With so many new ICO’s emerging almost daily, it can be hard to tell a great ICO from an inferior one. It’s incredible that less than 20% of initial coin offerings (ICOs) manage to raise the minimum amount of funds. The meanings of ICO, STO, and crowd funding are so convoluted that it is hard to make heads or tails of them. We would assist you in comprehending each of these phrases and their significance. Therefore, let’s commence at the beginning and contemplate the importance of a Security Token Offering in a crowdfunding/cryptocurrency ecosystem.
An Initial Coin Offering (ICO) is a widely used method of raising funds for cryptocurrencies. Through this process, a company which is any of the below:
- has an established non-block chain project
- or has a ground-breaking concept for Block chain application
- offers institutional investors and general public digital tokens or digital coins. These digital tokens/coins are a promise to future access to a company’s product or service. That’s why they are often called Utility tokens.
Now let’s compare an ICO with an IPO . An Initial Public Offering (IPO) is the established method through which businesses are listed on a stock exchange, offering stocks to both financial entities and the public. Having a share grants the holder of it possession over the company, and allows them to vote on matters related to the company as well as attend any shareholder conferences. A guarantee of future dividends or earnings due to the increase in stock prices. A token/coin provided during an Initial Coin Offering (ICO) is distinct from the stock offered during an Initial Public Offering (IPO).
However, all ICO projects don’t offer utility tokens. Essentially, buying tokens is equivalent to purchasing an investment contract, with the primary goal of gaining future monetary gain through dividends, percentages of income, or an increase in the token’s value. In July 2017, the SEC issued a statement in which they declared that certain tokens could be categorized as securities and hence were subject to the controlling laws associated with other securities.
What is a Security Token Offering (STO)?
The term security token offering (STO) is becoming widely used in digital currency jargon. The STO is becoming a strong and beneficial substitute to the funding from venture capital and private equity for companies from all over the world. Polymath is anticipated to create an immense economic possibility of $10 trillion in the upcoming two years.
Businesses which are attempting to secure financing should definitely consider an STO because there are a few compelling benefits that I am about to discuss. If your ambition is to collect a large sum of money and your organization meets three or more of the characteristics outlined below, please continue reading.
It is worth considering an STO if your firm is:
- Generating in excess of $10 million in annual revenue
- A high growth company
- Operating a global business
- Preferring to issue a transferable asset
- Interested in a funding method that connects with your customer base
- Desiring greater liquidity for stakeholders
- Before diving into why STOs are becoming more compelling for investors and companies raising capital alike, let’s step back to recap what security tokens are and how they function.
In basic language, a security is a financial product representing an actual asset. Examples of securities include stocks, bonds, and managed real estate trusts. In the past, when an investment was bought, the deal was finalized with a written agreement. A security token performs the same task, but authentication of ownership is done via blockchain transactions. Security tokens can provide multiple economic privileges to those investing, such as equity, payout distributions, portions of proceeds, portions of profits, voting power, and other financial means.
Types of Security Tokens
Below, we briefly explain the various types of security tokens available on the market:
Equity tokens
A equity token denotes possession of a basic resource, such as a firm’s shares. A person who owns an equity token may have rights to receive dividends, take part in the voting process, or possess both of these benefits. The same as shares, an agreement states the relevant rules and regulations for that.
Debt tokens
Debt tokens are tokens that accrue interest. The interest rate or short-term loan charged on the amount loaned to an individual or business is the same as what is due for the loan. They represent the debt owed by the token holder. There are two varieties of debt tokens: those that reflect a debt with a set interest rate and those that denote a debt with a fluctuating interest rate.
Asset-backed tokens
Cryptocurrencies built on a blockchain and viewed as actual physical assets are known as asset-backed tokens. These types of resources can range from property to company stocks, items, and even precious stones. They offer people ownership rights over important material or nonmaterial items, and these items can be found in digital form.
Utility tokens
Utility tokens can be utilized by corporations, startups, and project groups to raise money and acquire funds to construct blockchain technology projects. These tokens can be used in the future to buy products or services from the organization that is responsible for the cryptocurrency.
What Makes an STO So Compelling for Business Owners?
1. Access to Global Capital
In the past, it has mainly been large companies with enough financial security to undertake the costs and risks that go along with it who have had access to investors from other countries. Security token offerings are not restricted by national boundaries.
This implies that both big and small businesses can showcase themselves to potential investors via the web. We were able to witness the consequences of this situation in the ongoing ICO surge. A multitude of businesses have arisen to aid corporations in marketing their products to other countries and in varying languages.
Start-ups and growth businesses gain access to greater funding options and a higher level of recognition through this versatility. The international reach of tokens also creates an environment where a larger base of buyers and sellers can participate in trading activities following an STO, which could result in an increase in market fluency.
2. New ways to market your offering
In the past, fundraising on an international level came with a hefty cost and a great deal of complexity. Coping with regionalized securities regulations and the requirement of translating languages have proven to be difficulties.
The introduction of the ICO provided access to resources and technologies to assist in international token offerings. Reaching out to all parts of the world in multiple languages has become simpler, and innovative methods like incentive programs provide businesses with an opportunity to offer compensation to people around the globe in exchange for completing certain activities, like actively mentioning a corporate label on social media.
Making translations of materials into foreign languages and dispersing them on Telegram, WeChat, and KakaoTalk has also emerged as a lucrative form of advertising for gaining capital. Agencies with specialist expertise to assist in international cryptocurrency releases are increasingly coming about, and programs for investors such as those provided by Lexico can create a hassle-free exchange process.
