The crypto world is full of abbreviations that can sometimes be quite confusing. Even if you already know the difference between an IPO, ICO, and IEO, you may wonder what the STOs are. You might have heard about them because since 2017 they are gaining popularity as an alternative to the IPOs. In 2021, the tokenization market was valued at $3.4 billion. Interest in STOs among investors and companies wishing to attract investment is growing every year. Do you want to know more? In this article Trastra explains what an STO is and what investors should know about it.
What does STO mean?
STO stands for security token offering. During this process, a company issues digital assets (security tokens) pegged to a certain real asset on the STO blockchain. These real assets can be company shares, precious metals, ownership rights, etc. STOs may seem similar to the initial coin offerings (ICOs), as they both use the blockchain to issue tokens. However, an STO is more like a traditional initial public offering (IPO). It takes place in full compliance with the requirements of financial regulators, therefore reducing the risk of claims. At the same time, the company remains private, the cost of attracting investments is much lower, and the whole process is much faster.
It is important to understand that STOs are aimed at professional investors, and have to follow the same rules as the IPOs. The requirements may differ depending on the jurisdiction where the STO is held. Nevertheless, after the opening of the secondary market, any investor from any corner of the world, with even the smallest budget, can buy a security token. That is possible on exchange platforms, where you can buy a variety of security tokens using your Trastra crypto card or wallet.
What are the use cases for a security token?
Now, when you understand what an STO is, let’s move to the security tokens. They certify the ownership of an object along with all privileges associated with it, such as a voting right, dividends, share of ownership in the company, etc.
To ensure that obligations are fulfilled, STOs use smart contracts. The execution of such contracts is possible only when all the necessary conditions are met. Smart contracts provide reliable protection for investors.
Moreover, security tokens solve a key problem of ICOs – the high volatility of the coins. Unlike crypto coins, whose value is determined by supply and demand in the market, security tokens are backed by real assets. That means that their value directly depends on the value of a stock, bond, or other assets.
After a successful STO, the secondary market opens. That means that token holders can sell them at any time and thus exit easily. Meanwhile, retail investors from all over the world can buy security tokens if they consider them prospective.
So far, among businesses that conduct STOs are mostly:
- Venture crypto funds
- Real estate companies
- Blockchain-based startups of all kinds
- Commodity-related organizations
- Healthcare firms
Pros and cons of a security token offering
More and more people are asking, “what is STO?” as this fundraising method is gradually gaining popularity among investors. But knowing what STO stands for is not enough to feel confident in the crypto market. Those offerings have both advantages and disadvantages. Let’s consider them briefly.
Pros of an STO
- Regulatory compliance. Many types of STOs require registration with regulators, providing greater security for investors.
- Smart contract technology. It guarantees that the investor receives the tokens after the completion of the STO or gets money back if the STO is not finalized for any reason (for example, if the soft cap is not reached).
- Pre-sale prices. STO is a chance to buy tokens at a lower price. During the pre-sale stage, the value of digital assets is always lower than when they are traded on the secondary market.
- Liquidity. Asset tokenization and STO allow you to invest in previously illiquid assets.
- Fractional ownership. Have you always dreamed of owning a luxury resort but couldn’t afford it? Tokenization also implies fractional ownership, which allows you to acquire the rights to only a part of this resort for a smaller price.
- No intermediaries or regional restrictions. Conducting an STO does not require the services of brokers or other intermediaries in the issuance process. Investors from all over the world can put money into interesting projects.
Cons of an STO
- Complexity. Different countries have different requirements for registering and verifying STOs, which is quite confusing for companies.
- Limited access. STOs are only available to experienced investors. Only those with sufficient capital and experience (for example, accredited investors in the USA) can participate in security token offerings. For retail investors with small capital, STOs are not yet available.
- Difficult to manage. In fact, a company can’t just go ahead and launch an STO right tomorrow. The whole process of setting up the infrastructure takes about 4-6 weeks. Conducting an STO is associated with a considerable number of legal and financial nuances, so companies usually turn to consulting agencies that help with the STO launch.
What is the future of STOs?
According to experts, the market of tokenized assets will grow to $8.6 billion by 2027. Every year, the number of companies that conduct successful STOs is growing.This type of fundraising will become even more popular in the short term, primarily due to the high degree of investor protection. STOs will probably be on par with IPOs in terms of popularity as a fundraising tool.
Another important factor in favor of the cryptocurrency STO is the favorable attitude of financial regulators. Over time, regulators in different countries will create more clear and structured rules. It is also possible that STOs will become available for everyone, including retail investors with minimal funds. Literally, every interested person will have the opportunity to invest in tokenized assets.
An STO is a more flexible and democratized analog of an IPO. A company can raise the necessary capital and provide investors with payouts without going public. At the moment, only professional investors can participate in an STO. However, after the end of the STO, a secondary market opens up, available to everyone.
To buy the token you are interested in, you just need to go to the exchange and pay for the transaction using your Trastra crypto card or crypto wallet. That’s how you become the owner of a tokenized asset that can bring dividends and grow in value. Liquidity and democracy of investments are already here!
Trastra solutions allow each user to experience all the benefits of the crypto world with ease. Thanks to a personal crypto card, you can receive a salary in cryptocurrency, exchange crypto for euros and vice versa, and make any purchases online and offline with the lowest possible fees. The handy Trastra app will prove that cryptocurrencies can be part of your everyday life and are not complicated to use. Join the crypto world now!
What is the purpose of STOs?
The main goals of an STO are to attract new investments and simplify the mechanism for raising funds by excluding intermediaries. It also makes assets in various industries more liquid.
What is the difference between an ICO and an STO?
First of all, an STO issues a different type of token that has another purpose than traditional cryptocurrencies. In the case of an ICO, a company issues crypto coins that are not backed by anything. Their price depends only on supply and demand. During an STO, companies issue security tokens, which certify the owner’s right to participate in voting, receive dividends, etc. The real assets of the company back security tokens.
Are STOs regulated?
Yes, STOs are controlled by financial regulators. For example, in the USA, STOs are regulated by the SEC.