Everything you Need to know about Security Token Offering

Posted By Khushboo Arora | 05-Jul-2019


Everything you need to know About Security Token Offerings

 

Security Token Offerings are financial securities backed by the revenues of the company, profits or tangible assets. These coins emerged when initial coin (ICO) offerings were banned in 2018 by financial regulators in several countries. A Security token offering (STO) provides legal rights like voting and revenue distribution to investors. Demand for Security token offerings has increased because they are a simple, secure and legitimate form of investment. Raising capital through security tokens solve decentralization and capital investment related issues. 


 

Types of Security Tokens

 

Asset-Based Tokens:  Asset-based tokens represent ownership of assets like real estate or commodities. These tokens address issues of trust and transaction complexities. Developers build asset-based security tokens using blockchain-based networks like Neo and Etherium. Blockchain technology keeps a track of transactions and reduces frauds associated with  the exchange of assets. 

 

Debt Tokens- Debt security tokens represent debt instruments like corporate bonds or real estate mortgages. The prices of Debt tokens are determined on the basis of risk and dividend. These tokens are issued with the promise of payback in order to attract maximum investors.  

 

Equity Token: Equity tokens are backed by a company’s stock or capital. These tokens represent the value of shares issued by companies on the blockchain. Owning equity-based security tokens entitles investors to company’s profits and voting rights. Blockchain-based equity tokens enable traders to comply with financial securities laws. 

 

Security tokens function like conventional securities but their ownership is confirmed using blockchain transactions. These tokens comply with legal regulations and facilitate crypto ventures to trade security tokens to large companies. Security tokens are tokenized on a blockchain platform, therefore, payments are automated without involving a traditional middleman. 

Regulations Affecting Security Token Offerings 

 

Security tokens are investment contracts covered by security laws and are sold with an expectation to receive future returns. Federal laws differ from country to country, therefore, traders should ensure that they meet regulatory compliance requirements before soliciting funds from investors.  

 

The USA and Switzerland are the first countries that legalized security tokens. In the U.S any token defined as a “security” is regulated by the Security and Exchange Commission (SEC). As per SEC regulations, companies must file Form D to launch an STO. According to the EDGAR statistics, since 2014 18 blockchain ventures and 40 crypto ventures have filed SEC’s Form D. SEC is a federal government agency that protects investors from frauds. It maintains records of security markets and facilitate capital formation. 

 

Steps in Launching Security Token Offerings 

 

 

Step 1- Preparation 

Step2- Pre-STO 

Step 3- STO for Accredited Investors

Step 4- Post-STO

 

Let's discuss each step in detail:- 

 

Preparation: Before launching an STO, companies must come up with an idea to engage more investors. It is essential to adhere to regulations. Ideally, the counsel of legal expert who can assist you with your STO launch should be sought for global compliance.  

 

Principles on the basis of which an STO’s value is decided are - 

 

  • Role 

  • Purpose 

  • Feature

 

Regulations to be followed while creating an STO

 

According to Federal Securities Laws a company cannot issue or sell security tokens without being registered under the SEC. A token is a security token only when it qualifies the “Howey Test”

Many ICO startup companies are classifying ‘tokens” as “securities”. However, it is important to understand that not all tokens are securities.   

 

Let’s understand what the Howey Test is all about.

 

The US Supreme Court established the Howey test to determine whether a token is a security token or not. Howey Test was designed to evaluate the authenticity of an STO.  According to this test, four key points must be considered to label something as security:

  1. It should include the investment of goods or services.  

  2. It should generate profits either through capital appreciation or participation in earnings 

  3. The investment of money is in a common enterprise

  4. Profit coming from the efforts of a third party or a promoter

 

Step 2- Pre-STO 

 

Before launching your STO, it is important to introduce it to the market. Make people aware of your security token. The best practice is to feature it on listing websites. Listing enables investors to receive information about a company’s milestones, team members, and whitepaper’s links. 

 

Alternatively, email marketing or social media announcements can be made to make investors aware of your token.  It is good to know the technical architecture of your security token so that you can market it more efficiently. 

 

Step 3- STO for Accredited Investors

 

Crowd Sale

 

This is the main stage of your STO project. Here a company sells or exchanges its tokens to raise funds. Crowdsale companies need to have a button to sell tokens on their website. Investors can buy tokens by registering themselves and passing KYC/AML checks. It is essential to provide the investors community support services while selling their security token.   

 

Step 4- Post STO

 

After launching your security token offering, it is important to build a product that supports the launched security token. The product can be built after the token is launched. Also, build a secure and robust application on the blockchain. While creating the app, follow the product’s roadmap you designed during the initial stages of your STO launch.

 

Benefits of Investing with Security Token Offerings 

 

 

Fully Traceable and Transparent

 

Security tokens are designed and offered with regulatory compliance. These tokens are registered under the SEC and provide investors access to company’s information like assets state, management structure, risk of investors, and financial results. It also enables investors to conduct their own investigation and verify efficiency, professionalism, and fairness of the issuing company. Transparency provided by Security and Exchange commission enables investors to sensibly invest capital and avoid frauds and inefficiencies. It also provides stakeholders details about investors who own the tokens and their ownership duration.

 

24/7 liquidity 

 

Security tokens use blockchain technology to make traditional illiquid assets into liquid ones. Current securities require few days for settlement and can be traded only on weekdays from 9-5. Blockchain technology is used to divide assets into thousands or millions of digital certificates, and enable quick and easy settlement of tokens. Contrary to traditional investments, investors receive full liquidity on their assets when utility tokens are exchanged in the secondary market.

 

Intrinsic Value

 

Security tokens are digital certificates that provide investors access to revenue share, stocks, company’s profits, credit promises, dividend payments, and physical or virtual assets. These assets have an intrinsic value for their holders and are easily marketed without involving provider or issuer to participate in the process of generating profit.

 

Reduce the Cost of Public Offering

Cost Effectivness of STO 

Security token offerings raise capital automatically using blockchain technology to eliminate the need for a middleman. Fraudulent intermediaries maintain their own ledger of data and confuse issuer and investors by presenting ledgers that differ quite substantially.  Intermediaries charge an expensive amount which directly increases the operational cost of raising capital. STO uses smart contracts to simplify and automate the processes. It enables issuers to directly offer shares to investors, making the entire process transparent, immutable and accurate.

 

Raising capital through security token offering is an ideal option. Security tokens provide a high level of security to investors. These tokens are highly liquid and investors receive full liquidity on their assets when exchanged in the secondary market. 

 

Would you like to raise capital for your business through security tokens? Contact Oodles Technologies - we are a leading STO development company in India. We provide secure fundraising using blockchain technology. We enable businesses to raise capital with STOs that are legally compliant. Get in touch with our blockchain app developers  for complete details!

 

 

 

 

 

 

 
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