What Is STO? How It Differs From ICO & IEO; Benefits and Drawbacks.
Fundraising is an essential process in the financial world where companies raise funds using various fundraising methods to expand their operations for capturing the market and finally getting into the profit position.
Since cryptos have also become a big part of the financial world there are many fundraising methods available like ICO (Initial Coin Offering) or IEO (Initial Exchange Offering) for crypto startups and companies. The new entry to the funding method is STO.
What Is STO?
STO full abbreviation Security Token Offering means offering security token to the investors which is backed by real world assets such as stocks, bonds, debt securities, index funds, options, etc. And these tokens are compliant with government regulations.
Simply put, security tokens are the tokenized variant of a registered company or corporation assets and these tokens offered by the regulated exchange to the investors.
There are three different kinds of Security Tokens offered.
#1. Equity Tokens.
Equity tokens are similar to the traditional share they represent the shares issued by the company they’re recorded on the blockchain.
Owners of equity tokens are entitled to share the company’s profits and voting rights.
#2. Debt Tokens.
Debt tokens are debt instruments that include real estate mortgages and corporate bonds.
These tokens represent capital raised through debt, and they can be compared to a loan to the issuer.
Owners of debt tokens generally entitled to the repayment of principal and periodic interest.
#3. Asset Backed Tokens.
These tokens represent the ownership of specific assets such as real estate, commodities.
Difference Between STO, ICO, and IEO.
Benefits of STO.
Since STOs are regulated by the government and have real value backing, it is a rare chance that STO could fail or spam the investors.
This will encourage institutional investors to participate in crypto fundraising.
For many investors and fundraisers, it is hard to go outside of their jurisdictions. But with STOs, they can set foot aside from their country.
Token standards are uniform for all the regions of the world, making anyone participate or raise the funds anywhere from the world.
STOs can easily be divisible in small subdivisions form one large asset, even traditional illiquid assets, such as scarce paintings, property and collectables.
As a result, it opens the doors for many small investors to own a fraction of an asset instead of having to buy the entire product.
Dividing STO brings more liquidity in the market and attracts investors who want to make a good return with greater liquidity, helping projects raise large sums quickly and spread awareness of their business around the world.
It Is Possible to Embed Compliances.
STOs are highly regulated than other crypto fundraising methods, and the regulations vary depending on investor type, asset type or jurisdictions, making it hard to incorporate with all of them.
However, all the compliances can be hardcoded into the security tokens with new standards developed on a blockchain. It means that regulations become exponentially easier and automatic once the system is set up.
Drawbacks of STO.
To raise the funds in STO, projects have to set up processes for custodianship, tracking ownership, exchange approvals, Know Your Customer (KYC), AML, etc. to make sure they comply with the relevant securities laws.
All these additional upfront work does make STO more costly and raise the barrier of entry compared to traditional ICOs.
STOs Can Be Restricted Only to Accredited Investors.
This is the biggest drawback of STO because certain jurisdictions might limit who can invest in STO.
For example, in the US where only accredited investors are allowed to invest in STOs, to be one he/she needs to earn at least $200,000 per year, or, have at least 1 million dollars in the bank.
These kinds of restrictions reduce the overall investor pool and limit the fund flow.
Secondary Market Restrictions.
Security tokens allowed to transfer only in a licenced platform that must have a security trading’s license in the country they operate in.
For listing security tokens in different platforms, projects have to fulfil all the compliance of different countries.
The task of getting approval falls on the shoulders of the company; which further increases the administrative burden and limits reaching out to more investors.
STO is a new method of fundraising in the crypto world, so it has to be explored more to understand deeply.
But for sure it is one of the best methods for crypto projects to raise the funds, and on the flip side, it is also the best option for crypto enthusiastic investors to invest in crypto startups.