What Is STO? Can STO Replace ICO?

STO means Security Token Offering. Security tokens can be called analogue of classic stocks and securities, as they are developed to provide investor with property rights for assets or shares of a company.
Security tokens are tokenized analogues of securities. They give investor the right to get dividends, property rights for shares and company assets. Today security tokens are regulated by the USA SEC and the Swiss FINMA.

Can STO Replace ICO?

The difference between security tokens and other types of tokens is the fact that in the eyes of the law STOs are defined like investments and emitents of such tokens are regulated by SEC and FINMA.

According to this fact STO is more like an IPO, than ICO. One of the main advantages is a guarantee for investors. STO investor can apply for compensation on the basis of SEC and FINMA regulations, if the project fails or appears to be a scam. Security tokens are also used in case of the Simple Agreement for Future Tokens. This agreement guarantees to investor that he/she will get a specified amount of tokens in the future.

Thus, STO is a better fundraising method for those who want to deal with classic investors. However, it is not treated as the best choice for startups at the moment. Check the data from the ICORating research on 4 Quarter of 2018 below.
So far there are only 6.4% of projects which have launched STO, and the rest has chosen ICO as a fundraising method. 6.4% is 0.14% less than for the last quarter. It has to be mentioned that the first STO was launched on April 10, 2017 by the Blockchain Capital, so for the moment STO is only 2 years old.

STO vs IPO - Security Tokens Advantages

The main advantage of the security tokens today is absence of the intermediaries like financial institutes and banks which allows to decrease costs, sell and buy assets 24/7. Here is the whole list of advantages:

  • Automated share possession;
  • Instant order execution;
  • High liquidity;
  • Available automation of assets examination on compliance;
  • It is easier to get an access to security token trades than to the classic securities;
  • Integration of related services to the security tokens is possible.

How to Distinguish STO from ICO?

According to the SEC requirements there have to be positive answers on the following 4 questions (so called Howey Test):

  1. Is there investment of money?
  2. Is there expectation of profits?
  3. Is money invested in a common enterprise?
  4. Does profit depend on efforts of a company and not on efforts of an investor?
In case you gave the positive answers on all four questions, the token is treated as a security, thus the company is launching STO instead of ICO.

STO Disadvantages

Only accredited investors have a right to participate in financing of STO, meaning there is:
  • high barrier of entry for investor - it has to be someone with annual income starting from 200 000 USD, or a couple with an income starting from 300 000 USD, or an individual who has assets for more that 1 000 000 USD excluding the accommodation where he lives. In case when a company wants to become an investor, its equity has to be more than 5 million USD.
  • STO launch is much more expensive than ICO as aside from everything you do for ICO, STO demands examination by SEC and FINMA.

The Future of STO

Today ICO is much more popular than STO among startups as they do not want to deal with SEC and FINMA compliance. Moreover, according to the fact that only accredited investors can participate in STOs, the majority of the potential investors cannot join the process because they do not comply to the minimum requirements.

At last, the majority of cryptoenthusiasts is against adoption of industry to the classic economy standards and propose another ideas of economy system development based on the decentralization principle.
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