As the cryptocurrency market keeps beating investors left and right, those who tend to be more optimistic have now switched towards a promising money future strategy called “Security Token Offering”.
Everyone has started to dig out the pros and cons of this new fundraising scheme and how to conduct crowdfunding in accordance with the SEC regulations. Countries around the world are hopping on the path of digitization in the upcoming years!
In this article, we’ll go over the evolution of security tokens and why organizations will adapt to STOs in the future! Let us explore the solution!
STO: Security Token Offerings Explained
Security Tokens are essentially the financial securities issued in the form of digital tokens which have to be compliant with security laws. This means that Security Token Offerings offer an additional layer of security when it comes to protecting the investor’s pockets.
Security Tokens give the buyer the ownership of the tokens regardless of its form. For example, it can be a Real Estate, Equity, etc. These tokens are intended to bring in more liquidity and make it easy access for the investors.
It is ideal to consider Security Tokens if your enterprise is:
- Having a need to provide greater liquidity for Stakeholders.
- An Elevated growth organization.
- Operating global business.
- Issuing transferable assets.
Moreover, STOs support the Know Your Customer (KYC) process. This is crucial in the industry since it verifies the identity of customers, preventing fraudulent activities, and making the process more secure.
Therefore, by investing in security token offerings, investors gain the complete ownership rights of the underlying assets. Furthermore, depending on how the Security Token Offerings are structured, an investor could even record his/her views in company decisions as a shareholder which can enhance the dividends of the project.
If you have thought of buying the stocks, just check how many intermediaries you will face! It may be like Banks, Brokers, Custodians, etc. In the case of Security Tokens, you will be given access to regulated investments without the need for a middleman. Moreover, without the need for a middleman, transactions are performed instantly. Blockchain, the technology behind security tokens removes the intermediaries and ensures your trade at a lightning speed!
Importance of Security Token Offering:
There are already multiple stakeholders involved with Security Token Offerings such as issuer, buyers, regulators, exchanges, etc. Traditionally, accessing the public markets as a funding source was only possible for the biggest companies, but in the case of Security tokens even smaller companies can find their target market and raise their funds.
Harish D.Gupta, CEO and Co-Founder of Polybrid Exchange records his views on STO’s:
“Security Tokens will be gaining popularity for many reasons. Initially, the offerings will be straight forward and investors will get to know what they are investing in. I believe STO’s can change the destination of the success of the firms. Moreover, Security Tokens will ease the process and reduce the associated cost and time.”
Any real-world assets can be tokenized as security assets such as Houses, or even the portfolio of houses. The possibilities to tokenize these assets have been massive. One such instance is a Virtual Capital firm that could raise the money through Security Token Offerings by issuing a highly liquid and legal token.
The STO has started to build its momentum with where mature businesses tap into a highly liquid, borderless and decentralized market. STOs will have a great impact on the internal and organizational structures of the organizations. Just think of intermediaries, back-office work who are involved in payments are easily going to get streamlined with tokens and smart contracts.
Live Examples of Companies that are already engaged in selling Security Tokens:
- Blockchain Capital
STOs bring huge benefits such as:
Liquidity is completely high in Security Token Offerings. But the only challenge is to figure out the desirable exchanges. Therefore to bring out true liquidity, it is important that the tokens are listed in highly useable exchanges. These exchanges would expand the liquidity factor, thereby bringing in a good number of investors.
Smart Contracts eliminate the need for intermediaries which in turn cut downs the cost of service delivery. And the administrative costs of buying and selling are zero here.
These tokens are eligible for global trading depending on their set up which means that as long as you have your wallet you can trade from anywhere in the world.
Security Token Offerings are completely compliant with regulations. These regulations usually vary depending on the location where the company launches STO.
Security Tokens have gained much hype and importance nowadays. This type of fundraising is intended to save investors and holders from risk factors. Planning to launch a Security Token Offering?
What are the Regulations associated with the SEC's?
