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What is Security Token Offering?

To know where STO or security token offering came from, we should return to ICO. The was he idea of an ICO was to launch a utility token. A utility token is a token that provides the purchaser with future access to a product or service or gives the buyer certain voting rights within the network. However, the Securities and Exchange Commission (SEC) argues that many of the offered tokens are actually a security token as both purchaser and seller expect a rise in token price resulting in a profit.

A token is a security token if it fulfills the four criteria set out in the Howey Test. A security token offers the buyer certain rights and obligations in a particular asset, whether it be a stake in a company or ownership of real estate, art or digital assets. A security token is subject to regulations. Not complying with these regulations can result in penalties.

Distributing security tokens is done during a Security Token Offering (STO). Depending on how the STO is structured, it can give the investors so many benefits, such as the ability to voice their opinions through voting, gain access to dividends and so on based on the proportionate ownership in the underlying asset or company. An STO benefits the investors and also has significant benefits for the issuer as well as other stakeholders such as regulators.

What are the challenges of an STO?

There are also some significant challenges that need to be overcome before a Security Token Offering can be a useful replacement to an ICO. First of all, they are far more complex than doing an ICO. The moment you choose to do an STO, you will have to comply with lots of regulations and especially the SEC will follow you closely. Therefore, it needs a lot of preparations and significant legal advice to make sure you are doing an STO that is fully compliant. However, already multiple companies offer services to help with an STO, so maybe it will become a bit easier in the near future.

The second challenge is about exchanges. One of the main benefits of a security token is its liquidity, which means that an investor can sell a token at any time. To sell a token, you need a secondary market, or an exchange (when a security is sold for the first time, it is called a primary market offering, but when the investor decides to trade their investment, it is trading in a secondary market). Naturally, these exchanges will be required to comply with the most extensive regulations, which means it is difficult to develop a new exchange for security tokens. Existing exchanges such as Coinbase do recognize the opportunity that STOs offer and are preparing to allow secondary trading of security tokens. Also, traditional exchanges see the opportunities that STOs will bring and exchanges such as the Australian Securities.

Exchange (ASX), Gibraltar Stock Exchange (GBX), SIX Swiss Exchange (SDX), London Stock Exchange (LSE), Malta Stock Exchange (MSX) and the Canadian Securities Exchange (CSE) will all be offering STO listing and secondary trading. It is a matter of time before this challenge will be solved.

Will the STO replace the ICO?

The answer is YES. Although, it can take a while as the required ecosystem is not available yet, and regulations are still being developed. The advantages of an STO over an ICO are too big to ignore, and investors will simply no longer accept tokens that offer no security whatsoever. Once there are sufficient secondary markets to ensure the liquidity of the security tokens, and there is clarity from regulators, we will see a big rise in STOs and the ICOs will disappear to the background.