Security token offerings (STO crypto) have been talked about for some time, and now STOs are making a breakthrough in NFTs.
The ICO craze in 2017 and 2018 tarnished the reputation of blockchain and tokens for a brief period due to fraudulent crowd sales, illegal airdrops, and outright scams. It led to China and South Korea banning ICOs and the U.S. Securities and Exchange Commission (SEC) rapping a number of ventures and founders over alleged illegal activities.
STOs soon emerged as a better alternative to reinvigorate the space by putting securities like stocks and bonds on the blockchain. Unlike ICOs that represent utility tokens, STOs and security tokens are asset-backed and fall within regulatory parameters.
In this guide, you’ll learn about STO crypto, security token types as well as how best to conduct security token offering in 2021.
What is STO Crypto?
A security token offering (STO) enables companies to quickly fundraise under one of the SEC’s exemptions from registration, thereby remaining compliant with U.S. securities laws and regulations. This ensures that only accredited investors can participate in a security token offering.
STO crypto originates from the industry phenomenon known as “tokenization”, i.e. the process of transforming tradable assets like equity and real estate into digital assets that use blockchain technology. A token is considered security only if it passes the Howey test. The Howey test states that 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
Thus, a security token is a token issued on the blockchain, representing a stake in an external asset or enterprise. Blockchain companies and startups can issue security tokens that serve the same purpose as stocks, bonds, and other equities.
Since STOs are subject to a wide range of regulations, an entity issuing security tokens must ensure that the tokenized assets offer the same benefits investors would expect from traditional securities like shares, voting rights, and dividends. Moreover, upon qualifying for an SEC exemption, the tokens can be issued on a tokenization platform and then traded on a secondary market through an alternative trading system (ATS). This facilitates the trading of the security tokens round-the-clock, even after markets close.
In short, security token offering involves issuing new security tokens which are then sold to investors, similar to how new digital tokens are sold through ICO.
Types of security tokens
- Equity tokens – Holders of equity-based tokens are entitled to a portion of the firm’s profit and have a right to vote.
- Debt tokens – A debt-based represents a short-term loan on an interest rate, in the amount given by investors as a loan to a firm. Examples include real estate mortgages, corporate bonds, or another type of structured debt.
- Asset-backed tokens – These tokens represent ownership of assets, such as real estate, art, carbon credits, or commodities. Asset-backed tokens provide holders with all of the rights associated with traditional shares, combined with the transparency and liquidity of a digital token.
Why Issue an STO
The emergence of security tokens not only enhances liquidity and revenue distribution frameworks, it has also opened up investment opportunities for crypto projects and companies. More importantly, STOs give startups a better opportunity to reach more potential investors and reach their goals faster. In 2020, security tokens market saw a 500% growth and stood at $449 million. In January 2021 alone, security token infrastructure companies raised over $30 million in funding.
Here are some of the reasons why startups and even established companies may find security token offerings very attractive:
- Low barrier to entry – From debt to art, security token offering facilitates tokenization of any asset. Such flexibility allows smaller companies to raise funds through private capital markets at lower up-front costs.
- Get more for less – Unlike a typical VC deal, STO crypto offers several advantages to issuers- founders don’t need to surrender voting rights or board seats – providing you with peace of mind and focus needed to grow the company. Also, launching a security token does not require surrendering voting rights to investors since security token issuers can choose to sell a share of profit tokens or offer simple dividend rights.
- Accessibility to institutional capital – Due to the regulated nature of security tokens, STO act as a gateway for traditional capital into the blockchain domain. It opens opportunities for medium-sized companies and startups to attract investment from VCs and family offices across the globe.
How to Launch Security Token Offering
The following steps should be followed when issuing security token offering in 2021:
- Before you plan to launch Security Token Offering, it is necessary to create a suitable idea of technology that resonates with investors.
- Since a security token has to follow certain regulations, ensure to consult a team of legal advisors that can help you with the regulatory requirements in different countries.
- Apart from regulations, a token’s value is decided on its role, purpose, and feature. Some tokens give holders certain rights within the ecosystem (such as voting, product usage, etc) while others can be utilized to offer leverage to the holders to perform specific tasks within the product (e.g. Basic Attention Token ‘BAT’). Still, some tokens can be considered a store of value to perform transactions both inside and outside the ecosystem.
- Choose the right security token issuance platform to save time. Some of the top security token platforms include Polymath, Harbor, Securitize, Securrency, and Swarm.
- Write a whitepaper – A security token whitepaper is the most crucial marketing document of the product and if done wrong, can kill the product even before it goes to the market. Consider hiring a professional Security Token Offering Whitepaper Writer to market the product in an efficient way.
- Gather a team of experts – A Security Token Offering backed up by a professional and experienced team can bring profit to the business.
- Create a marketing website – A website is essential to introduce and sell the security tokens to crypto investors. The website designed for Security Token Offering should allow investors to register to participate in the security token sale.
- Promote the STO- It is equally crucial to introduce your security token offering to the market so that people could know about it. Listing new STO on different listing websites can help crypto investors get the relevant information about the project.
- Another strategy is to run email marketing and social media campaigns to create awareness across all crypto communities. Make sure you understand the utility of the token and have a technical architecture of the product ready.
- Choose a partner exchange – Some regulated exchanges for security tokens include Polymath, Swarm, Harbor, tZero, Securitize, Alpha Point, and Securrency.
- Partner with custodians to collateral assets for security tokens – the time of tokenization, the assets should be kept in the custody of third parties with mechanisms like Special Purpose Vehicles or Trust Companies. Some of the qualified organizations that can help you include CoinBase and PrimeTrust.
- Create a security token – After deciding on which platform to issue your security token, it is time to focus on the creation of a token.
- STO marketing – marketing your STO is vital to building trust and reaching the right crypto investors in the market. Make sure that you have allocated a budget for the Security Token Offering marketing campaigns.
- Conduct crowdsale – To run the crowd sale, you should have a button for the token sale on the website from where the investors can buy the tokens by registering and passing the KYC/AML checks.
- Community support services – After you launch STO, you should focus on creating a support team that can offer assistance on various social media platforms and crypto forums. Make sure to respond to customer’s queries instantly which can help you build a long-term relationship with them.
- Build a product – Once the crowd sale is over, build the product for your security token. Consider hiring blockchain development experts who have an in-depth understanding of the various blockchain platforms and security tokens.
TokenMinds: STO Launch Services
Launching a successful STO crypto 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. Furthermore, STO requires a different marketing strategy than the one used to promote ICO. The latter is close to crowdfunding and rests on community building and social media activity. Only professional investors will be able to take part in STO – this is a much more sophisticated audience that is harder to impress.
Thus, promotion of the product and business model among professional investors will require much more effort and marketing strategy. STO service providers, therefore, exist to help with the complex STO strategy.
Take TokenMinds as an example. We are an STO marketing and consulting 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 security token offering.
Contact our team to help you issue security token offering successfully.