What are Security Token Offerings (STO) ? What are the pros and cons compared to ICOs?
What is Security Token Offerings (STO)? What are the pros and cons compared to ICOs?
Do neither. You’ll lose either way.
ICO - raise capital, but more than likely lose it all when SEC comes knocking, and odds are you’ve built a useless product on a worthless protocol (because the viable protocols required for disruption aren’t in production just yet).
STO - register your token offering as securities, enabling regulatory compliance while opening up a new set of legal vulnerabilities (investor protection), with no secondary trading market, and often limited use of blockchain (doesn’t go past equity tokenization which is a mediocre implementation of blockchain at best).
The most significant disadvantage to STOs is the model tying the tokenization to securities. A true utility token model will destroy a competitive security token model any day of the week.
So have at it! Keep in mind: there is an excellent value in the story of the tortoise and the hare.
The STO is a valuable and powerful alternative to venture capital financing for companies around the world.
Security is a financial instrument that represents a real asset, such as stocks, bonds, and managed real estate trusts. Generally, when protection is purchased, a transaction is signed on a paper. A security token does the same. However, ownership confirms through blockchain transactions. Security tokens provide investors with various financial rights, like dividends, equity, voting rights, revenue shares, profit shares, and other financial instruments.
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The benefits of STO
Access to global capital: It has usually been easier for established companies to access foreign investors. However, STOs have no geographic barriers. This empowers companies, both large and small, to present themselves to international investors over the internet. Start-ups and growth businesses can enter deeper funding pools and broader brand awareness.
Better terms: STOs offer relatively better terms than raising capital from VCs. First, companies need not lose control of their board seats or company. Management teams are in a stronger position to make business decisions. Second, for equity security token offerings, companies can sell common stock instead of selling preferred stock. Finally, STOs usually rise at higher valuations.
Low-cost entry: STO can be used to tokenize various assets, commodities as well as financial instruments. This means that small companies can benefit from the opportunity to raise a large amount of capital from a pool of global investors.
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The disadvantages of security tokens
Complicated compliance: Security Tokens still fall under existing securities regulations. As such, companies running an STO will still have to comply with the same rules as they would floating an IPO. The slight benefit of STOs is in coding some of those compliance factors into the token and smart contract, making the token more easily tradable after issuance. The complexity of legal regulations over multiple jurisdictions still carries risk, however, so it’s crucial to get right.
Platform required to create and manage tokens: Unlike traditional securities, which have exchanges and brokers established around the world, you can’t simply call up your broker or NOMAD, if you’re listing on the AIM, and like them to create security tokens. STOs require you to create your tokens as well as a platform to manage their sales. Get this crucial technological part wrong, and you’ll end up in financial and legal hot water. Creating a secure and suitable platform is a complex process, however, which means bringing a mediator in to manage the platform and tokens.
A growing market: The first STO completed less than two years ago, making this a very new space. As such, nothing has been extensively tested in the long-term, increasing the risk for both business and investor. As such, there isn’t much legal precedent to rely on, and regulators could change their minds at any time.
ICO: Initial coin offering:
ICO is a way for a project to raise his funds without a loan by issuing their coin. The idea is that when the company gains momentum, the coin value will rise accordingly.
This way, the company raises funds, and the investors earn money.
1-Its not always safe. many projects turn up to be scams
2-No regulation. Anyone can launch an ico
3-There is no way to monitor the actual development of the company.
4-Bad name and reputation, come from the late events regarding ICO.
5- Almost No legal or any law’s obliged the project decided to launch an ICO
6- There is no restricting on the person choose to invest; any child can take his mother’s credit card and buy countless coins.
7-Investor does not gain real shares in the company he invests in
Security Token Offering, the big brother of the ICO, its somewhat close to ICO except, in STO you buy real shares in the company you get dividend and individual rights, also, the process of launching an STO obliged the company stand on a strict rules and regulations unlike the ICO’s (which everyone can start)
First, the preparation stage is different and takes a lot more time then ICO. But I will not go in into all the details.
What is the Difference Between an STO an ICO?
While STOs and Initial Coin Offerings (ICOs) are similar, in the sense that they are both used by companies to generate capital for their projects, in most other aspects, they are very different.
Firstly, because Security Tokens considers as securities, whereas ICOs aren’t, people who invest using an STO are further protected by securities legislation. This helps to prevent fraud or to provide the investor with a type of recourse if the company they have invested in goes bankrupt. Because of this, generally speaking, STOs are currently being considered as a potentially safer purchase for investors.
Furthermore, there is a difference in the way STOs and ICOs back. STOs, as securities back by real assets that have an intrinsic, monetary value. ICOs, on the other hand, do not have their value fixed by any tangible assets and, therefore, do not have an inherent monetary value.
Also, ICOs generate their value through the technology of its platform and the appreciation of the coins themselves. In contrast, STOs create their value through the operations and the climate of the business itself. Because of this, for an STO to be valuable, your company would need to be run efficiently, similarly to that of a publicly-traded company. This is in contrast to an ICO for your business, which would not devalue as your coins as severely due to unfavorable events hitting your company.
Since STOs are securities and therefore bound by securities regulations internationally, their legal situation has considered a lot more clearly than it would for a traditional ICO. This would involve bringing in legal experts, who can help to steer your business in the right direction when launching an STO. While you would still potentially need legal advice for an ICO, the hours of work that your lawyer would have to put in, is a lot higher for an STO, due to their regulated nature. This would involve increased costs for your business.
Due to the regulations surrounding securities, Security Tokens would be slightly more limited, about the breadth of their target market. This is because, due to the unregulated nature of ICOs, there is no restriction on who can invest. Someone with $10, could invest in an ICO from anywhere in the world. This is in contrast to STOs, which have to comply with anti-money laundering and know-your-client regulations. These regulations place certain barriers in the way of certain investors, depending on the securities legislation in their country. On the flip side, this can be seen as a good thing, because it means that generally, STO investors would be more reputable.
An example of this is that in the United States, investors have to be accredited before they can actually make any deals of this nature. This provides a barrier to people that may have less capital. However, it also helps to ensure that investments are coming from legitimate sources.
In essence, STOs are more similar to floating on the stock market than they are to ICOs.