WILL THE SECURITY TOKEN OFFERING REPLACE OTHER FUNDRAISING METHODS?
Before the concept of crowdfunding, the only way that startups and early-stage founders had new ideas was to approach angel investors for seed funding or opt for VC (Venture Capital). On the other hand, established companies opt for the IPO (Initial Public Offering) to raise a large amount of capital.
While each of them has associated benefits and limitations, none of them come close to the amount raised by the new form of financing, that is, ICO (Initial Coin Offering) for Blockchain-based projects through crowdfunding in a matter of a few weeks, and sometimes even days. . And now, we have a fundraising method that combines features of traditional fundraising like IPO and ICO, in the form of Security Token Offer (STO).
What is an ICO?
To understand what a security token offering is, let’s remember what an ICO is. Initial Coin Offering (ICO) is a method by which a team of Blockchain developers, analysts, and consultants distribute digital tokens to the general public at a specified price. These tokens are called utility tokens because, as such, they have no value. They serve as a promise of future adoption of the product, that is, the true value of the token can only be determined in the future when it is used by a considerable number of users. In other words, the value of these tokens is based on their future usefulness.
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The base price of utility tokens is determined by the project team based on future potential and the size of the target market. However, there is no regulation or defined rules based on which token prices are determined. And that’s what makes it lucrative for startups that don’t have a proven business model, customer base, or even a functional product. It helps them avoid strict regulatory rules that take time and money to achieve compliance.
Since there are no regulations or compliance for conducting an ICO, a scam group with few fake social media profiles, a super awesome website, a detailed whitepaper, and some money for promotion can raise millions and then run away with money. . A study by advisory firm Statis revealed that 80% of ICOs conducted in 2017 were scams. That is why investors are now skeptical about investing in ICOs.
So what is a security token offering?
In an STO, instead of utility tokens, security tokens are distributed. Unlike utility tokens, security tokens are backed by tangible assets like stocks, bonds, gold, real estate, etc. When they are backed by stocks and bonds, they are known as stock tokens, as the holders have the right to participate in the business.
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Security tokens are classified as ‘securities’. They are subject to securities regulations for the country in which they are launched and to which they are targeted. For example, an STO to be launched in the US must comply with regulation imposed by the US Securities and Exchange Commission (SEC).
Because all STOs go through strict audits by legal authorities, the chances of an STO being a scam are slim to none. In addition, they are advantageous for the organization that performs them. This is because due to regulations investors who can participate in these STOs must be identified and only accredited investors can buy security tokens.
Final verdict …
The security token offering combines the features of an initial public offering and an ICO. It is inexpensive and time-consuming compared to launching an initial public offering, and offers greater security and authenticity to investors compared to an ICO. Although, due to strict regulation, only a few accredited investors can put their money in an STO. In the future, with increased adoption of Blockchain, we may see these regulations loosen. But still, it will be correct to say that STO is the ‘IPO of crypto verse’. The advantage that security tokens have over stocks is that they can be traded at any time 24 hours a day, 7 days a week.
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