Security token offering, also known as STOs, are slowly but surely replacing ICOs. In a traditional ICO, companies usually utility tokens in exchange for supporting the project. Token holders then swap these tokens in exchanges for ETH or BTC. It is similar to buying shares.
Just like when you buy shares security tokens usually carry a specific set of rights and obligations—like shareholder dividend payouts, for instance. However, when you buy tokens in an ICO, you don’t get any of those rights or obligations. For ICOs, your new “utility tokens” give you access to a specific network, platform, or service.
The ICO model saw an exponential growth in 2017 with over $13.7 billion raised. However, the question arises why have ICOs snagged despite such a remarkable success?
Short answer—the market uncertainty, the lack of regulation and mixed messages that come with it, the fraud and speculation, and the SEC’s warnings. In addition, we have seen a boycott by big tech companies like Facebook, Google, Twitter and MailChimp due to this ICO market volatility.
The Era Of Security Token Offering
Security token offerings are projected to have a market cap of $10 trillion in 2020. But why such a high evaluation?
First, STO, which stands for security token offerings, is financial security because they mimic traditional shares. These types of tokens give investors some rights to the company. An STO is similar to an ICO—a business or project offers tokens to the public through a crowdsale, in which consumers purchase crypto tokens built on a blockchain.
Second, only accredited investors can participate in a security token offering. These investors pay some amount of money in exchange for security (i.e. equity, debt, revenue share, etc) that is represented by a token.
STOs are catching wind now because of the lower scrutiny from the SEC as compared to ICOs. For example, Desico and Newfund are some of the most popular STO projects in the market right now.
Is There A Catch?
Like any new ideas, it is new. There is no prior reference. We do not know how security tokens will perform in the long term as they are just entering the market. And there are various types of security tokens each with its own characteristics.
One major concern about STOs is that regulators can swoop in at any moment and change the regulations. As a result, companies could find it difficult to stay compliant.
These are 2 main limitations/uncertainties faced by the market as of now.
However, as of now, companies can choose to wait for the market to stabilize. Conversely, you can ride on this new wave to raise funds for your project and sort out potential problems as they come.
Difference between ICO, STO, IPO
ICO – Initial Coin Offering
ICO is similar to crowdfunding. It involves the selling of digital assets to investors in the form of tokens in exchange for other cryptocurrencies or fiat currencies. The downside is that trading of these tokens is not permitted on traditional stock exchanges. They are also free from any regulatory compliance and holders do not require intermediaries to trade.
STO – Security Token Offering
STOs represents tokens backed by tangible assets. Trading of security tokens takes place only on digital exchanges that comply with the SEC regulations like Polymath. In addition, the STOs are completely adherent to the regulatory frameworks set by SEC
IPO – Initial Public Offering
IPOs are the very first sale of a part of a companys stock to the public. Traders can start to buy shares as soon as possible after they start trading in the stock exchange like NASDAQ. Usually, privately held companies issue IPOs.
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