Definition of STO

STO stands for “Security Token Offering” and allows crypto companies to “tokenize” their shares, i.e. to represent a share in the form of a digital asset, a blockchain token. These tokens are often referred to as “security tokens“ because they are backed by a real-world asset and are subject to federal securities regulations. It is more complex and expensive to structure an issuance process through STO than ICO, but still, ICO is less complex than initial public offerings (IPO) (e.g. less bureaucracy). STOs are similar to IPOs, with the difference in that STOs use blockchain technology to create and track the ownership of digital tokens.

Since STOs are subject to federal securities regulations, not everyone can have the right requirements to offer this type of financial instrument. When issuing security tokens, companies must adhere to specific guidelines and procedures. To do this, the offering must be registered with the relevant regulatory organizations and investors must be given comprehensive information about the business and the offering. STOs have become increasingly popular in recent years as a way for companies to raise capital and for investors to access a wider range of investment opportunities. This type of crypto fundraising is considered by many to be the most successful in the future, as global regulations are becoming more stringent.

Examples of Successful STOs

Although it is important to note that the STO market is relatively new and therefore, it is hard to say which STO has been the most successful over time, some of them have received significant attention and raised large amounts of capital. We have two of these below:

• Nexo: A financial technology company that offers a range of digital asset-backed lending and borrowing products. In April 2019, Nexo launched a security token offering (STO) to raise capital for its business. Nexo’s STO managed to raise over $52 million from more than 11,000 investors. Currently, Nexo’s security tokens, which are known as NEXO tokens, are backed by the company’s assets and are designed to provide holders with a regular dividend payment.

• tZERO: A financial technology company that operates a platform for trading and issuing security tokens. In December 2018, tZERO launched a security token offering (STO) to raise capital for its business. tZERO’s STO managed to raise over $134 million from more than 1,000 investors. tZERO’s security tokens, which are known as TZROP tokens, are backed by the company’s assets and are designed to provide holders with a share of the company’s profits.

STO vs. ICO

We have seen how investors in an ICO can buy into an initial coin offering to receive a new cryptocurrency token issued by any company/startup, which can create a crypto token and decide to put it “on the market”. A security token offering or STO also involves an investor exchanging money for coins or tokens that represent their investment, but there are more rules in place. Investigations of token listings, data sharing, and investor onboarding processes for STOs is an in-depth process. In this way, an STO is more similar to an IPO.

Based on this brief comparison, we can start analyzing some of the advantages and disadvantages of ICOs and STOs. Let’s look at them below:

How to Develop an STO

Here are some steps you can follow to develop an ICO:

1. Preparation: It is advisable to determine the purpose of the STO, i.e. whether the company is looking to raise capital, monetize assets, or both.

2. Definition of the idea: To attract potential investors, you must have a strong, convincing idea. It is advisable to seek legal counsel at this phase to sort out regulations and speak with specialists about how the token can increase in value.

3. Documentation: Keep in mind that you need to make your STO known to the market before ever releasing it. Make sure to spread accurate information, such as the offering memorandum, subscription agreement, and other legal documents that outline the terms of the offering. Also, it is very important to release the white paper and the token structure.

4. Choose a blockchain platform: The ideal course of action would be for you to collaborate with a reliable cryptocurrency exchange. Select one that employs stringent due diligence procedures and confirms that the exchange needs investors to adhere to KYC and AML laws in their country.

5. Conduct due diligence: It generally involves thoroughly researching and evaluating the company’s assets, reviewing financial statements, reviewing the company’s business plan and growth projections, and speaking with key stakeholders.

6. Launch the STO: The company can start the STO by offering investors tokens once all the prerequisite steps have been taken. This typically involves creating a marketing plan to attract investors and establishing a process for accepting investments. There are several ways that companies can sell tokens during an STO, including through a private placement to accredited investors or through a public offering to a wider pool of investors. The specific approach will depend on many situations.
   During the STO process, the company must be open and transparent with investors to foster confidence and improve the chances of a successful offering.

Highlights
A Security Token Offering (STO) is an initial public offering of tokens representing security. An STO applies the benefits of blockchain to a common practice of the traditional finance world (the raising of capital to grow a business) in a way that is fully regulated and compliant with the law.
In April 2019, Nexo launched a security token offering (STO) to raise capital for its business, managing to raise over $52 million from more than 11,000 investors.
While STOs are subject to regulation by securities agencies and may provide investors with greater protection and transparency, they may be more complex and costly to set up compared to an ICO.

Conclusion

In this module we have addressed the topic of STOs and made the necessary comparisons with the much-discussed ICOs, to fully understand how the lack of regulation related to ICOs has led to a new form of crypto fundraising, that is much more regulated and controlled. In the next module, we are going to analyze IEOs and talk about the differences with STOs.