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- 1 Security token offerings bring more reliability to sales of tokens as a means of crowdfunding.
- 2 By knowing all the prospects of STOs, entrepreneurs can plan the campaign well.
A security token offering (STO) is a strategic sale of security tokens like an ICO. To understand how it works and what it does, one needs to understand security tokens first. In essence, security tokens are crypto assets that are recognized by regulations. These assets also derive value from external tradable assets like stablecoins.
It should be noted that governments or enterprises can issue these tokens. Characteristically, these tokens function like any instrument. However, they are different from the utility tokens that don’t bear any ownership. When it comes to investments, there are particulars that everyone wants to know.
Insights Into Security Token Offering (STO)
On the face of it, STO looks exactly like an ICO or IEO. But by design, STO has some different attributes from the crypto-based investment vehicles. They all store and validate information on a public ledger. On the other hand, a security token offering is considered a safer option.
This is because the security tokens are classified as a security. They are subjected to rules and regulations set up by the government. They emerged as a safer option when ICOs started to become more volatile and prone to scams and fraud.
A Peep Into STO Mechanism
Like the other investment instruments, STOs are designed to give a push to crypto projects. However, the difficulties and risks associated with other vehicles make security tokens popular. STOs are fundamentally legal which makes them more reliable for investors.
Another big highlight of it is the crypto-fractionalization. It means that the assets are secured through securitization or tokenization. Moreover, the tokenization can be implemented in various domains and use cases. For example, the assets belonging to real estate, retail, or any other sector could be tokenized.
Tokenization doesn’t just facilitate the transactions, it also reduces the overall governance cost. Additionally, paperwork is significantly reduced with this process.
Assets That Can Be Represented by Security Tokens
Real Estate
When it comes to converting into security tokens, real estate assets are quite prone to it. They function just like real estate investment trusts (REITs).
Capital Markets
If companies want, they can tokenize their dividends, voting rights, and other instruments into security tokens.
Commodities
Just like the other company property, commodities can also be turned into security tokens.
Equity Funds
The company stocks can also be converted into security tokens
The traders should note that securities offered by STO are the same as the traditional investment platforms. So, they essentially become a new approach to investment that involves blockchain.
Things to Keep in Mind Before Launching an STO
After figuring out the following factors, the planning of STO becomes easier.
Item Being Tokenized
First of all, the investors need to consider the item being tokenized. This is because different assets will bear diverse values. They also have to consider the legal facts about the instrument.
Token Jurisdiction
The region’s regulations regarding crypto assets and STOs will have a big impact on the launch. There are a few things to consider when looking into this scenario:
Location of physical assets pegged against the token
Regulations regarding securities in that area
The norms around marketing strategy in that area
Corporate Structure
After checking the legal aspects, it’s time to check the corporate governance. For instance, the rules for traditional equity securities and cryptos in that country’s corporate ecosystem should be checked too.
AML & KYC
The norms of Know Your Customer (KYC) and Anti-Money Laundering (AML) have to be checked. This is because they impact the security compliance of the campaign. The project as well as the investors get affected by them.
Tokenization Platform
The project owners have to decide on the tokenization platform too. There are multiple platforms and each of them offers different services. Thus, they need to compare the options thoroughly. Some of the popular platforms are Token IQ, Securitize, and Tokensoft.
The Process of Launching an STO
Before the process of launching, it is important to have the whole project thought out. It all begins with legal consultation and laying out the strategy. Then, the project leaders decide the purpose and features of the token. The next step is to prepare for the pre-STO.
It involves the preparation of whitepaper, token structure, milestones, and team’s credentials. After that, they need to figure out the KYC and AML regulations in their country. When the time comes for the launch, the project owners need to monitor the process closely.
Once the campaign is over, it’s time to review the sales. STOs are less riskier and they can bring better results too. Nevertheless, entrepreneurs must work with professionals and do it very strategically.
Anurag is working as a fundamental writer for The Coin Republic since 2021. He likes to exercise his curious muscles and research deep into a topic. Though he covers various aspects of the crypto industry, he is quite passionate about the Web3, NFTs, Gaming, and Metaverse, and envisions them as the future of the (digital) economy. A reader & writer at heart, he calls himself an “average guitar player” and a fun footballer.
