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

An STO can be called 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 conducting an STO, and the whole process takes much less time than an IPO.

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

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

Various types of assets can be tokenized, for example:

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

Unlike any other types of tokens, security tokens are always tied 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.

Another important factor behind the growing popularity of security tokens is guarantees. If the project is declared insolvent for some reason, investors will be able to assert their rights through regulatory authorities or in court.

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SEE ALSO: South Africa Regulatory Body, IFWG, Highlights the Potential Benefits and Risks of Tokenisation

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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 trading – Assets in conventional financial markets are traded during trading sessions in various regions. Plus, markets are closed on weekends and public holidays. But if you want to buy security tokens, you can do it anytime 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 funding from a broader range of investors. 
  • Cost reduction – Transactions with security tokens do not require additional intermediaries, brokers, etc.
  • High liquidity – Tokenization makes assets more available for investment by retail investors, thereby increasing liquidity accordingly. Moreover, tokens are easy to sell and buy; there is always supply and demand. Liquidity is a huge advantage as it increases company valuation up to 40%.

There are also other benefits of such tokens. For example, thanks to tokenization, you can create a whole ecosystem of interconnected services. In addition, compliance procedures are fully automated.

What is a Security Token Offering (STO)?

An STO can be called 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 conducting 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 that issue tokens.

STOs are often conducted under private placement regulations, which significantly reduces launching time and legal costs, but also creates restrictions. In particular, a company can often raise no more than a certain amount (for example, 5 million Euros) or can 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 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 for organizations – $5, 000, 000 or more. For example, it can be venture or trust funds.

Companies, all members of which have the status of an accredited investor, can also take part in the STO. You can learn more about restrictions and rules for investors in consultation with Stobox experts. 

Why Do Companies Need to Launch STOs?

STOs have benefits not only for private investors but also for companies. Your business gets the opportunity to raise funds much easier and faster than through other methods. This is especially true for private joint-stock companies that cannot place their shares on stock exchanges. For such companies, an STO is one of the main ways to raise funding.

To issue security tokens, it is not necessary to change the form of ownership or to transform the organization. Another significant plus 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 buy a tokenized stake in an object receive certain rights, mainly to receive dividends or the right to vote in management.

Fractional ownership is a profitable form of raising capital because it is much easier to find 100 retail investors than one large investor. In addition, tokenization allows you to lower the entry threshold. For example, finding an investor willing to invest $1,000,000 in a prospective mineral 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 will cost, for example, $10,000. This amount is more accessible to retail investors, including risk-averse ones.

Thus, by launching STOs, companies can raise the necessary funding faster without making significant changes to the structure or organizational form of their business. 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 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 offering of equity ownership in a company that purchases agricultural land in the US to farm cash crops. With the help of Stobox Digital Securities Dashboard, it helped to raise up to $30 million to expand the business and reduce risks through diversification.

Stobox is a top-tier tokenization company with more than 4 year of experience and many successful tokenization cases. Now you have an opportunity to invest in this future-oriented company since it has launched STBX tokens available to investors worldwide.

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 safely and securely; and the transfer of the right to such assets takes a matter of seconds.

STOs are gradually gaining popularity worldwide because they allow companies to raise funding from retail investors, which is not always possible in other cases. In addition, investors who participate in STOs have guarantees from government regulators, which makes security token offerings safer than other methods of issuing digital assets.

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RECOMMENDED READING: A Look at Laws Governing Security Token Offerings (STOs) Under the Capital Markets Authority of Kenya

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