Security Token Offering: A Complete Guide for Beginners
A Security Token Offering or an STO is a public offer of security that is tokenized. The right to the assets is reserved for the owner of the token on a contractual basis, as promised by the security. The token can be used as the means for payment. The token also entitles the owner to buy goods or services from any company. More precisely, security tokens are cryptographic tokens that share profits, pay dividends and interest, or invest in other assets or tokens to generate profits for the token holders. The security tokens act as a bridge between the blockchain world and the legacy finance.
With STO, there is a right to share of an asset within a strict legal framework. As such, the legal securities for STOs are much more stringent as compared to other securities. However, an STO is not free from risks, it has its limitations and it is also susceptible to market risks.
Various regulations that affect STOs:
Regulation D
Regulation D is available for accredited investors. Under this regulation, the issued securities need to be locked up for one year. This regulation also assures that all the information that has been provided in the solicitation are true. This regulation also allows an STO to avoid being registered by the Securities and Exchange Commission (SEC), provided “Form D,” which has been filled in by the creators and securities are also sold.
Regulation A+
By this specific exemption, the creator will be able to provide an SEC approved security to non-accredited investors. Though this is a huge priority, qualifying for this is very hard indeed. This makes Regulation A+ very costly and also it is very difficult to issue Regulation A+.
Regulation S
This regulation is not subjected to the registration requirement u/s 5 of the 1993 Act, but the creators are required to follow the security regulations where the same is applicable.
Layers in STO:
Blockchain Protocols
There are no separate blockchain protocols for security tokens as such, but they are constructed on existing protocols like that with Ethereum, which is the most popular in the crypto market to date. Nevertheless, there are many more new protocols making up their way in the crypto space.
Issuance Platforms
These platforms are responsible for creating and distributing tokens and are simultaneously responsible for having complaint-regulated smart contracts for the token issuance.
Smart Contracts
All the security tokens are associated with smart contracts, which is a simple program designed to execute a specific criterion. Smart contracts determine how the tokens are to be purchased, sold and traded in an immutable, traceable and fully transparent fashion to be at par with the cryptocurrency requirements.
Exchanges
This is an essential element in the digital asset ecosystem that facilitates trading, thereby providing liquidity in the transactions. Tokens have no worth without exchanges unless anybody else is ready to pay for them.
Advantages of STOs:
Tokenization of Assets
The STOs are offered for fundraising with a backup of an asset. This backup in crypto terms is called the “tokenization of assets.” Tokenization of assets also helps in avoiding the fees and makes the operations easier.
Freedom of Trade
With the help of STOs, trade has become much easier as STOs help in removing the barriers to trade that opens trade opportunities 24X7.
Absence of middlemen
STOs have made it possible to eliminate go-betweens in the transactions and now everything is done by the buyers and the sellers themselves. Though this has put a substantial amount of burden on both the buyers and the sellers, the cost has reduced exponentially because of the elimination of the middlemen.
Fractional Ownership
Splitting ownership by fractions will enable us to avoid a high amount of payments together and will make the work easier.
The downfall of Initial Coin Offerings (ICO) has increased the demand for STOs to a manifold. Tokenized securities have managed to bring in the trust of the investors, as a security token of a cryptocurrency is a guarantee for the safety of people’s assets.
