A security token offering (STO) is a public offering in which tokenized digital securities – security tokens, are sold in security token exchanges. It is a unique token on a permitted or permissionless blockchain, demonstrating a stake in an external asset or business. Like the initial coin offering (ICO), an investor gets a crypto coin or token which shows their investment. Unlike an ICO, an STO represents an investment contract into an underlying investment asset, such as stocks, bonds, funds, and real estate investment trusts (REIT). Because STO overlaps with these two investment financing methods, it is also a hybrid approach between cryptocurrency ICOs and traditional IPOs.

What Is the Difference Between an ICO and STO?

ICOs and STOs follow the same process; however, the token characteristics are different. ICOs and STOs represent the initial issue of coins associated with a particular investment mechanism. They differ in the features of the tokens.

STOs are asset-backed, while most ICOs are utility tokens that give users access to the native platform or decentralized applications (DApps). The aim of ICO coins is the usage and not the investment. As a result, ICO platforms avoid particular legal frameworks and do not have to register or correspond to the strict governance of managerial bodies.

The aim of ICO coins is the usage and not the investment. As a result, ICO platforms avoid particular legal frameworks and do not have to register or correspond to the strict governance of managerial bodies.

Launching an ICO is much easier than running an STO because there is no need to do all the upfront compliance work when launching an ICO.

How Do Security Tokens Work?

Security tokens are for raising money for a startup or a business. In raising capital for startups or established companies, the STO is a logical continuation of the concept behind ICOs and IPOs. Security tokens are also helpful for tokenizing or securitizing existing real-world assets. The process of tokenizing of real-world assets represents another potential opportunity for security tokens.

Global stocks’ value is at around $ 70 trillion, and real estate assets are over $ 230 trillion ($ 180 trillion for residential real estate, $ 32 trillion for commercial real estate, and the rest for agricultural real estate). These stocks form the basis of security tokens and develop the market just under development in 2018.

The large-scale introduction of security tokens will replace much of the current paperwork in securities trading. Security tokens minimize the overall cost of managing today’s financial system. If security tokens have large numbers on the stock market, the world can save up to $ 6 billion annually on paper-based economic systems.

What makes an STO so beneficial for businesses?

1.           Global capital access

2.           New techniques to market products and services

3.           More favorable conditions

4.           Low entry charges for investors

5.           Prices are hundreds of times cheaper for the issuers

6.           Opportunities that go ahead the field of the usual security

Statistics

The study for STOs shows that the amount of Security Token Offerings rose from 35 in 2018 to 55 in 2019, with the finance and banking sector holding the most projects. The total funding raised grew to $452 million in 2019.

Another statistic shows that from 2019-2030, the Security Token Offering Space will have growth at a CAGR of 59%, following the institutionalization of the digital assets ecosystem around 2025. Even though there are distinctions in the stats, various analyses guide in a likewise direction. The tokenization of assets and consequently the Security Token Offerings market will experience a rapid increase in the next years.

Conclusion

A security token offering (STO) is a public offering that sells security tokens in security token exchanges. It is a unique token on a permitted or permissionless blockchain, representing a stake in an external asset or company.

Unlike launching an ICO, launching an STO is a complicated process. However, they follow a similar procedure, but their tokens have different features.

Security tokens are mainly for raising money for a business or a startup. They have many benefits for companies, such as low entry costs for investors, better conditions, new methods for market products and services, and so forth.

ICO – Initial Coin Offering is an acronym that shows how funds are raised for a new cryptocurrency offering. ICO trading platforms are created for investors; they receive the unique cryptocurrency called “tokens” in exchange for their monetary investment in the business. It is a means of crowdfunding in which a digital token is created and sold to raise funds for a project’s development. These tokens are unique because they serve in funding open-source software projects that would otherwise be difficult to fund through standard methods.

The Creation of ICOs

An initial coin offering is a complex procedure that involves a thorough understanding of technology, finance, and the law.  The fundamental idea behind ICOs is to use blockchain technology’s autonomous networks in capital-raising operations to align the interests of different stakeholders. The four steps of creation an ICO are as follows:

1.     Identification of investment targets

Any ICO begins with a company’s idea to increase capital. The company determines the fundraising campaign’s target goals and prepares the necessary materials for potential investors to learn more about the company or project.

2.     Creation of tokens

The production of tokens is the next step in the initial coin offering. The tokens are blockchain representations of an item or function. The tokens are tradeable and fungible. Because the tokens are simply modifications of already existing cryptocurrencies, they should not be confused with cryptocurrencies. Tokens, unlike stocks, do not typically provide an equity stake in a corporation. Instead, the majority of the tokens provide their owners with a share in a company-created product or service. 

The tokens are created via specified blockchain platforms. Because a corporation does not have to create a new code, the process of creating tokens is relatively simple.

3.     Promotion campaign

At the same time, when implementing the previous step, usually, a company begins advertisement to involve investors. Mostly the campaigns are run online in order to reach the widest number of investors. 

4.     Initial offering                                       

In the last step, the tokens are proposed to the investors, and mainly the process of offering consists of several steps. The company can then use the proceeds from the ICO to launch a new product or service. At the same time, the investors can expect to use the acquired tokens to benefit from this product/service or wait to appreciate the tokens’ value.

Statistics

Despite the fact that ICOs aren’t regulated, the Securities and Exchange Commission (SEC) can intervene. For instance, the maker of Telegram raised $1.7 billion in an ICO in 2018 and 2019, but the SEC filed an emergency action and obtained a temporary restraining order. This order was obtained due to alleged illegal activity on the part of the development team. In March 2020, the U.S. District Court for the Southern District of New York issued a preliminary injunction. After that Telegram had to return $1.2 billion to investors and pay a civil penalty of $18.5 million. 

Conclusion

ICOs are unique icons created and offered to investors in four thorough steps.

1. Identification of investment targets
2. Creation of tokens
3. Promotion campaign
4. Initial offering. 

ICOs are unique because they function in funding open-source software projects. These kind of projects would otherwise be difficult to fund through standard methods.

Cryptocurrency airdrop is a smart marketing strategy aimed at promoting new cryptocurrencies. This is typically done by sending small amounts of newly emerging cryptocurrencies to the members of the community. People normally receive them for free or in return for a small service. For instance, community is should share or retweet posts sent by those companies to raise awareness about the virtual coins. 

So, this is a purely promotional activity to boost the newly emerging virtual currencies that enter the market. Such actions are initiated both on the very websites of those companies and other crypto-related platforms.