Security tokens have raised a lot of attention in the industry in the course of the last year. Like every new trend, it raises a lot of questions, myths, and misconceptions. In this article, we aim to debunk some of those myths and bring more clarity into what Security Token Offering and security token are.
Is STO just a new ICO?
No, no, and no. The first misconception that you can see on the market is that many people are saying that STO is the new version of ICO which is completely wrong. Initial Coin Offering is a fundraising method via the use of cryptocurrency, which can be a source of capital for startup companies. Basically, ICO is a token distribution event where investors invest in BTC or ETH in return for the native tokens of the particular project and this token can represent a number of things such as pre-sold rights to access the service when the product is ready or they could be a part of a product’s ecosystem with a certain role in the work of a product.
STOs are also digital tokens issued over the blockchain, but they all need to abide by the regulations of securities where they are getting launched. Unlike ICOs, STO are actual securities which designate token assets. These tokens describe the real assets and secure value for investors. Just like the stock market. On the one hand, STOs gives intermittent returns, property control, cash progress, polling benefits, and more interests. There are only two things that ICO has in common with STO: 1) Smart Contract inside them; 2) Both serve the role of raising funds. It’s more logical to compare STO to the traditional fundraising methods which we did in our articles before: STO vs. IPO; STO vs. Venture Capital; STO vs. Crowdinvesting.
Security Tokens Always Represent Equity
Just like with traditional securities, security tokens do not have to represent equity in a company. They can relate to debt, revenue shares or other valuable assets.
STO is Applicable for Blockchain Startups only
One of the main features of STOs is that they’re not aimed exclusively at early-stage startups and tech companies. Successful companies and traditional businesses can also leverage an STO to attract funds and maybe develop a new product, or expand their business line.
There are No Intermediaries in the STO
It is true that technology helps to significantly decrease the number of intermediaries comparing to traditional fundraising methods. But it’s impossible to eliminate all intermediaries at the moment due to the current regulation of financial instruments. Regulations can’t evolve in a short period of time, so to launch and run a successful and fully compliant STO you will still need to work with lawyers and communicate with the regulator.
Traditional Fundraising Methods Will Fall Into the Abyss
Yes, it is true that STO has a number of advantages to traditional fundraising methods: issuance costs are substantially lower, the process is much faster than traditional methods, legal compliance is programmed into the code, so it is a great tool for both startups and companies. But for some businesses, traditional methods will still be the choice. The fact is: STO will take a fair share of the investment market but it’s highly unlikely that traditional fundraising methods will be completely forgotten.
Another thing that you will read in almost every article explaining security tokens is SEC (The United States Securities and Exchange Commission). Almost all articles mention SEC and their regulation regarding STOs but SEC rules apply only to companies in the United States. If your key investors' audience is located in other countries than the USA, you don’t even need to bother yourself with thinking about the SEC. Each jurisdiction has its own regulator so don’t get confused with people mentioning SEC over and over again.
STO is a Guarantee for the Success
Conducting an STO is not an automatic win. Even a token is fully compliant legally it may lack profitability and fail to deliver the returns promised and expected. So investors still have to do their due diligence, no technology is going to change that on the financial market.
Strict Regulation of the STO Market is a Downside
Some blockchain enthusiasts are showing the negativity to the fact that STO market is strictly regulated while we believe that it to be one of STO’s greatest advantages. Regulation accelerates blockchain adoption on the traditional markets, restores credibility in the crypto space, and provides investors security which is extremely important.
The regulation also provides guarantees. For example, STOs provide token holders with some form of ownership or equity over a tangible asset that belongs to the company. This way, investors can expect a profit via the STO’s revenue or through dividends.
STO is for Qualified Investors Only
As we’ve stated before, it is true that the regulation around STO is strict. For sure, all investors will have to complete KYC/AML verification and requirements might be a bit stricter than what people are used to on the crypto market but right now there is no barrier for those that are not qualified investors. The decision of whether investors must be qualified is entirely up to the company and regulators.
Launching and Managing STO Campaign is Complicated Technically
Issuing a security token was complicated technically before but that’s no the deal with Tokenomica. Our Security Token Issuance Platform (STIP) is completely automated and simple. You won’t need any programming skills to launch an STO with Tokenomica. All you need is a browser, we will help you during every single step of the process.
We will help you choose a financial instrument that is right for your company. Fill out a simple form, we will guide you through the rest. After that, we connect you with our network of experienced lawyers that will do all the paperwork based on your information. During this step, you negotiate the terms directly with them. You can skip this step if you want to do all the paperwork yourself.
As soon as the instrument for the issue is chosen and your paperwork is ready, you can launch your STO company in two clicks. Book-building, KYC procedures for your investors, bookkeeping, token distribution, token offering statistics, and reports are available in your account at any time.
Once your paperwork is ready and the instrument for the issue is chosen, you can launch your STO company in two clicks. Bookbuilding, investors KYC, bookkeeping, token distribution, tokensale statistics are available in your account at any time.