Security Token Offering or STO

STO is an abbreviation of a Security token offering. Just like ICO, the investors received a crypto token or coin that represents an investment. But in STO, the investment contract is represented as various underlying assets like funds, real estate investment trust, and stocks.

·  Security

Security is the negotiable and fungible financial instrument that holds some monetary value. It is backed by any real-world asset like property or company.

·  Security token

It represents the information of any investment product provided by the owner and recorded on the blockchain. The ownership information in the case of traditional stocks is written on the physical document and issued as PDF digital certificate. But in STO, the asset is recorded in the blockchain but issued as a token.

STO is the hybrid approach between IPO and ICO because of the overlapping of both methods.

Difference between STO and ICO

The process of both STO and ICO is the same but the characteristics of the token are different.

• STO is asset-based but complies with some regulatory governance. ICO positions coin as utility and give users access to decentralization applications. The main aim of the coin is to use it instead of an investment. So, ICO avoids some legal structures. They do not have strict governance to register users.
• The barrier of entry in ICO is lower because they do not focus on compliance. They can also sell the coins to the public.
• Launching STO is difficult as it offers the contract under some securities law. They do some upfront compliance work and ensure to comply with the regulation they set. They only raised the funds from those investors who passed their certain requirements.

Difference between STO and IPO

• On the blockchain, STO's issue tokens while IPOs issue chared certificate on the traditional market.
• IPO used in private companies. They raise the funds by issue the shares to investors.
• STO's represent the share of asset that is issued to the investor on the blockchain. These shares can be company share but due to tokenization, it can be an asset like fine art, property, or investment fund that gives profit.
• IPO's are more expensive than STO's. In IPO's, the company needs to pay high investment cost as well as brokerage fees to access the deeper base of an investor.
• In SO's, there is a need to pay advisors and lawyers. It offers direct access to the market and would not pay more fees to a brokerage or any investment bank. The administration for STO is cheaper and less cumbersome as compared to IPO's.