to decide if they want to carry out an IPO or not. In case of ICOs, the blockchain technology is free of borders and startups have successfully raised funds from all corners of the world. This same situation applies to STOs also. Out of nowhere, an organization can offer their securities to the global market and thus give it a higher chance of triumph. In addition to that, as opposed to an IPO where markets would commonly involve a heap amount of fee, STO fundraising charges substantially lower fees for raising funds.

Traceable and Compliance: The regulatory compliances are the key for security tokens. Having said that, regulations might vary depending on the type of investment, type of assets or the enclosing jurisdictions. Implementing all of them would normally be too much hassle. Having said that, since security tokens are programmable, these regulations can be integrated in the code. This simply means that regulations will become exponentially feasible and automated once the system is set up. Also, security tokens are entirely traceable, just like utility tokens. SInce cryptocurrency can be traced throughout the years for potential information of the owner, there is a certain volume of transparency that comes along with the involved stakeholders.

Ownership: Security tokens offer the possibility of fractional ownership. Investors would always prefer to divest in order to avoid their risks. Having said that, in this situation, fractional ownership is complicated, especially when dealing with high-priced assets like real estate or art. Using security tokens, it becomes possible to own a fraction of a building in one side of town and another part in a completely different area. The investors can divest their money across several properties instead of spending all funds on one building.

Just like any other business sector that involves monetary functions, Security tokens also carry a certain degree of so called challenges. These are some technical hiccups that come while dealing with security token offerings.

Challenges of an STO:

Just like in any business, every single advantage will be followed up by a certain degree of challenges as well. In that regard, there are some significant challenges which need to be addressed before making use of Security Token Offering.

For starters, they are much more complex than carrying out an ICO. When you decide to go with STO fundraising services, then you will be obliged to follow a lot of regulations from the local governing body and specifically the SEC will be breathing right over your shoulders at all times. In order to overcome such regulatory hiccups you will require a lot of preparation as well as a considerate amount of legal advice for making sure that you are fully compliant before executing an STO platform.

The other challenge is in relation to cryptocurrency exchanges. One of the major pros of a security token is the liquidity. This simply means that an investor can sell a token at their desirable time. In order to do that, you will need a secondary market or an exchange. Therefore, quite naturally, these exchanges will be required to oblige with most of the regulations and this ultimately makes it difficult for a crypto exchange to develop new security tokens.

These so-called challenges somehow make the security token offering more efficient in their own way. Such regulations have managed to earn a certain volume of trust among the investors as well as creators. With all the malicious activities swirling around the crypto ecosystem, STO fundraising has gained prominence among the crowdfunding circle.

STO - The future of fundraising:

As more people are willing to start their own business in the financial sector, an increased number of crowdfunding has been executed. The overwhelming demand for crowdfunding gave opportunities to unwanted malicious activities also. Entrepreneurs and investors who trusted unregulated crowdfunding are slowly shifting their allegiances towards a more safer form of fundraising. In simpler words, investors are looking for a certain degree of accountability for their investment.

In that regard, being monitored and overseen by governing authorities, Security Token Offering has gathered a lot of prominence among the investors. This is simply because the investors can count on registered authorities to make sure that their investments do not go in vain. As a result, more people started to invest in fundraising events that involve a certain volume of security. Hence, it is becoming evident that investors are showing interest in taking part in crowdfunding that is capable of assuring proper return of investment.

In addition to these, there are few valid aspects that play a major role in people opting with security token offerings rather than conventional crowdfunding methods.

Why STO is preferred to traditional methods:

Initial Coin Offering was an infamous fundraising strategy that was implemented for blockchain-related projects. This was getting more popular as days went by, especially among the startup ventures. This served as a means of fundraising technique using which digital coins or tokens were created. On the other hand, Security Token Offering emerged with one particular motto which made the entire crowdfunding process much more secure. Security Tokens come with a default advantage of governed regulations and laws that should be imposed over the project according to the SEC guidelines.

The traditional crowdfunding methods include diverse industries as a potential fundraising project. On the other hand, the ICOs only execute projects that are purely based on blockchain technology. However, when you take the STO platform into consideration, it also involves diverses industries in it’s fundraising campaign. When talking about conventional crowdfunding and Initial Coin Offerings, the regulations are very much next to none. On the flip side, Security token offerings are completely regulated in adherence to the SEC guidelines in all the countries.

If you wish to raise funds through crowdfunding, you should consider executing it with a security token offering. In addition to opting for the most secured form of crowdfunding, security tokens are completely regulated with respect to the SEC guidelines and regulations in all the countries.

Choosing the ideal STO platform:

There are multiple platforms which look as if they can offer a top quality service. Having said that, selecting the right provider is a vital step during the Security Token Offering process. This is because, if we compare the service provided by multiple platforms, then on a microscopic level, the provided features can differ significantly. While choosing the platform, the investors need to analyze the specific requirements of their tokens in parallel to the service offered on the platform.

It is important to take into consideration that an issuer should be able to manage the whole lifecycle through one compliance provider. In addition to that, they should also consider the effect of everything that comes after viz., investor management, dividend issuance as well as secondary listings.

Final thoughts:

It would be very great if an issuer can work along with the same service provider throughout the business cycle. This would be possible if you manage to pick out the absolute professional group of service providers. In order to pick out the best in the business, you would have to go through some intense research and extensive analysis to get the top professionals by your side. This is mainly because the current market is filled with a lot of amateurs. Therefore it is highly advisable that you go with the best STO development company in the crypto ecosystem. Always keep in mind that having the support of an elite group of professional experts in your corner will be very helpful for the long run of your business.