What is a Security Token Offering (STO) and Why Does Your Company Need it?


Tokenization is becoming increasingly popular in various business areas, 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 give them in the end.

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 Security Token Offering is an effective solution for companies that need to raise capital.

What is a security token?

Before learning what an STO is, it is worth understanding the concept of security tokens.

A security token is a digital equivalent of the security issued during an STO. Such digital assets may have different functions. For example, they can be used to confirm ownership of a share, the right to receive dividends, a share in profits, etc.

Smart contracts establish the characteristics of security tokens. The peculiarity of this technology is that the smart contract is executed only after both parties fulfill their obligations.

Various types of assets can be tokenized, for example:

  • public capital
  • Private capital
  • Real estate
  • Monetary obligations, etc.

Unlike other types of tokens, security tokens are always linked to real assets. In many jurisdictions, they are considered securities, so companies that issue them must comply with the requirements of regulatory authorities and file reports.

Another important factor behind the growing popularity of security tokens is collateral. If the project becomes insolvent for any reason, investors will be able to enforce their rights through regulatory authorities or in court.

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SEE ALSO: South African Regulatory Body IFWG Highlights Potential Benefits And Risks Of Tokenization

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Benefits of Security Tokens

Security tokens have several advantages over traditional financial instruments. The main ones are the following:

  • 24/7 access to trade – Assets in conventional financial markets are traded during trading sessions in various regions. Also, the markets are closed on weekends and holidays. But if you want to buy security tokens, you can do it at any time and from anywhere in the world.
  • fractional ownership – Security tokens make investments more accessible to retail investors. Tokenization allows you to divide the rights to an asset into shares and attract funds 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. Furthermore, the tokens are easy to sell and buy; there is always supply and demand. Liquidity is a great advantage as it increases the valuation of the company by up to 40%.

There are also other benefits of such tokens. For example, thanks to 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 called an analogue 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 conducting an STO, and the entire 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 held under private placement regulations, which significantly reduces launch time and legal costs, but also creates restrictions. In particular, a company may often not raise more than a certain amount (eg €5 million) or may target only accredited investors.

In the USA, this category includes investors that meet the following characteristics:

  • Annual income – $200,000 for a single person or $300,000 for a couple married for at least two consecutive years.
  • Net assets for private investors – $1,000,000 or more. At the same time, net assets do not include the home in which the investor lives.
  • Net assets for organizations – $5,000,000 or more. For example, they can be hedge funds or trust funds.

Companies whose members have the status of accredited investor can also participate in the STO. You can get more information about restrictions and rules for investors by consulting the experts at Stobox.

Why do companies need to launch STOs?

STOs have benefits not only for private investors but also for companies. Your company has the opportunity to raise funds much easier and faster than through other methods. This is especially true for private limited companies that cannot list their shares on stock exchanges. For such 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 important advantage is that it is possible to make asset management more flexible and attract financing 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 purchase a tokenized stake in an object receive certain rights, primarily to receive dividends or the right to vote on management.

Fractional ownership is a profitable way to raise capital because it is much easier to find 100 retail investors than one large investor. Also, tokenization allows you 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 involves high risks. With the help of tokenization, it is possible to divide 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.

Therefore, by launching STOs, companies can raise the necessary funding faster without making significant changes to their business structure or organizational form. The STO also makes it possible to make traditionally illiquid industries more liquid. In simple terms, you can get the necessary investments, but at the same time, you will not become a public company and continue with your 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 agricultural land in the US to grow cash crops. With the help of Stobox Digital Securities Dashboard, he helped raise up to $30 million to expand the business and reduce risk through diversification.

stobox is a top-tier tokenization company with more than 4 years of experience and many successful tokenization cases. Now you have the opportunity to invest in this future-oriented company as it has launched STBX tokens available to investors around the world.

Summary

STO is the initial placement of security tokens. These tokens are a tokenized form of securities. During the tokenization process, the company transfers them to the blockchain, where they are stored securely; and the transfer of the right to said goods takes a few seconds.

STOs are 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 participating in STOs have guarantees from government regulators, making security token offerings safer than other digital asset issuance methods.

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RECOMMENDED READING: A look at the laws governing security token offerings (STOs) under the Kenya Capital Markets Authority

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