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Fundraising Evolution: The Trend and Impact of Security Token Offering (STO)

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Fundraising Evolution: The Trend and Impact of Security Token Offering (STO)
_ _ Kush P_ 0 Comments

Fundraising Evolution: The Trend and Impact of Security Token Offering (STO)

What is an STO?

Fundraising remains a significant aspect for the startups to initiate their projects; over the years, many fundraising mechanisms have aided the startup. Numerous startups are using Initial Coin Offering ICO for fundraising purposes. Another fundraising option is Security Token Offering(STO).

To get a grasp of various fundraising mechanisms, we must know why they differ. Besides, we must know why ICO has been replaced by the Security Token Offering or the STO. They are secure because of the distribution registry. Also, they are legal because STOs are regulated to avoid any fraud.

The automation of all significant transactions reduces human intervention. It also reduces the cost that the end-users have to bear because of mediators. Let us start by understanding how both of these mechanisms work. Also, why security tokens are here to stay for the foreseeable future.

A closer look at the STO or Security Token Offering

Each version of the fundraising mechanism has its pros and cons. Competitors use those versions to bring about a required featureful device.

STO is the latest form of fundraising that has taken over startups by surprise. It is also ready to offer a security token to the investors rather than the utility tokens. To understand the STOs better, you should first understand why ICOs are no longer useful, and later we will discuss the security tokens.

Why ICOs became ineffective?

Initial Coin Offerings are used by companies and startups that deal with blockchain-related projects.  It provides investors with digital value in exchange for their capital. Initially, investors were investing in ICOs. But over time, there was an increase in the number of frauds in this space.

It led to the ineffectiveness of the ICOs, and STOs took over.  Because of STO’s ability to provide the investors with the security token. ICOs were not failures in their initial phase because they provided the investors with tokens built on blockchain technology. Investors gain access to any product or platform through utility tokens.

The ICO investors found a way to use the tokens as a means of investment due to their high liquidity. They could sell the token for higher prices. But even after collecting investor’s money, companies failed to complete their products, which came as a massive loss for the investors. It led to the failure of the ICOs.

Insight about the Security tokens

A proper Return On Investment is what an investor would want to ensure that they will not have to face any loss in the process. ICO did not provide security to the investors. Thus, the security tokens were introduced for a secure investment. Security tokens are nothing but a digital representation of tradable assets with real value. Tobe, a security token, has to pass the Howey test. After that only, security tokens can serve their purpose.

The latest fundraising mechanism is that Security Token Offering (STO) is more secure than the ICO and is trusted by the investors for various reasons. One of the primary reasons is that the investors will receive security tokens in exchange for their money from the company they invest in. Since the law also recognizes it, the investments will not have to worry about the Return of Investment (ROI) and invest peacefully.

Many startups have raised an enormous amount of funds using this mechanism, which makes it a highly adopted method by investors and startups. The tokenization of securities makes the investment ore transparent, and the regulated security tokens are a boon for the investors.

Advantages of STO

In previous sections, it is clear why there was a shift from ICOs to STOs and how the latter has proven to be much more secure for the investors. It has also helped startups with fundraising for their projects. Apart from these, some advantages make STOs favorable among the companies.

Business owners get more flexibility

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Running the business, according to your wish, can be a dream come true, but it does not always. You are often subjected to the decisions of the analysts to make any significant changes in your business. You will still have to focus on short-term goals instead of your long-term visions, which will provide le flexibility to your business. STOs solve this problem by providing business owners with the freedom to run the company on their own. Security tokens are liquid investments that will help you gain profits in the initial stage of the business. Since the token is transparent value-based, it is less likely that your business encounters a financial glitch even with a small number of right investors.

No more middlemen

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Usually, it takes a lot of time to complete the entire transaction process in traditional investments, and the main reason behind it is the middlemen such as the banks and other stock authorities. However, the security tokens will provide a respite from the middlemen who will pave the way for lower processing time and faster execution. This ultimately means that you can raise funds for your business in no time.

No more Time barriers

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You will not have to wait for your investments until tomorrow. One can do it today because of the 24/7 trading possibility. You can take up trading at your own time from anywhere in the world as people do cryptocurrency trading mostly online. Security token trading can ultimately be done online, which allows you to trade 24/7 without any restrictions. It will be convenient for the companies as well as the investors to perform trading without any issues.

Global investment potential

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The standards of the token do not vary according to the regions, which ultimately means that the investors can easily buy and trade tokens all over the world. Security tokens are more liquid than privately held shares, which will help the investors utilize the opportunity to trade in STOs. You should also know that the STOs attract investors of a slightly different profile than the AIM or the stock markets. It also ensures that global investors are looking forward to a good return contribution, which will help the businesses raise funds faster. Additionally, awareness of your business will also spread around the globe.

