What is a Security Token Offering (STO) and why does your business need one?
Tokenization is becoming increasingly popular in various business fields, from real estate to natural resources. As a result, more and more companies are interested in how to tokenize their assets and what it will ultimately bring them.
Stobox has extensive experience in tokenizing assets for clients around the world.
In this article, Stobox experts explain what an STO and security tokens are and why offering security tokens is an effective solution for companies that need to raise capital.
What is a security token?
Before learning what an STO is, it helps to understand the concept of security tokens.
A security token is a digital equivalent of security issued during an STO. These digital assets can have different functions. For example, they can be used to confirm ownership of a share, the right to receive dividends, a share of profits, etc.
Smart contracts define the characteristics of security tokens. The peculiarity of this technology is that the smart contract is executed only after both parties have fulfilled their obligations.
Different types of assets can be tokenized, for example:
- public capital
- Private capital
- Monetary obligations, etc.
Unlike all other types of tokens, security tokens are always linked to real assets. In many jurisdictions, they are considered securities, so companies that issue them are required to comply with the requirements of regulatory authorities and file reports.
Collateral is another important factor in the growing popularity of security tokens. If the project is declared insolvent for any reason, investors will be able to assert their rights with regulatory authorities or in court.
SEE ALSO: South African regulator, IFWG, highlights potential benefits and risks of tokenization
Benefits of Security Tokens
Security tokens have several advantages over traditional financial instruments. The main ones are:
- 24/7 access to trading – Conventional financial market assets are traded in trading sessions in various regions. In addition, the markets are closed on weekends and public holidays. But if you want to buy security tokens, you can do so anytime and from anywhere in the world.
- Fractional ownership – Security tokens make investments more accessible to retail investors. Tokenization allows you to split the rights to an asset into shares and attract funding from a wider range of investors.
- Cost reduction – Transactions with security tokens do not require intermediaries, brokers, etc. additional.
- High liquidity – Tokenization makes assets more available for investment by retail investors, increasing liquidity accordingly. Additionally, tokens are easy to sell and buy; there is always supply and demand. Liquidity is a huge advantage as it increases the company’s valuation by up to 40%.
These tokens also have other advantages. For example, through tokenization, you can create an entire ecosystem of interconnected services. In addition, compliance procedures are fully automated.
What is a Security Token Offering (STO)?
An STO can be described as an analog of the traditional IPO. As a result of STOs, security tokens are issued, which are similar to company shares. The company does not go public by doing an STO, and the whole process takes much less time than an IPO.
STOs are always conducted in accordance with state or local securities laws. This provides a higher degree of investor protection and reduces regulatory risks for companies issuing tokens.
STOs are often conducted under private placement regulations, which significantly reduce launch time and legal costs, but also create restrictions. In particular, a company can often only raise a certain amount (eg 5 million euros) or can only target qualified investors.
In the USA, this category includes investors who meet the following characteristics:
- Annual revenue – $200,000 for a single person or $300,000 for a married couple for at least two consecutive years.
- Net assets for private investors – $1,000,000 or more. At the same time, the net assets do not include the housing in which the investor lives.
- Net assets of organizations – $5,000,000 or more. For example, these can be venture capital funds or trust funds.
Companies, all of whose members have qualified investor status, can also participate in the STO. You can find out more about restrictions and rules for investors in consultation with Stobox experts.
Why should companies launch STOs?
STOs have advantages not only for private investors but also for companies. Your business has the ability to raise funds much easier and faster than through other methods. This is especially true for private stock companies that cannot place their shares on the stock exchange. For these companies, an STO is one of the main ways to raise funds.
To issue security tokens, there is no need to change the form of ownership or transform the organization. Another significant advantage is that it is possible to make asset management more flexible and attract funding for large investment assets from small investors. For example, a company that owns a certain property can tokenize it and divide it into shares. In addition, investors who buy a nominal stake in an object receive certain rights, mainly to receive dividends or the right to vote in management.
Fractional ownership is a cost effective form of raising capital because it is much easier to find 100 retail investors than one large investor. In addition, tokenization makes it possible to lower the entry threshold. For example, finding an investor willing to invest $1,000,000 in a potential mining development can be very difficult as this area is high risk. With the help of tokenization, it is possible to split an asset into shares, and each one will cost, for example, $10,000. This amount is more accessible to retail investors, including those who are risk averse.
Thus, by launching STOs, companies can raise the necessary funds more quickly without making significant changes to the structure or organizational form of their business. The STO also helps to make traditionally illiquid industries more liquid. Simply put, you can get the necessary investments, but at the same time you won’t become a public company and carry on business as usual.
One of the examples of successful tokenization is the Farmland Assets security token offering. The result of the company’s cooperation with Stobox was the offer of equity participation in a company that buys farmland in the United States to grow cash crops. With the help of Stobox Digital Securities Dashboard, he helped raise up to $30 million to grow the business and reduce risk through diversification.
Stobox is a leading tokenization company with over 4 years of experience and many successful tokenization cases. You now have the opportunity to invest in this forward-looking company since it launched STBX tokens available for investors worldwide.
STO is the initial placement of security tokens. These tokens are a symbolic form of securities. During the tokenization process, the company transfers them to the blockchain, where they are securely stored; and the transfer of the right to these assets takes only a few seconds.
STOs are gradually gaining popularity around the world because they allow companies to raise funds from retail investors, which is not always possible in other cases. Additionally, investors who participate in STOs have guarantees from government regulators, which makes security token offerings safer than other methods of issuing digital assets.
RECOMMENDED READING: A look at the laws governing Security Token Offerings (STOs) under the Capital Markets Authority of Kenya
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