If you are somewhat familiar with the world of blockchain, you might have noticed in the last few months a great number of conversations turning towards tokenization and STOs.
No wonder! Last year’s ICO model proved to be an epic fail, with 81% of projects declared to be scams. However, there is one thing ICOs did manage very well: open the eyes of people to the possibility of innovative investment models. STOs have been growing in popularity around the globe, and bring promises of a bright future rich in tokenized assets.
What are security tokens?
Securities are financial representations of real-world assets, such as stocks, bonds, and other equities. Security tokens are representing these same underlying assets, however, instead of regular paper transactions, they are registered on the blockchain. Security tokens are regulated by the same legal frameworks as traditional securities. The tokens can offer many financial rights to the investor, including equity, dividends, profit shares, business benefits and make fractional ownership of the organization available to the mass public.
The most exciting part about security tokens is that they bring along the possibility of a number of new business models by establishing fractional ownership and increased liquidity.
Security tokens vs. tokenized securities
While these terms often appear in the same context, there is a key difference to highlight. Security tokens are newly issued securities, which function on a blockchain. On the other hand, tokenized securities mean digitization and token representation of existing financial assets. So creating a new financial product, like your startup’s equity, is a security token. While creating tokens out of your Miami beach resort, it is a tokenized security.
Benefits of STOs
Now that we’ve got the basics down, let’s focus on why STOs are great for both investors and business owners.
- Liquidity – Security tokens are open to international markets, providing 24-hour trading, hence wider access to capital and liquidity.
- Fairer valuation – with increased liquidity, investors can focus on the value of the company instead of higher exit costs.
- Time and cost savings – accurate record keeping, with an automatically refreshed ledger, make sure administrative and error costs stay to a minimum.
- No middlemen – no more broker-dealers, FA or third-party costs.
- New efficient incentives – using blockchain smart contracts helps you invent and automate investor benefits with your tokens like dividend payments, revenue shares and program benefits with an added layer of transparency and trust.
- Fractionalization – secondary markets allow micro-ownership of assets, which give access to a wider variety of small investors by lifting the burden on the administration.
- Global markets – The international security token market opens borders for investors and companies alike.
- Aligned with regulations – security tokens adhere to the regulatory framework of traditional security, with international legislation developing rapidly.
Launching an STO
Many of you might think, “Wow, this seems great, let’s just launch our own STO”!
Hold your horses, Carol.
There are a few things to consider, such as:
- Business Basics
- How solid is your business model?
- What is the growth rate of your company?
- How many customers do you have and get?
- P.S.: Many ICOs have skipped this step and look where they are now
- How much do you want to raise and at what valuation?
- Consider your pre and post-valuation before raising funds
- What will you use your funds for?
- Investors will want to know how you will make sure their tokens grow in value
- How will you use the funds to accelerate further growth?
- When will you need the funds?
- Are there any other financing options you can explore?
- Do you have the necessary funds to market an STO?
Running an STO does not mean investors will back you just because you run an STO. Have a great business model, proven success, and a plan to grow. The STO strategy will need to make sense for your business, and you will need to ensure that you can answer all these and many more questions from potential investors.
If you are still sure you would like to run an STO, reach out to an STO issuance platform- they are the ones who can take care of the legal frameworks, KYC/AML, token setup, and deployment. Find a full list of Security Token Issuance platform here.
Investing in an STO
Let’s get legal: in some countries, such as the United States, only accredited investors are able to invest in security token offerings. Outside of the US, it is key to check your local regulations to confirm whether you would be able to purchase your own tokens, and what is required for the necessary KYC, AML, and other checks.
Now that we’ve got this covered, let’s see where you can invest in STOs.
Token Issuance and Trading Platforms – for example, BnkToTheFuture and Polymath. You can purchase their utility tokens on cryptocurrency exchanges and use them to invest in STOs listed on their site.
Venture Capital Funds – for those with a couple of $100,000 lying around, they can contact a VC specializing in security tokens such as Spice.
Directly- check out listing websites, such as the Security Token Network, and connect directly to the projects you would like to invest in.
STOs are driving at the speed of light
Compared to the boom of ICOs, STOs seem to take a slower, more careful approach in development, while letting regulatory bodies catch up with the technology. Yet, it is undeniable that 2019 is the year of tokenization and a whole industry is marching forward to make security tokens mainstream. I’m eager to see the development of this new financial product and hope to see it soon, living it up to all the benefits to investors and companies.
Disclaimer: This article is not meant to be investment advice.