Since the advent of blockchain technology, many innovative technologies have been rising every day. Some of them have the potential to take this digital word to the next level. In the financial industry, digital currencies are taking a crucial role. The term cryptocurrency is a general term that comprises many minute technologies and techniques. STO (Security Token Offering) is one of them. STO allows entrepreneurs those who are in need to raise funds for establish or expand their business. If you are one among them, get into this blog to explore the new ways to collect funds from a global audience by tokenizing your illiquid assets and utilities.
All these are possible with the help of STO and a security token development company. As a bonus, you can get tips for choosing such a crypto tech development company. Here we go.
What is Security Token Offering?
Before leaping the STO (Security Token Offering), you need to get some points regarding the security token. It is nothing but a digital asset that is used to stand in for transferring ownership rights or asset value to a blockchain token. The term “Token” is used to represent a numerical value that is randomly generated and is assigned to mask the original information. Assigning tokens to digital assets is known as “tokenization” in the blockchain industry.
If the explanation seems puzzling then, simply, the security tokens can be identified as a digital form of traditional investments like stocks, bonds, or other securitized assets. It allows companies or any business entities to raise funds by issuing fractionalized ownership by using digital tokens that replace issuing stock.
Despite both security tokens and cryptocurrencies being crafted and stored on blockchain technology, they are separated from both for the purpose of usage. Cryptocurrencies are used as currency but the security tokens are used as investment assets like stocks, bonds, and others. Now, let’s explore Security Token Offering (STO).
The STO is merely the issuance of digital tokens in a blockchain environment. Usually, it takes place in the form of regulated securities. In this STO process, the companies are issuing digital tokens for their stocks to the people who purchase and pass these tokens. Such transactions are recorded on blockchain technology that stores and provides the stock ownership information. It helps the firms to determine the dividend payments. It’s how the STO process takes place.
Initially, the inspiration for the STOs was taken from Initial Coin Offerings (ICOs). That allows the distribution of utility tokens to raise capital from investors. Then how does STO differ from ICOs? Let’s check.
Differences between ICO, IEO, and STO
Usually, you can see the terms like ICO, IEO (Initial Exchange Offerings), and STO in the crypto space. Despite all three terms looking the same, each has its unique qualities. In this part, you can check the major difference between them.
The Initial Coin Offerings usually issue a virtual asset that can be used on a platform that is yet to be built. That means the business related to the crypto space to raise funds to establish their blockchain-related venture/ start-up. Numerous ICOs were launched successfully in recent times and were even more popular around 2016. They are especially gaining fame after the successful issuance of Ethereum in 2014. However, after some ICO market scams. The first IEO was launched.
The Initial Exchange Offerings (IEO) allows the start-ups to list their ICO directly on a virtual asset exchange. Frequently it has been listed on the sponsor’s platform. It is intended to provide credibility to the offering by mitigating the risks of scams, as the due diligence performed by a third party here.
Meanwhile, STO represents the distribution of ownership of an asset or equity or debt, or other kinds of securities of the issuer. It is similar to analog securities and allows entrepreneurs to raise funds by tokenizing their illiquid assets (like private company shares, real estate, or other properties) with much lower transaction costs. Usually, such entrepreneurs who issue STO should pledge the underlying security/asset under the custody of a credible intermediary entity. So, it is more reliable.
To put it in a simple sentence, STO is nothing but an ICO that is backed by real-world value. not as determined by the supply of the token or the price determined by its creators.
Benefits and Scope of Security Token Offering
Nearly half of the blog has been crossed. But, we guess, still you have the question, “why should I choose to develop STO?” If yes, This part will provide the perfect answers.
- Accessibility – The tokens distributed through the STO are constant which means uniform in any region on this globe. So, people from any country can invest their money without any barriers to national borders.
- Liquidity – Access around the globe has made this method of offering more liquidate. Through that, the entrepreneurs can monetize/ liquid their illiquid assets easily. That helps them to raise funds in a short time.
- Fractional Ownership – STO allows splitting the value of a costly token into fractions and distributing them to a vast amount of investors. That makes the STO simple and easier to buy for economical investors.
- Regulated – STO is a regulated token offering process. In many countries, the Security Token Offering takes place as a regulated process that is monitored by a legalized authority. It increases the reliability among the investors. Thus makes it unique from ICO.
- Transparency – As it is regularized by third-party authority, it can be traceable and the transparency of the STO is maximum. So, any investors who are involved in the STO can check their history and the transaction process with up-to-date records.
Besides this, by choosing the STO process, the entrepreneurs who want to monetize their illiquid assets (issuer) can raise money at a minimum cost. That’s why investors and issuers are choosing security token offerings.
Based on the utilizing process and the acceptability the STOs can be classified into the following groups.
Equity Tokens – It denotes the process of raising funds by distributing the tokens for the ownership of equities like corporate stock or debt, and others.
Asset-based Tokens – This kind of token is dealing with monetizing the digital or physical objects of significant value (assets) through a blockchain-based tokenization process.
Utility Tokens – Unlike an equity token or an asset-based token, the utility token delivers access to a product or service at a later time. It allows holders/investors to get many benefits like early access, offers, etc.
Debt Tokens – As the name suggests, this token enables issuers to provide debt instruments for a short-term loan with an interest rate to raise funds.
You can decide the type of STO that is compatible with your business plan and future goal. But, you need to pay more attention to the STO development process. Let’s discuss the crucial part now.
How to Develop a Security Token to Launch an STO?
When you are reaching global investors, you need to explain your business plan and its credibility of success and reliability of your STO. So, knowing about the development process of STO, you can efficiently do the process.
Planning and Preparation – In the first step, you need to spend time analyzing your business plan, the reason why you need to do STO, the purpose of fundraising, and others. Then you should take care of the legalized documentation process. In this situation, you can approach a crypto security token development company like CryptoApe.
Development and Design – As the issuer, you need to decide the structure of the token, which includes quantity, the value of each token, soft capitalization, embedded rights, and duration of
the offering. As the trailblazer, we CryptoApe can assist you by giving suggestions in feasible ways. Once the structure of the STO is designed, we take care of the development process instead of you.
Select Service Provider – There are numerous crypto STO developing firms in recent days. But not all of them have skilled developers and complete financial analysis to do the STO development process properly. Fortunately, you are at the right place. CryptoApe is an experienced and well-organized firm that helps many startups to develop crypto products and services.
That’s all. Within a few days, you can start your STO. This is an easy and effective way to crowdfund your startup with the help of tokenization using distributed ledger technology (DLT) with a variety of block-based encryption.
The way of collecting funds to establish or expand a business is changing continuously by concerning recent technologies and financial practices. In that manner, blockchain technology has been upgrading the fundraising method with its unique style.
It allows startups to list their STO to global investors and collect sufficient funds from them in a short time. But, as a piece of humble advice, be dedicated and focus on choosing the security token development company for your token offering. CryptoApe can help you to do the process with robust tech solutions.