No more violations of regulations

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The introduction of STOs helped the investors get an assured return on their investments. Also, STOs made it impossible to violate any regulations. If the KYC checks are automatic, only accredited investors will be able to trade the STO. This feature will surely convince everyone to switch to STOs and ditch the traditional trading mechanisms.

The ease of investment through fractional ownership

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The security tokens also incorporate the ease of investment to those investors who cannot afford significant investments by dividing the underlying asset into smaller units and claiming fractional ownership. This way, many investors can contribute to your security token offerings and make it easier for them to transfer to a secondary market.

Prevention of frauds through an automated system

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Since most of the transactions are automated, and there are zero chances of human intervention, there is no possibility of fraud or extra charges when it comes to the STOs. It will increase profitability as well as security for the investors.

Customizable

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One can customize cryptocurrency easily. You can put any type of functionalities, such as transaction limits, dividends, and functionality. Digital assets can be flexible which makes it more profitable as well as provides you with the ease to customize.

More transparency and liquidity

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The transactions that involve security tokens are often public and transparent, and the primary benefit is they are easier to verify in case of issues. The implementation of blockchain technology has enabled users to liquidate even the illiquid assets because the assets can be tokenized. STOs also make it possible to divide the ownership into thousands of digital tokens, after which the token can be sold as a single person or an organization of many people.

You never lose tokens

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If you send the bitcoins to an empty address, it involves a certain level of risk. It is one of the main reasons virtual assets do not get the needed attention in the virtual market. However, the programmer can program the STOs appropriately to recover it when lost or stolen. The owner will have to pass the verification procedures to procure the tokens. Even if you can not use it practically, your tokens will be safe with you.

Soon, there is a possibility that all the blockchain platforms dealing with the STO will provide the investors with such features. They also introduced verification through KYC procedures, which would identify the investors and track stolen tokens. It will make it easier to find the lost tokens and to keep your security tokens safe.

Better efficiency and scalability

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After the introduction of blockchain technologies, one has to do less paperwork as it brings tons of benefits to it. It can eliminate all the inefficiencies and provide the investors with the features they need. Here are some of the features the tokenization of security provides to its end-user:
  • They can entrust their work to the smart contracts rather than on the lawyers to do all things
  • The KYC procedures are all automated, so there is no need for excess expenditure if the money
  • The absence of intermediaries helps reduce the extra cost incurred by then and the intermediation of the banks
  • The process of accounting, as well as auditing, will now be more straightforward
  • You can also automate dividend payments because there is less human intervention involvement
  • There is no need for more great working staff
With the STOs, you will be able to track all the financial results and status of documents in real-time in a separate platform or with all the other market participants. These are some of the benefits the STOs can offer as compared to the ICOs.

Reliable

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The main reason for the failure of the ICOs is their inability to be accountable. The utility tokens does not require regulation. It has given the STOs an edge over the ICOs and reduced the number of frauds happening in the space. Investors are seeking STOs for a more secure investment, and its credibility feature will continue to lure in companies as well as investors with these features. The reduction of fraud in this space has made STOs the most favorable investment mechanism, which will assure the investors of a return of investment.

The future scope of the Security Token Offerings

The in-depth discussion of the significant aspects of the security tokens would have made you wonder what the future scope of the security token offerings is. Experts have expected the STOs to enable the companies to increase their liquidity in the business by transforming their valuable components into a more tradable asset, which will profit the company with new investments. Fundraising for startups is a result of many underlying reasons, such as providing their investors with a revenue-sharing model or enhancing the other investment aspects. Some startups would use the blockchain feature of the Security token offerings to increase their fundraising capabilities by luring global investors to invest in their companies.

Conclusion

All the points mentioned above about the STOs point out that they are regulated and secured compared to the utility tokens offered by the ICOs. It is the main reason why the investors and companies are looking forward to tokenizing their assets, and STOs have become the most sought-after mechanism for investment. After going through a lot of facts, it is safe to conclude that the STO will continue to grow in the foreseeable future and lure investors and companies towards STO. This fundraising mechanism will also ensure that the startups can quickly get the capital required for their projects, and the future is blazingly bright for the Security Token Offerings.

FAQs of STO

A security token offering is essentially a regulated offering of securities using blockchain technology. It involves the creation of digital blockchain tokens. These digital blockchain tokens can be created, transferred, bought, sold, and destroyed. This is based on their computer code rules.
Security tokens authenticate identities electronically by storing personal information. Security Token Services issues it, which authenticates the person’s identity. They may be used in place of or also an addition to a password to prove the owner’s identity.
It takes anywhere between 6-9 months to launch STO. But it can be lesser or can take a bit longer. Contact us now to know the exact time required to launch STO.
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Author

Kush P

Kush Patel is the Chief Technical Officer and Managing Director of Echo Innovate IT – a software development company. He is responsible for the overall operations of the company and has played a major role in making Echo innovate IT the top-notch IT services provider and transforming it into a globally trusted web and app development company.