Benefits of a Security Token Offering
Once upon a time, Initial Coin Offerings (ICOs) were the talk of the town. However, various research findings reveal that ICOs have experienced a drastic decline since 2018. As of the first quarter of (Q1) 2019, research by BitMEX indicates that the ICO market had dropped by 97 per cent based on the amount of attracted capital.
The primary factors contributing to this drastic drop being a lack of regulations and increasing cases of fraud. STOs emerged to fix these challenges and enable companies to raise funds legally from accredited investors.
So, what are STOs, and how can you benefit from them? Let's dig in and explore:
What are STOs?
STOs, short for Security Token Offering, are regulated token offerings. They operate the same as ICOs. However, unlike ICOs, which mostly generate Utility tokens, STOs generate Security tokens, which are asset-backed and highly regulated.
With security tokens, investors enjoy some stability in a highly unregulated market. Many crypto advocates agree that there is a lot to benefit from STOs, especially for investors.
Benefits of STOs
1. Lower costs
IPOs have, for the longest time, been one of the best ways for institutions and individuals to raise funds. However, due to the many costly regulations and time-consuming processes, they lock out many potentially productive businesses.
The reliance on intermediary services also makes IPOs quite expensive to utilise. Intermediary services come with high fees that not many businesses can comfortably cater to. This leaves only the large corporations with extensive cash reserves to enjoy what IPOs have to offer.
STOs, come in to offer a cheaper, faster, and more efficient way that businesses, small and large, can raise funds. Because STOs offer trustless transactions, they cut out the need for intermediary services.
The processes involved when a company looks to go public via an Initial Public Offering are lengthy and time-consuming. For example, it will take a startup about 30 days to be audited and 60 to 120+ days for a large operating business.
The SEC review process can take 60 to 120+ days, while the stock exchange review process can last between two weeks and three months. Accumulatively it can take an average company between six and nine months to go public via an Initial Public Offering.
STOs can help speed up the whole process by cutting out the need for a lot of institutional intermediaries. KYC and AML checks become faster because the processes are automated, making selling assets to accredited investors faster.
One of the main reasons many investors are opting out of ICOs is insecurity. ICOs became infested with scammers and thieves stealing a lot of investors' money. Day-in-day-out cases of Ponzi schemes and exit scams are being reported. In 2019 alone, the CipherTrace's Crypto Anti-Money Laundering Report reveals that crypto investors lost $3.1 billion to exit scams.
Compared to ICOs, STOs offer investors more secure options for investment. STOs come with strict regulations that lockout scammers and thieves.
Because security tokens are powered by blockchain, they also enjoy transparency and immutability. Transparency promotes credibility, while immutability locks out any illegal activities that can be costly to investors.
STOs improve liquidity in the crypto space by allowing investors to invest in multiple asset classes. Security tokens promote the tokenisation of different asset classes that include illiquid assets like real estate, collectables, and art. These are assets that have, for the longest time, been hard to trade-in.
Tokenisation of assets enables fractional ownership of investment products, thereby lowering minimum investments. With STOs, more people can participate in investing in products that were once a privilege of those with deep pockets. This allows for more liquidity to come to the crypto market.
5. Global exposure
STOs open up the crypto market to global exposure, improving scalability. Their reliance on the internet makes it possible for any investor with access to the internet to participate in the token offerings.
Investors also get to benefit from 24/7 access. Unlike traditional financial systems, STOs have no stoppage time. This is thanks to automation brought by the blockchain technology.
The use of the internet makes the offerings more accessible across the globe and the best available option when looking to trade non-stop on crypto coins.
6. Boost the entrance of new investors
Many people shy away from the crypto space because of volatility and the lack of regulations. Without regulations, the market has seen many illegal activities that have kept many investors from investing in digital coins.
STOs look to change the gloomy picture of the crypto space with regulated tokens. The security tokens offer some sense of stability in a highly unstable market. The tokens also provide significantly greater value to the holder when compared to utility tokens, which is attractive to investors.
The regulations, tokenisation capability of security tokens and global access to security tokens can open up the crypto market to new investors. The more investors participate in the crypto market, the more projects take off, promoting technological advancements.
7. Regulatory Compliance
The advent of regulations in the crypto world has resulted in several ICOs getting shut down because of a lack of compliance.
Currently, many ICOs are masquerading as issuing utility tokens while in real sense issue security tokens. Such ICOs usually get into trouble when caught by regulatory institutions like the SEC. There are penalties to be imposed and possibly shut down.
In 2018 the SEC shut down Blockvest ICO over false regulation problems. The company had sought to raise funds from investors by misrepresenting its partners and regulatory status.
STOs offer a more viable option when looking to invest in projects that are compliant with set rules and regulations. Companies looking to issue security tokens have to satisfy set regulations before the tokens are accessible to the market. This ensures only eligible companies operate STOs.
STOs maybe a new way of raising funds in the crypto space, but they are already showing a lot of promise. Compared to ICOs, STOs stand out because they are more secure, faster, and reliable. Compared to IPOs, STOs are cheaper, faster, and efficient.
By eliminating intermediary services and using automation to streamline services, STOs outperform IPOs. Thanks to the blockchain technology. A Security Token Offering also comes with immutability and transparency in check.
The regulations in place help deter illegal activities, thereby protecting investors. Investors don't have to worry about scammers and thieves as they used to with ICOs. Evidently, many benefits come with STOs.
Security Tokens Explained: Everything You Should Know
About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Last updated: 28/08/2020