3. Better terms
Security tokens provide more favorable conditions in comparison to obtaining funding from venture capitalists. At first, firms do not have to surrender their governance of their enterprise or appoint a representative to their board. This affords management teams more power when it comes to making decisions on behalf of the organization, decreasing their odds of getting ousted from their own firm.
For their security token offerings, businesses can offer common shares instead of preferred shares. This allows executives and other owners of common stock to keep more of their ownership stake in the company, particularly in times when it is not doing so well.
Common stock security token holders are given the right to receive dividends, but voting rights are not necessary in order to carry out an STO. Once more, this is a benefit that grants management teams enhanced oversight of their organization. Finally, STOs generally raise at higher valuations.
4. Low Cost of Entry
A security token offering can be used to create a digital token for various assets, commodities, and financial instruments. This suggests that smaller enterprises can generate considerable sums of money from an international group of investors quickly and without incurring major outlays, particularly on legal fees.
Think of gaining financing from a worldwide group of financiers with customary practices. It would be necessary for you to hire a different attorney for each nation where an investor desired to invest in your venture. The necessity for compliance is eradicated with the use of security tokens as the compliance is inherent in the token.
In the United States, businesses who intend to obtain funding can utilize frameworks like Reg D and Reg A+, and they are able to abide by the rules of these frameworks without asking a lawyer for help.
5. Uses Beyond a Traditional Security
Adding features of utility tokens to security tokens can increase their worth. For instance, if “Hotel Crypto” distributed a security token, individuals who possess the token may be eligible to receive a 10% reduction in their hotel room rate, or complimentary access to VIP areas.
Through tokenized offerings, businesses are able to discover creative ways to provide their customers with additional advantages. In an alternate example, organizations could provide benefits with a monetary worth to clients who hold their tokens for more than three years, such as reduced prices on meals, spa treatments, in-room entertainment, or reduced lodging costs.
Companies giving out security tokens have the possibility to give out rewards to patrons who purchase and maintain the securities for extended periods. This appreciation surpasses the worth of the underlying asset.
How to Launch an STO
Phase 1: Preparation
Before beginning an STO, you need to possess an effective, reliable plan to entice prospective investors. It is recommended that legal help be sought during this process to carry out any necessary rules, as well as to seek the advice of experts on ways to increase the worth of the token.
Typically, the worth of a token is determined by its purpose, role, and characteristics. The job that you assign to your token will lead to a relevant intention. In return, the characteristics can be established and customized to meet corporate objectives.
It is imperative to classify and refine the particulars before you start your STO.
Phase 2: Pre-STO
Prior to initiating your Security Token Offering, you should make sure that you have advertised it in the market. This is the point where your marketing plan will be utilized. Utilize crypto-related forums and websites to their fullest extent that list Security Token Offerings and Initial Coin Offerings. Make sure to get the right information out there, such as:
Your white paper
Token structure
Your team’s credentials
Milestones
It would be of advantage to you if you partnered with a reliable crypto trading platform. Select an agency that is thorough in their examination, as this will eradicate possible swindlers from consideration and prevent you from facing any problems or difficulties in the long run. Be certain that the trading platform also permits investors to meet KYC and AML requirements in their homeland.
Security tokens must also have custodians for their backing assets. Generally, companies that have Special Purpose Vehicles or Trusts can accomplish this. Popular custodial companies comprise Coinbase and Prime Trust, in addition to others.
Once you have sorted out these particulars, you can now start creating your tokens and advertising your STO. The selection of a platform will have the most important role in deciding what the token formation will be like, so make sure you have taken the time to find out about it beforehand.
Phase 3: Launching STO
The next step in the security token offering procedure is to carry out a crowd sale, the most crucial element of an STO venture. This is the place where your organization can offer its tokens to the public at large to obtain money.
Now is the perfect opportunity to put the sales section of your website online. Make sure that the webpage includes a clearly visible area that includes buttons for token sales that can be quickly accessed. Investors from this location can sign up and complete know-your-customer and anti-money-laundering steps before getting tokens. You can also employ the aid of the startup launch services from STO in this stage.
Be certain that your community aid services are available to provide prompt help to investors when needed. Your support team should be ready to assist investors and respond to questions about crypto on forum boards and social media sites. Replying quickly to questions is essential, as it can be the deciding factor between a successful token sale and a failed one.
Create a way for clients to submit questions or contact you on your website, such as a hotline or ticket submission system, so that they can reach out for assistance when needed.
Phase 4: Post-STO
Once the crowd sale has finished, it is time to construct your product. Now is an opportune moment to construct a program utilizing the blockchain. Make certain that your app is easy to utilize, strong and, most crucially, safe.
It is essential to guarantee that the item you fabricate will back your recently propelled security token. At this point, it is essential to recruit software engineers who have experience in blockchain app design and building an STO.
As you are developing your product, it is important to keep your investors informed. They will need to make sure that the business plan is being carried out as planned and satisfies their desires and requirements.
Once your product has been completed and made accessible to the public, the final step is to make sure that there is technical support in place that can promptly and accurately respond to queries from customers. Tech assistance should be accessible at all times, day and night, through conversational messaging, social media networks, your website, and any other platforms that your customers might use.
Security Token Offerings (STOs) allow novice investors to participate in investment opportunities that they would not have access to without the fractionalization of digital assets. Investors have the advantage of round-the-clock trading, which gives them both the comfort of access and the liquidity of quick transactions.
If you plan to keep cryptocurrency as an investment for a long period of time, it is suggested that you store them in a self-directed individual retirement account (SDIRA) that is kept in a cold storage environment.
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