It is shocking that Security Token Offerings (STOs) are not more popular by now. For a fundraising option that is superior to an IPO or ICO, more project owners should be issuing this type of offering.
So, what is the problem?
As a company that is issuing an STO, we have discovered that many people are still unaware of this offering type and security tokens. Therefore, we aim to enlighten the public with this article on five reasons why STOs are the future of fundraising.
What Are STOs?
An STO is a process of raising funds by selling tokens that represent a valuable financial instrument or asset. These financial instruments fall in the category of securities, which experts define as tradable financial assets. Examples of securities include bonds, stocks, cash, and mutual funds. These are liquid assets. On the other hand, illiquid securities include art, land, collectibles, and jewelry.
Companies can create security tokens on tokenizing platforms like Ravencoin and Ethereum. These tokens have unique names and are in limited supply to increase their value.
When you buy a security token, you are indirectly investing in the underlying asset it represents. You will not hold the asset, though, and you will obtain fractional ownership. Moreover, you will get a share of the income the asset generates that is proportional to the tokens you hold.
In a nutshell, when you run an STO, you raise funds for your project while the investors get fractional ownership in the underlying asset and any income that it generates.
Reasons Why STOs Are the Future of Fundraising
Make no mistake, STOs are already making a huge impact. However, we predict a future where projects will use STOs as the main method of obtaining funds. Below are five reasons why.
They Are on the Blockchain
The fundraising process on the blockchain has several advantages. They include:
- Fewer intermediaries are involved. As a result, the process is faster, cheaper, and more efficient.
- Automation thanks to smart contracts. You do not have to wait for approval from someone. The process moves from one stage to the next seamlessly.
- Global investment. While an IPO will only involve investors within a given country, an STO is borderless. Consequently, more investors will participate in the token offering.
- More investor benefits. Issuers can customize tokens that provide more benefits to long-term token holders. To illustrate, you can customize higher dividend payouts for investors that have held a token for five years and smaller payments for those that have just recently acquired it.
- Increased liquidity because the tokens are offered in smaller denominations, they are tradeable on exchanges, and transfers are fast because intermediaries are non-existent.
- Investment at the micro-level is possible as a result of fractionalization. Tokens are easily divisible. For instance, you can say that one token will represent a tenth, hundredth, or thousandth of the total valuation of your asset.
Using the blockchain to raise money has many perks. As time goes on and blockchain adoption increases, it is possible that all IPOs will move to the blockchain.
STOs Are Regularized
Since security tokens represent securities, they are regulated in certain jurisdictions like the US. ICOs, on the other hand, are unregulated because they issue utility tokens, which do not fall in the category of financial instruments. Also, investors receive a promise that at some point in the future they can access a product or service. Therefore, utility tokens are for utility purposes and not investment.
In contrast, issuers sell security tokens as an investment. The token holder is investing in the underlying security. To avoid confusion, the Securities and Exchange Commission (SEC) uses the Howey Test to determine which tokens are securities and which ones are not. A transaction is considered a security sale if “you invest your money in a common enterprise and expect profits only from the efforts of a third party.”
In the US, you are exempted from registering with the SEC if your STO falls under any of these regulations:
- Regulation D: if you are raising money only from accredited investors, then you do not have to register with the SEC. An accredited investor has a net worth of $1 million and above or a yearly income of $200,000 or more over the last two years. The SEC requires investors to wait for a year before they can sell their tokens.
- Regulation crowdfunding: you can raise money from both accredited and non-accredited investors if you are only raising $1,070,000 in a year. Investors have to wait for a year before selling their tokens.
- Regulation A+: you need approval from the SEC. However, anyone can participate in the STO. The limit is $50,000,000. Note that investors can sell their tokens immediately after receiving them.
The regulation bit makes STOs low risk compared to ICOs.
They Are Attractive to Institutional Investors
Because STOs are regularized or in other words, a tokenized version of an IPO, they are likely to attract institutional investors.
We are planning to sell our MS tokens to both retail and institutional investors. This will increase liquidity and boost investor confidence.
Examples of institutional investors are banks, venture capital funds, insurance companies, pension funds, hedge funds, and credit unions.
The 2020 and Q1 2021 bitcoin bull run was partly driven by institutional investors like MicroStrategy that were buying bitcoin. That shows that institutional investors could have a positive impact on token values.
They Are Asset-Backed
It is hard to believe that people have invested billions of dollars in ICOs which only promise the use of a non-existent product. In other words, investors have nothing but the word of the project owners that they will implement the project. That is why many people have lost their money because the companies never intended to see the project through.
In contrast, investors of STOs acquire ownership in an asset as they wait for project implementation to take place. They also have access to ownership documents, and they can track this ownership. So, investors know what they are investing in. What is more, they have a passive income to look forward to once the asset begins to make money.
In comparison to IPOs, issuing an STO has more flexibility. To meet exchange eligibility requirements for an IPO, you need an operating business that has its own profits, losses and liabilities. However, an STO can be created around an existing hard asset that isn’t generating revenue, profits and losses yet. It makes it far more simple, therefore, to issue an STO while providing direct asset ownership of the underlying asset to security token holders.
The Asset is Independent of Crypto Markets
The performance of the underlying asset is not affected by the crypto market. For instance, if you are selling exhibition tickets for your tokenized art in USD, token holders do not have to worry about volatility. That means that their dividend payments will not lose any value by the time they hit their accounts.
That makes STOs a great option for investors that want to enjoy the benefits of blockchain technology while avoiding the volatility of the crypto market.
If you believe that STOs are a suitable investment opportunity for you, join our telegram group. You can learn more about our upcoming fine art STO public sale there.
Also, visit our website to learn more about the Millennium Sapphire project.