Security Token offerings (STOs) are essentially crowdfunding 2.0.
Over the last ten years, equity crowdfunding has emerged as one of the most innovative ways to raise growth. It has democratized finance, providing opportunities to retail investors, which would otherwise be restricted to institutional investors such as venture capital or private equity, and it has provided a fresh way for companies to access growth finance.
A security token offering (STO) is a type of public offering in which tokenised digital securities/shares, known as security tokens, are sold in digital asset exchanges. Tokens can be used to trade real financial assets such as equities and fixed income, and use a blockchain virtual ledger system to store and validate token transactions.
Due to security tokens being classified as securities, STOs are more susceptible to regulation and thus represent a more secure investment than ICOs.
What are the advantages of STOs?
STOs have some essential advantages which will make a difference to both fundraising entrepreneurs and their investors. For a start, security tokens are built and managed on blockchain technology.
The efficiency of blockchain technology means better transparency, a simpler and easier fundraising process, with lower administration and management costs for both companies and investors. Entrepreneurs can also reach a wider universe of international investors. Those investors have greater access to investment opportunities that, up to now, have been the preserve of VC funds only. STOs, you could say, will help to democratize finance.
What Are Asset-Backed Tokens?
Asset-backed tokens are tokens whose value is backed by a real-world, tangible, and intangible asset. Essentially, they are digital tokens whose value is pegged against an existing asset value. People tokenise real-world holdings to increase their liquidity (the real-world assets) in a market place.
Asset-backed tokens are offered during a Security Token Offering (STO). An STO is a process where an investor exchanges money for tokens representing an investment. As such, we can describe security token offerings as events that distribute securities. And since tokens represent real-world property, STOs represent a secure investment option.