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 Besides, we must know why ICO has been replaced by the Security Token Offering or the STO.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.
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.
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.
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.
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.
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.
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.