The Security and Exchange Commission is an Independent government agency responsible for regulating the security industry. The primary goal of SECs is to protect the investors and maintain orderly markets which are efficient.
These Security Tokens are offered under guidelines framed by the SEC. Here are the set of regulations with SEC on Security Tokens for various countries:
The United States
In the USA, only accredited investors who have $200,000 of minimal annual income are allowed to take part in STO campaigns. On the flip side, when it comes to financial enterprises, they should at least have a minimum of $5 million worth of digital assets.
- Rule 504
Issuers can raise up to US$5,000,000 for a period of twelve months. They will be required to fill the form D with the SEC, which includes the information such as the name and address of the company, senior & executive officials and some details related to the offering.
- Rule 506(b)
In this private solicitation rule, an issuer can raise an unlimited amount of funds from an unlimited number of accredited investors and 35 sophisticated investors.
- Rule 506(c)
This is a public solicitation where accredited investors may purchase the security tokens. It is mandatory that investors should pass KYC/AML requirements.
In this type of Regulation, the investors can launch the STO’s only after the approval of the SEC. The issuance of Regulation A+ will comparatively take more time than other times of security. This type of regulation usually has two tiers. In the first tier, an offering of up to $20 million for a period of 12 months is allowed. While in the second tier, an offering of up to $50 million for a period of 12 months.
In this type of regulation crowdfunding, there is an exemption for small offerings up to a maximum of $1.07 million for a period of 12 months with a limitation on the amount that an investor can invest.
The European Union
The European Union legislation has published in its prospective directive that the requirement to publish a prospectus that does not apply to the following offers:
- An offer that is addressed solely to qualified investors.
- An offer that is addressed to fewer than 150 people other than qualified investors.
- An offer where the denomination per unit is a minimum of €100,000 for 12 months.
In addition to these regulations, there are a few EU countries that provide exemptions for crowdfunding. For instance, in Germany, it doesn’t require a prospectus for domestic offers up to €2.5 million. Similarly, there are a few laws in Finland and Spain as well!
Security Token Offerings: What to expect in the future?
STO’s have not made any history since they are still in nascent stages. No wonders that regulators are always watching. Thus, Security Tokens are intended to enforce responsibility. Funds that are held in Escrow Software of the Smart Contract can now be used to incentivize projects to be responsible with investors’ money. They are a step in the right direction.
By leveraging the versatility of STO Script, companies are discovering that various components of the company’s value can now become liquid, tradeable and investable. Investors interest is upscaling in Security Tokens since they provide high liquidity benefits of cryptocurrency.
We are now witnessing an increasing number of Security Token Offerings. It is predicted that there are over 60% of STO website built with STO Script which is either active or upcoming. One such live example is, Neluns has managed to raise $136 million through STO highest till date, followed by Tzero with a raise of $134.7 million.
Additionally, companies that are intended to raise the funds have explored and examined the interests of the investors who are more inclined towards the Security Tokens!!
The future of fundraising belongs to Security Tokens since:
- A great number of STO Software exchanges and platforms are ready to be launched.
- With the growth of cryptocurrencies, cryptocurrency startups will be looking for money to raise their projects.
- Investors will be in need of High Liquidity.
- Since they are well-regulated, there are higher chances that a high number of investors will march towards Security Tokens
Moreover, in adherence to regulations, a large number of Governments and Banks will start welcoming Security Tokens since it provides a high level of financial safety and security. Thus, it remains beneficial to both the people and financial governments.
The fundraising market will see its rebirth with the enhancements of Security Tokens in the future. STO’s are yet to prove their value and worthiness. Undoubtedly, a great number of investors globally have an eye towards the possibilities and investing opportunities with the Security Tokens. Finally, we can expect that STO’s are slowly but surely have a great impact on Fundraising campaigns!
No wonder that Security Token Offerings will be the near future. They will be legalized, well-regulated and issuers can invest in them with credible expectations of return. Security Tokens also has the potential of opening up asset ownership to a wide variety of people. Keeping all these facts in mind, we can see the hype of Security Token Offering in the upcoming years!