What is Security Token Offerings (STO) ? A Security Token Offering is a public offer of security that is tokenized. The owner of the token obtains rights in a company or contractual claims to assets as promised by the security and in contrast, an ICO is usually not backed up with assets, but it mostly involves the issuance of a cryptocurrency or a utility token. With a cryptocurrency token, the token can be used as a means of payment. The utility token entitles the owner to purchase goods or services from a company. They both have in common however that they are not secured by assets. The risk of an empty promise is therefore very high. With the Security Token Offering, however, there is a right to a share of an asset and there is also a stricter legal framework.
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. For Security Token Offerings it’s the same process but recorded on a blockchain and issued as a token.
Security Token Offerings can also be seen as a hybrid approach between cryptocurrency ICO and the more traditional initial public offering (IPO) because of its overlap with both of these methods of investment fundraising. STOs are asset-backed and comply with regulatory governance. Most ICOs, on the other hand, position their coins as a utility token that gives 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 Security Token Offerings , 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.