Security Token Offerings are heralded as the ICO 2.0, new and improved version. Today, we will take a look at the basics of STOs, the differences between ICOs and STOs, how you can participate and what the buzz is all about.
What is a Security Token Offering?
First, let us take a look at the basics of an STO. While there is no official definition for a Security Token, the core property is that the Token acts as a share certificate, backed by the value of the company giving out the Tokens.
A Security Token has a clear investment focus and acts as a representation for the ownership information on a blockchain, similar to how stocks represent ownership information of a company. This includes dividends, voting rights, profit share rights, and equity ownership. These properties give the Token its intrinsic value.
Back in the day, a share of a company was a piece of paper that represented your stake. In the second half of the 20th Century, Investors stopped keeping their shares at home and instead stored them inside the depot of a bank for security reasons. When you wanted to trade your stocks, banks moved them from your depot to the buyer’s depot manually.
With digitalization, shares evolved from a physical piece of paper into the digital form we know today.
Security Tokens represent the next step in the evolution of shares: Instead of being traded on a stock exchange and stored in a digital, mutable database a Security Token is stored in an immutable Blockchain.
The difference between ICOs and STOs
Security Tokens are generated in the same way a Tokens are generated for an ICO. They are bought by investors in an initial offering from the company that is creating the Tokens. The aim of the company is to raise capital to build its business.
The first major difference is that Security Tokens are backed by assets that give them intrinsic value in the form of equity ownership, dividends, voting rights, and profit share rights. STOs also submit to much tighter regulations than ICOs.
The argument that helps ICOs circumvent regulations is that the Tokens main use case is in its utility and not as an investment.
Tokens given out during an Initial Coin Offering, often called Utility Tokens, give investors access to a platform or decentralized application the business giving out the Tokens operates.
The second major difference is that STOs will not be tradeable on cryptocurrency exchanges like Binance, Bittrex or BitBox. Security Token must be traded through a multilateral trading facility, MTF for short. Hongkong-based DX.Exchange is the first exchange to provide trading of Security Tokens on secondary markets.
Since a security token is a fungible financial instrument that can be transferred via the blockchain, private resale outside of an exchange is already possible.
How to participate?
STOs mainly opperate on the Ethereum Blockchain and are technologically the same as Tokens given out during an ICO.
To participate in an STO, register and complete the KYC process required to become an investor.
Most businesses accept multiple cryptocurrencies, for the sake of simplicity however, we will only be detailing the process using Ethereum.
Then send Ethereum from your Wallet to the Ethereum Adress of the business running the STO. You can find the address after you register and complete the KYC process.
The Tokens become available either after the main sale is complete or shortly after your Ethereum is received. The Tokens are sent to your address and can be transferred just like any other ERC-20 or ERC-1400 Token.
After the Token is listed by a multilateral trading facility, you can transfer your Tokens to the MTF and trade them on the secondary market.
A piece of advice for investors regarding Initial Coin Offerings and Security Token Offerings: Don’t buy what you don’t understand, do your own research and evaluate the Whitepaper and Team before you invest in any ICO or STO.
Examples of STOs
PO8 is a marine artefact recovery Start-Up that is based out of the Bahamas. Their goal is to recover sunken treasures and place the recovered artifacts into a museum. Investors participate in the revenue generated by the Museum, not the sale of artefacts.
PO8 already has a salvage license granted by the government of the Bahamas and is starting its second exploration phase in Q4 2019. Submersible drones and divers will be deployed to carry out the recovery of artifacts.
The SPO8 Token carries the right to Dividends, Equity Ownership, and Profit Share Rights. It is regulated by the U.S. Securities and Exchange Commission (SEC).
BlockState wants to create accessibility to financial instruments that are out of reach for a large portion of investors. Their goal is to remove barriers of entry such as large ticket sizes or high costs through tokenization.
They claim that they can tokenize any asset class, from real estate to debt, equity and unbankable assets such as fine art or other unique high-value assets by fractionalizing ownership and enabling digital transferability via a Blockchain.
BlockState looks to create an ecosystem of Security Tokens that represent ownership in financial assets, making them accessible for a new audience of investors.
The BKN Token carries the right to Dividends, Profit Shares and Voting Rights.
It is regulated by the Swiss Financial Market Supervisory Authority (FINMA).