Security Token Offering is a popular fundraising strategy that is adopted by most of the startups. As the former Initial Coin Offering strategy has lost its value in recent days, startups and investors were looking for a popular scheme which can overcome all these issues. This blog discusses the importance of security token offerings in the cryptocurrency world.
What is Security Token Offering?
A Security Token Offering is the scheme where a startup/ company which offers security tokens in exchange for capital investment in their company. This can mutually be beneficial for both the ends.
With a security token, the investor gains legal rights since only qualified tokens under specific laws such as voting are taken into consideration. But in the case of ICO, the tokens aren’t subjected to any such qualifications.
Hence most of the STOs are now considered as ICOs with some regulations under SEC. Security Token Offering involved Howey Test where the tokens have to satisfy certain eligibility criteria.
Here are some of them:
- If the transaction is an investment of money.
- If the investment of money is in a common enterprise.
- If there is an expectation of earning profits from the work of the third party.
If the token satisfies all the above criteria, they are considered to be Security Tokens. Moreover, an investor can purchase these tokens in return for capital investment.
Importance of Security Token Offerings:
For the year 2019, there was around 130% growth when compared to the previous year 2018. The reason was the increased pressure from regulators to ensure compliance with security norms.
When comparing Security Token Offering with other fundraising mechanisms such as IPO, ICO, there has been a huge set of benefits noticed.
Here are some top features of Security Token Offerings in the industry:
- Security Tokens are completely compliant with jurisdictions and regulatory norms. This means that the regulatory risk is completely low when compared to previous fundraising mechanisms.
- Secondly, a Security Token Offering renders low dilution. Dilution here refers to the decrease in the ownership of existing stakeholders of the company.
- Since STOs are subject to security laws, the KYC/AML factor has become a mandatory thing here. Hence, the investors and startups participating in Security token offerings should satisfy the verification process to get started with.
- If you look at Traditional venture capitals, they don’t just offer capitals to startups. Security Token Offering doesn’t provide the strategic impact that the investors may or may not be experts in Blockchain.
In addition to this, the Security Token Offering has different regulations for different countries. Here are the major regulations in the United States.
- Regulation D
- Regulation A+
- Regulation CF
- Regulation S
Similarly for each country, there are different regulations involved in the European Union, Singapore, UK, Russia, etc. These Security Tokens have become more popular and hence regulations have become a mandatory thing as well.
How to launch an STO successfully?
Launching an STO mainly into the following set of steps:
Pre Issuance Platform
- Initially, one should set up the STO and decide on the rights that the token is going to offer. Make sure what features your STO Tokens are going to offer.
- Secondly, you should come up with the documentation. It should consist of mechanisms such as Overview of the Company, Investment Risks, Price of each token, etc.
- Start Marketing your token. This is the crucial step to grab a huge amount of investors for your projects.
Token Issuance Phase
- You should ensure whether the STO Tokens are compliant with KYC/AML regulations.
- Secondly, you should choose the type of security token issuance platform to launch your STO.
- Start Issuing the Security Tokens to raise the capital from the accredited investors.
- Set up a clean channel for investors’ communication.
- Secondly, you can move your STO Tokens to exchanges.
- Start enhancing the liquidity for low liquid assets.
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