A Security Token Offering (STO) is an intelligent combination of an Initial Coin Offering (ICO) and an Initial Public Offering (IPO). Fundamentally, Security Token Offerings are asset-backed tokens in which the details of the ownership of the investment product are chronicled on a block chain.
This asset holds monetary value – it is real-world collateral represented by equity. It is defined as a security token because it complies with governing regulations on securities.
Benefits of STOs
Tokenization confers a number of benefits, including but not limited to, increased liquidity, portioning of larger assets, increased market efficiency, and lower issuance fees.
As regulatory institutions continue to crack down on noncompliant ICOs, STOs are positioned as a viable alternative.
Some of the reasons why STOs are looked at so favorably right now include:
Compliance with Regulatory Agencies
In 2017, ICOs dominated the cryptocurrency market. However, the U.S. Securities and Exchange Commission took a harder look at these offerings, identifying them as unregulated securities. As a result, many ICOs closed down and were forced to return capital to investors.
On the other hand, Security Token Offerings are able to avoid many of these pitfalls since companies list their tokens as securities from the start. They can file for exemptions with the SEC, protecting themselves from the Cease and Desist orders which were directed at many ICOs.
Security tokens are programmable for the purpose of authenticating who is permitted to purchase and sell the tokens. This restricts holders of these tokens from trading them to any non-validated address and assuring the issuer that the tokens are only accessible by accredited investors.
STOs allow for full transparency, enabling the investor to obtain information about the issuer, with total visibility on all tokens provided, promised, or discredited. This secures both the investor and the issuer.
Security tokens enable issuers to offer lower minimum investments through fractional ownership of an investment product. As a result, greater liquidity is allowed into the market.
With more individuals able to buy smaller stakes in the company, many assets with no resale value or those considered illiquid can have their liquidity increased on the block chain.
When security tokens become a globally tradable commodity, any person with an Internet connection will have access to these tokens under regulatory limits, effectively democratizing access to capital markets for investors and companies.
Unlike utility tokens that represent future access to an issuer’s service or product, STOs represent fundamental interest in equity, voting rights, profit sharing, dividends, and other benefits available to investors.
STOs give investors a legal right to ownership of the inherent value of the issuing company.
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