STO crypto is gaining momentum at an alarming rate, but what exactly is STO and how can you take advantage of STO to raise funds for your project ?

The ICO model of raising funds has snagged and security token offering or STO crypto is emerging as a preferred and compliant fundraising method.  In fact, Polymath, an STO exchange platform, has predicted the market for STO crypto could reach 10 trillion dollars in just a few years.

Difference Between STO Crypto and ICO

Security token offering STO are similar to ICO except that instead of offering utility in the form of future products or services, STO offers a stake in the company. ICOs enabled blockchain startups to raise money for their ideas by issuing utility token in exchange for the investments. These utility tokens could then be used to purchase services within the blockchain network. STO, on the other hand, represent tokenized assets such as property, shares, bonds that are issued to investors in exchange for project funding.  

Unlike ICO, STO involves registering with the relevant financial authorities such as SEC to ensure compliance so that only accredited investors can participate in a security token offering.

Types of STO

To understand different types of STO, let’s take a look at what actually constitutes a security.  A token is essentially a security only if it passes the Howey test.  The Howey test states a transaction is a security if:

  • It is an investment of money
  • The investment is in a common enterprise
  • There is an expectation of profit from the work of the promoter or a third party

Based on the conditions above, the following types of STO emerge:

Earnings based

This STO helps in the fair distribution of profits or related financial benefits among investors. That is, if an investor hopes to gain profit from the token through revenues, dividends, or favorable price movements, then it is a security.

Dividend based

The amount of dividends a person receives is based on token he or she is holding. It is calculated using the total dividends paid out to shareholders over one fiscal year and the number of tokens outstanding.

Equity-based

An equity security is an investment vehicle in which each investor is a part owner of the controlling company. In addition, holders of equity-based STOs are collectively the owners of the company.

Profit-Shared-based

In this type of STO, the profit sharing plans are based on predetermined economic sharing rules. In short, split of gains is shared between the company as a principal and the investor as an agent.

Debt based

Here, the tokenized assets represent debt instruments such as real estate mortgages or corporate bonds. Examples of projects include BlockEstate, St. Regis Aspen resort, Slice, among others.

Where to STO

Security tokens are issued through one of the approved platforms that meet the required legal aspects. STO issuance platforms exist to make the process of token generation much simpler and more democratic.  For example, the top STO issuance platforms include Polymath, Harbor, Securitize, Swarm, and Securrency.

STO Cyrpto Regulations

Security tokens are subjected to a wide range of regulations. In the U.S, for example, security tokens need to comply with three regulations:

Regulation D (private offerings) – Companies offering this security must provide verification that investors are indeed accredited according to Rule 506C. Companies must fill “Form D” after the securities are sold.

Regulation A+ (limited public offerings) – The creator can offer their security token to non-accredited investors without registration with the SEC for solicitation of up to $20 million in 12-month period (Tier 1) or $50 million in a 12-month period (Tier 2)

Regulation S (foreign offerings) – Companies can have their security token offerings take place outside US but cannot involve US investors. They still have to follow the STO regulations of the country where they are being executed.

STO providers

Launching a successful STO requires a massive amount of expertise in a wide range of fields including legal, finance, technology, marketing etc. It is very difficult to handle all these functions internally and you will definitely require assistance from outside. STO service providers therefore exist to help with the complex STO strategy.

Take TokenMinds as an example. We are STO marketing agency that focuses on helping STO companies with marketing, PR, and fundraising. More importantly, we help you reach your target investors, build a strong community as well as partnerships to ensure successful STO crowdsale.

Talk to us today and we will help you get in the right direction.