What is a security token offering and what are STOs?


ICOs are dead. Long live the STOs. The poster child of the 2017 cryptocurrency bubble, initial coin offerings (ICOs) raised over $20 billion from major investors around the world. But, they risked the wrath of the SEC by failing to comply with securities regulations. And the SEC cracked down.

In contrast, Security Token Offerings (STOs) are compliant offerings that still involve the sale of cryptocurrency tokens to fund new business. Although a relatively new approach, STOs have raised $380 million so far. and many analysts predict 2019 will be the year of the STO.

In this two-part guide, you’ll learn what security tokens are, how to create a security token, and how to run your own security token offering.

What is a security token?

A security token is a blockchain-based tradable financial asset that meets strict criteria and regulations, specific to the country in which it is issued. Tokenizing a security offers multiple benefits, such as being able to fractionate it, which you cannot do. with stocks and bonds.

The United States has strict securities regulations. It uses the “Howey test” to determine whether an asset is a security, which asks:

  • Is there an investment of money in a common company?
  • Is there an expectation of benefiting from the efforts of others?

If the answer to both questions is yes, then the SEC could treat the asset as a security. This means that if you are a business making an offer, you will likely meet both of these criteria, as offers tend to imply that the value will increase through the sale. The regulations are also strict on who can invest in security tokens because they use certain rules that have specific limitations. Other countries have different securities rules, which will be discussed later.

Security tokens are used to raise funds for a company. The token can be designed to provide owners with tangible value, such as an equity stake or a return through income distribution. Because of this, it is more likely to hold a constant value as long as the company is profitable, compared to cryptocurrencies, which are highly volatile.

What is a Security Token Offering (STO)?

A security token offering refers to when a security token is issued at a fixed price, usually before the tokens are made available on an exchange. They often include “discounts” during the time of the initial crowdsale. They will usually have restrictions on who can invest in the offering.

In the US, a security offering must be registered with the SEC or qualify for an exemption. All security token offerings are made pursuant to one of several registration exemptions granted to companies under the federal securities laws. This means that these investment opportunities will be limited in how they can be marketed and to whom they can be sold: they are almost always Restricted to accredited investors.

Security token offerings are intended to be the adult version of initial coin offerings, a trend in the cryptocurrency sector that has attracted more than $20 billion in revenue in the last two years. But many initial coin offerings were not registered as securities or qualified for an exemption, even though the SEC argued that they were securities. This means that most of the initial coin offerings were probably unregistered securities and may face prosecution and fines.

By keeping the tokenized aspects of initial coin offerings, but following the rules, security token offerings hope to capture similar or greater market demand. However, outside of the US, while they are more likely to attract investment from accredited investors, they can be least likely to gain high street support due to higher minimum investments.

Companies have already started the ball rolling. A total of 18 companies, including Chat Y Blockchain Capital— have raised $380 million through STOs, according to crypto venture fund Evercity and Security Token Club. The largest STO was Overstock tZero, which grossed $134 million. Other notable STOs include Nexo, a platform for crypto-backed loans, which raised $52.4 million in its offering last April. Additionally, Lottery.com’s LDCC came close with an STO of $47 million. It intends to host global sweepstakes events.

Why would you run a security token offering?

If you are thinking of creating a security token and looking to raise funds for your project, it might be a good option for you.

These are some of the main advantages:

  • The tiles can be divided into smaller parts. This means that investors can own tokens in part. This is the equivalent of buying a piece of a stock, which you cannot do.
  • They are compliant, unlike ICOs, which risk being classified as unregistered securities, something the SEC is already doing. breaking in.
  • It can bring in thousands or millions of dollars in funds.

Should I Run a Security Token Offering?

It can be tempting to jump on the security token bandwagon in the hope that it will make millions and everything will turn out great. But there are several potential downsides to running one. These are some of the main disadvantages:

  • It is an expensive process and costs can range from $50,000 to more than $100,000.
  • There is a lot of compliance that has to be dealt with.
  • If you want to do business in the US, you must register with the SEC or file a waiver, which will limit how you market your offering and who you can sell it to.
  • Lack of liquidity. Security token platforms are new and the sector is still growing, so there may be an initial lack of investors until they really take off.

What are security token issuance platforms?

If you are looking to create a security token, you will need to offer it on a security token issuance platform. You should not issue it yourself because you risk not being fully compliant. You also cannot offer it on regular crypto exchanges because they do not meet regulatory requirements such as full KYC procedures. Several new security token exchanges have been established to cater to this new wave of security tokens.

Security token issuance platforms will guide you through the necessary steps to create your security token. They will also help you with the necessary paperwork and let you know how to overcome any regulatory hurdles. Plus, they’ll help you decide on the right ways to make sure your token is compliant.

Please note: This article has been updated to show that the cost of security token offerings is lower than originally stated.

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