Traditionally, a fundraiser takes the form of an initial public offering called an IPO (Initial Public Offering). With the advent of the crypto environment appeared the Initial Coin Offering (ICO). An innovation that allows startups to raise funds without intermediation on the blockchain thanks to the presale of tokens. This led to the madness of 2017 and 2018 where hundreds of startups emerged and got funded through this channel.
But a new form of ICO has appeared more recently: STOs for “Security Token Offerings”. What exactly are they and how do these STOs work?
What are STOs?
STOs are tokens that are issued by a startup and registered on the blockchain to raise funds in cryptocurrencies. This allows them to finance their digital project.
Very concretely, investors will buy these tokens which will give them various rights (voting rights, dividends, etc.). Here we find the concept of “tokenization”. Like shares in a company, the idea with STOs is to acquire a share of the capital of a company using cryptocurrency.
It should be noted that several types of tokens coexist during an STO. The main ones are:
- The Debt Tokens. These are tokens similar to corporate bonds when they raise funds through debt.
- The Equity Tokens. These are tokens similar to the shares of a company issued during a capital increase for example.
NB: do not confuse “security tokens” with “tokenized securities”. The first are full-fledged financial securities created by a startup to raise funds. In the second case, these are tokenized financial products that already exist (such as works of art for example).
How does it work?
To set up STOs, you must comply with the KYC identification procedure (know your customer). You must also submit to a anti-money laundering procedure (Anti-Money Laundering).
You should also know that for some projects, there may be a restriction on the number of investors provided on a white list.
As you will have understood, the platforms allowing these STOs are highly regulated. Among the most famous are:
- Swarmknown for enabling the Robinhood Equity Token (RHET) STO.
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NB: It is possible to consult websites such as STOscope to consult the various STOs in progress in the cryptosphere.
What are the differences between STOs and ICOs (initial coin offerings)?
In both cases, they offer valuable assistance to companies wishing to raise funds and promote their development. However, STOs and ICOs also have major differences. We will retain here the advantages of each.
- Simple and automated distribution of tokens.
- No barrier to entry for buyers and sellers.
- Anonymous participation possible in some ICOs.
- Easier process to set up, because less burdensome in regulations than STOs.
- They offer better security thanks to 100% regulated offers.
- An STO associates with an underlying investment asset, such as stocks, bonds, funds or REITs.
- Being open to institutional investors, they ensure greater market liquidity.
- Since going through brokers and regulators, there is less market manipulation and speculation with STOs.
Conclusion: More innovative and secure ICOs
Being generally initiated with a view to regulatory governance, STOs are registered with government agencies to meet all legal requirements. This therefore requires the issuing company to undertake significant initial compliance work.
In return, the security emanating from these STOs could ultimately open up the world of blockchain to traditional finance and institutions often very cautious when it comes to regulation.