The evolution of digital assets and new routes to fundraising has culminated in the creation and adoption of Security Token Offerings (STO), which are often compared to ICO (Initial Coin Offering) and IPO (Initial Public Offering). While IPO is a traditional way for companies to go public and ICO brought a number of controversies and some level of disappointment to investors along with legal questions, STOs are said to fill in the missing gaps.
So why do crypto market experts and investors believe in the security tokens? Let’s take a deeper look. Let’s start by understanding what STOs are offering to investors.
During the security token offering, an investor acquires a token/crypto coin that represents their investment, similar to the process of the ICO. But in this case, the issued asset, unlike in an ICO, represents an investment contract into an underlying investment asset, such as stocks, bonds, funds or real estate trusts.
In short, a security token is an investment product that is backed by a real-world asset such as company or property. Therefore, this type of token represents the ownership information of the investment product that is recorded on a blockchain, similar to when one invests in traditional stocks and ownership information is written on a document and issued as a digital certificate.
So How do STOs Compare to ICOs and IPOs?
- Compared to an ICO, STOs are seen as a lower risk because these security tokens fall under the securities laws which require it being compliant, transparent and accountable, making investors feel safer.
- Security tokens are also backed by a real-world asset, which makes it a lot easier to assess whether or not the token is being priced fairly.
- This also means that security tokens could boost the adoption, especially among institutional investors.
- Compared to IPOs, STOs are considered to be more cost-effective since IPOs typically have higher brokerage and investment banking fees to be able to get access to a deeper investor base. Even though with STOs issuers will still need to pay lawyers and advisors, they are getting direct access to the investment market which would typically mean lower fees. The post-offering administration is also cheaper and less complex than the ones for traditional IPOs.
- In addition, smart contracts reduce the reliance on lawyers and blockchain reduces the paperwork.
- Blockchain adds up more value. Fractional ownership and ability to trade 24/7 brings liquidity to the market, especially with traditionally illiquid assets, such as art and property.
That said, it is important to mention that even though 2019 is labeled as the year of tokenized assets by many analysts and experts and security assets are much more compliant with existing laws, we are yet to see the place STOs take in the market. A number of countries have already banned this approach to digital fundraising, along with crypto trading in general: China, South Korea, Vietnam, Algeria, Morocco, Namibia, Zimbabwe, Bolivia, India, Lebanon, Nepal, Bangladesh and Pakistan.
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