Security token offerings began to gain popularity in 2017, gradually replacing ICOs. The number of STOs increased significantly in 2018 and is growing steadily every year. Over $1,500,000,000 has been raised in all time. Importantly, the number of STOs that are successful is also growing. However, many companies are still skeptical about this fundraising tool and are in no hurry to open up new prospects for themselves. 

Security token offering explained

Initially, ICO (Initial Coin Offering) was used to receive investments in the cryptocurrency world. However, this method had a number of drawbacks, and in many respects, it did not live up to the expectations of both the crypto community and regulators. All parties had to look for alternative ways. One of them was the Security token offering (STO) procedure.

STO is a combination of legal and technical aspects, due to which the tokenization of assets of legal entities is carried out. Thanks to tokenization, securities are digitized and turned into a token called a security token. Such digital assets have a number of features, including:

Security token benefits

Asset tokenization is a technology that allows us to change the world of securities for the better. STO has a number of advantages both for markets in general and for specific companies.

What are the benefits for the markets?

Today, companies seek to place their shares on the stock exchange since their economic success largely depends on this. However, conducting an IPO forces organizations to spend a lot of resources – both money and time. Therefore, companies are looking for alternative ways. One of the main alternatives is DeFi protocols such as AMM (Automated Market-Making).

Thus, tokenized assets allow companies to trade securities without changing their status from private to public. It is much easier and more convenient for investors to buy and sell such assets. As a result, markets become more liquid.

Benefits for issuing companies

Companies that issue security tokens benefit a lot. First of all, they get a wider range of investors. With easier access to buying tokenized assets than classic securities, a company can attract many more interested investors without an upper or lower budget limit. In this case, it is not necessary to change the form of ownership.

Tokenized assets have great liquidity. Because of this, they are of great interest to investors, which means that companies can raise funding faster and easier. Risks are also reduced thanks to the solutions that blockchain offers. For example, the blockchain provides a high degree of protection of information encrypted in tokens, and smart contracts make it possible to guarantee the fulfillment of obligations by all parties.

Issuing companies can save a lot of money. Issuing security tokens costs much less than conducting an IPO (that starts with a million dollars and usually takes almost a year). In addition, it is possible to reduce the number of intermediaries or completely abandon them during the STO.

Current STO peculiarities

Security token offerings are becoming more and more popular. However, many companies are not yet ready to conduct an STO due to a number of difficulties. First of all, it is connected with legal nuances. Some states have already enacted legislation regulating STOs, but in a number of states, the legal framework is still missing or imperfect.

The cryptocurrency industry as a whole is experiencing difficulties in regulation, and such nuances as decentralized exchange and P2P transactions are often not mentioned at all in the laws.

Summary