What are STOs?
What are STOs?
Hello, in short, STO is kind of the new ICO, it a way for companies to raise funds, same as the old method, but with more regulations and spouse restrictions, in my opinion, the most effective way regarding STO will come in the form of real estate.
I will explain every aspect of at here, so grab your self a cup of coffee, because you ask for it, let's start
What is an STO?
To understand what an STO is, firstly, we must look at what a security is.
In terms of finance, security is a certification or some other financial instrument that has an intrinsic monetary value. These securities can then either trade by exchanges, who will broker the transaction or, they can trade directly from peer-to-peer. Then, these securities break down into two subcategories, equity and debt securities. This is, in effect, owning part of a company, without actually taking it into your possession.
Companies use these methods so that they can raise capital from investors to fund other parts of the business, such as expansion plans. In return for their investment, the financiers typically offer to make their money back and make a profit through means such as dividends, interest rates, or a share on the company profits.
Security Tokens are, in essence, cryptographic tokens that can pay the owner dividends, entitle them to a share of profits, pay them interest, or, they can be used to reinvest into other Security Tokens.
There is a prerequisite to qualify a crypto token as a Security Token. As a requirement, the token must pass the Howey Test, which set out in the case of SEC vs. Howey (1946) in the United States.
This means that if the token aligns with the following rules, it will consider a security token:
It involves an investment of money.
The investment is in a common enterprise, where there is more than one investor.
There is an expectation of turning a profit from the works of either a third party or the promoter of the token.
Security Tokens generally garner their market value from outside, the tradable asset. Because these classes as securities, regulations apply to them, and a breach in rules will leave the offeror exposed to potential liability.
If marketed effectively, with a platform that can help advertise your business through an STO, it can be a potent and effective tool in raising capital. It is also widely believed that STOs will eventually outgrow traditional ICOs since they offer more security for investors, due to the regulations in place.
Selling a Security Token is comparable to an ICO in the sense that coins issued to the investors. However, while an ICO investor would seek to gain value through the unlocking of a platform or the appreciation in the value of the coin, an STO investor would find to earn cash flow in future, potential dividends, or any inherent right to vote that comes with the security.
Security Tokens, as previously mentioned, are backed by outside assets that give them an intrinsic monetary value as soon as they are issued. This is in contrast to the use of a regular utility token, where the actual value is based on speculation until a platform is developed and marketed for it.
In essence, the model of using a security token makes the process of raising capital for your project, look less like a Kickstarter page, and more like a professional stock that is for sale.
You can also create dedicated black and whitelists with an STO that assists with anti-money laundering and know-your-customer regulatory requirements. Through operating in the manner, an STO can cut out a lot of the stigma that has currently been generated by the usual "Wild West" approach to crowdfunding. An example of some of these is a lack of corporate responsibility, the potential for fraud, and having no way of getting anything back if the company fails.
These positives surrounding STOs seem likely to generate a massive increase in the amount of capital invested in the blockchain industry.
When should my business Consider an STO?
There may be a point when you are considering marketing your company through an STO. Might you be thinking about it right now?
There are some key points to consider so that you can make sure you get good value for your STO.
Your company should only consider using an STO if you are looking to generate much capital, and your company aligns with four of the following seven descriptions.
Currently turning over more than $10 Million annually: This is because, to run successful funding round by using an STO, your business needs to generate the best valuation possible. The higher the turnover and profits of your business, the higher your company valuation will be. This will increase the amount of capital you can get for the percentages of your business.
Operating a global business: This is because, to maximize the potential of your STO, you must be able to market to a worldwide audience, rather than being limited to being regional. This will help you to raise a lot more capital, a lot quicker.
You should be interested in a funding method that connects with your current base of customers. If you wish to issue a readily transferable asset, then it would be wise to consider using an STO, as these can transfer relatively quickly. You should also be a high growth company if you want to maximize the positive effects of carrying out an STO.
Furthermore, you should be willing to take a slight risk, in the sense that the regulatory position surrounding STOs can change in different places, at any time. This could potentially place your source of investment at risk. Especially if countries with more spending power such as The United States, The United Kingdom, Germany, Russia, and South Korea, tighten their regulations. This carries the risk of massive losses of the business. Thankfully, the chances of this happening seem to be very slight. Therefore everything should be okay.
Finally, you should desire greater liquidity in the assets of your stakeholders. This is because, as opposed to ICOs which do not offer in this sense, STOs are an incredibly liquid investment.
If your company fits in with the majority of these descriptions, then your company would be incredibly likely to gain a lot of capital and support from your fundraising efforts.
However, if your company falls short of these points, it may be worth not jumping in at the deep end. This is because a failed attempt at launching using an STO could have dire financial implications for your business. Especially if the amount of capital raised is lower than the amount of money used to set up the offering.
If you set on using an STO, then it would be worth waiting until your business is at a point where it aligns with these descriptions a bit more closely. It will also give you more time to plan your offering.
