Before the concept of crowdfunding, the only way for the early stage startups and founders with new ideas was to approach angel investors to get seed funding or go for VC (Venture Capital). On the other hand, established businesses opt for IPO (Initial Public Offering) to raise a huge amount of capital.
While each of them have associated benefits and limitations, none of them come close to the amount raised by the new form of the funding i.e. ICO (Initial Coin Offering) for Blockchain based projects via crowdfunding in a matter of few weeks, and sometimes even days. And now, we have a fundraising method that combines features of traditional fundraising like IPO and ICO, in the form of Security Token Offering (STO).
What is an ICO?
To understand what is a Security Token Offering, let us recall what is an ICO. Initial coin offering (ICO) is a method by which a team of Blockchain developers, analysts, and consultant distribute digital tokens to the general public at a specific price point. These tokens are called utility tokens because as such they don’t hold any value. They serve as a promise of future adoption of the product i.e. true value of the token can only be determined in the future when it will be used by a considerable number of the user. In other words, the value of these token is based on their future utility.
The base price of the utility tokens is determined by the project team based on the future potential and size of the target market. However, there are no regulation or defined rules based on which the prices of the tokens are determined. And that is what makes it lucrative for the startups who don’t have a proven business model, customer base, or even a working product. It helps them to avoid strict regulatory rules that require time and money for achieving compliance.
Since there are no regulations or compliance to conduct an ICO, a group of frauds with few a fake social media profiles, a super impressive website, a detailed whitepaper, and some money for promotion can raise millions and then run away with money. A study by advisory firm Statis revealed that 80% of ICOs conducted in 2017 were scams. That’s why investors are now skeptical about investing in ICO.
Then, what is a Security Token Offering?
In an STO, instead of utility tokens, security tokens are distributed. Unlike utility tokens, security tokens are backed by tangible assets such as stocks, bonds, gold, real estate, etc. When they are backed by stocks & bonds, they are known as equity tokens since the holders are entitled to a stake in the business.
Security tokens are classified as ‘securities.’ They are subjected to securities regulations for the country they are launched in and targeted to. For example, an STO to be launched in the U.S. must adhere to regulation imposed by the American Securities and Exchange Commission (SEC).
Because all of the STOs go through stringent auditing by legal authorities, the chances of an STO being a scam is almost zero. Moreover, they are advantageous for the organization who conduct them. That is because due to the regulations, the investors who can participate in these STOs need to be identified and only the accredited investors can buy security tokens.
Security Token Offering combines the features of an IPO and ICO. It is not very costly and time taking as compared to launching an IPO, and offers better security and authenticity to the investors as opposed to an ICO. Even though, due to stringent regulation, only a few accredited investors are able to put their money in an STO. In the future, with more adoption of Blockchain, we may see these regulations easing down. But still, it will be right to say that STO is the ‘IPO of the crypto verse.’ The advantage that security tokens have over stocks is that they can be traded anytime 24x7.
If you want to develop an STO, then you can opt for the services of Daffodil Software. We have both technical and legal expertise to make your STO event a success. For a complimentary consultation session, click here.