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 consider securities, whereas ICOs aren't, people who invest using an STO further protect 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 backed. STOs, as securities backed 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 value through the technology of their platforms and the appreciation of the coins themselves. Whereas 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 in an efficient manner, similar 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 adverse events hitting your company.
Because STOs are securities and therefore bound by securities regulations internationally, their legal situation has to consider 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, regarding 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 specific barriers in the way of 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.
The Positives of STOs
There are many positives to using an STO. People wouldn't be clamoring and falling over themselves to find out more about it if there weren't any. However, the benefits are substantial.
Firstly, it is incredibly easy in comparison, for a business to market themselves to the public using an STO, as opposed to entering into the public through the more conventional means of floating on their country's stock market or an Alternative Investment Market. This is because it is considerably cheaper, as an individual wanting to invest will not necessarily have to pay broker's fees, exchange fees, and the costs associated with extensive due diligence processes. Also, this process can take a considerable amount of time to finalize, making it even more arduous.
In contrast to this, an STO can be used to place a value on an asset so that it can then be quickly traded on an online platform. This helps smaller businesses to rapidly gain substantial amounts of capital, without the high costs eating away at the profits from the offering.
These reasons make it easier for smaller businesses, with less spending power to market themselves and attract public investment.
As the legal situation surrounding blockchain technology becomes less of a mystery, and the facilities to create tokens become more accessible, the costs of running an STO will decrease significantly as time goes on. This will make it feasible available to businesses that are even smaller and will help to foster in the rapid development surrounding blockchain through this new wave of investment.
An STO can also provide greater flexibility to business owners looking to gain investment. This is because when a person wants to list their company publicly, there are rigorous background checks and even more ongoing compliance exercises. As well as this, some businesses become trapped in a pattern of looking at the company in a short circular context. This is because you will be going by the recommendation of analysts to take specific actions to maximize your stock. Without this pressure, you may find your long-term vision to be more transparent, and you can make changes to your business more freely.
STOs are also a great way to attract investors from all around the globe. This is because the standards required of an STO are fairly regular across different regions. Security Tokens also tend to be a much more liquid investment in comparison to private company shares, which can be cumbersome and expensive to trade.
This means that STOs, generally, are of interest to a different type of investor, in comparison to the stock market or Alternative Investment Market. Usually, contributions through STOs are from global investors who are wanting to create a reasonable return that has a much higher level of liquidity. This helps to raise large sums of money very quickly and can effectively market your business to many different parts of the world.
STOs are also good, in the sense that they can allow you to divide any of your underlying assets into smaller assets. This acts as a facilitator for fractional ownership. Fractional ownership can help to make your offering more affordable to investors. It can also make your tokens easier to transfer on a secondary market.
Finally, matters of compliance with STOs are a little more complicated than they would be with ICOs. However, compliance can be designed into an STO using new standards that have been introduced by certain blockchains; an example of this would be Ethereum. An example of this is a measure that can be inserted when making the STO whereby only trusted investors can buy or sell them.
The Negatives of STOs
Like anything, there are some negatives to using STOs. The following are some essential cons to consider when you are thinking about using an STO.
Firstly, securities in the traditional sense have brokerages and various other outlets, all over the world which can trade for you, or create security tokens for you. Whereas, with an STO, you have to create your Security Tokens to trade, in addition to creating your platform for them to trade on. If this isn't managed correctly, you could end up losing much money, or worse. You could end up in legal trouble with securities regulations.
Creating one of these platforms can be incredibly complex, which means you may have to bring in an external expert to develop and manage it for you. This will incur a cost. However, the decreased risk of financial or regulatory complications is definitely worth both the start-up and maintenance costs.
Furthermore, the world of STOs is a very new concept, with the first only completed in the last couple of years. Therefore, nothing has set in stone in terms of compliance and regulations. This makes using an STO slightly riskier for investors and your business.
There is minimal legal precedent regarding STOs, and regulators could move in a different direction at any point, so if new regulations brought in, the liquidity of your token and the stability of your STO might put at risk.
How Can STO help the Blockchain Ecosystem Keep Growing?
There is a firm belief that STOs will play a pivotal role in helping the blockchain ecosystem to continue its rapid growth, as a behemoth of an industry.
One of the reasons that STOs can help with the growth of the blockchain ecosystem is that because the actual Security Tokens are backed by real assets, they assure the people who invest. This assurance provides in the fact that the Security Tokens would be regulated by their respective countries, this means the likelihood of someone being defrauded out of their money, decreases. This will lead to a safer blockchain market for investors.
If the blockchain market shifted towards STOs, even cautious investors who are dubious about the legitimacy of some blockchain projects would be a lot more likely to take the risk, knowing that if anything goes wrong, the law is on their side.
The number of people investing in blockchain projects would then increase dramatically. This increased investment in the sector would allow for rapid expansion and the faster development of new blockchain technologies.
Eventually, the legitimacy of security regulations could serve to be the thing that sends blockchain technology into the stratosphere.
That would be it.