What is an STO? Explanation of its Structure and Features
Have you heard of the term STO? In this article, I will explain what an STO is as it is drawing much attention as a means of raising funds instead of ICOs.
What is an STO
STO stands for Security Token Offering and is a new way to raise funds by issuing security tokens.
Difference between ICO and STO
ICOs, which everyone has seen with cryptocurrencies, is an abbreviation for Initial Coin Offering, and it is said tokens issued to raise funds should be classified as utility tokens. If these tokens are ruled to be securities, there is a need to comply with various laws and regulations including securities laws.
As a criterion for ruling whether or not it deserves securities classification in general, there is what is called a how-to test, which measures whether “the user is investing money” and if “the user expects a profit from the investee.” The investment destination of the user is a corporation and “the profit is generated by a third party such as a bank,” and the ICO token that applies to these can be regarded as securities. Actually, the US securities exchange committee also sees that most of the ICO tokens fall under securities law, so it is currently unknown when regulations will be clarified and strengthened.
Regulatory agencies of each country are concerned with the situation where utility tokens that should be used for ecosystem management originally, have a speculative value and are traded as investment property. From such a regulatory flow, STOs are trying to issue a security token as a security-compliant security from the beginning rather than raising funds as a utility token with an investment aspect.
Advantages of an STO
The advantage of STOs is that you can access global capital, and you can exclude scam projects by taking the initiative in issuing tokens that comply with regulations. The concern is that the ICO’s crowd-funding elements may be lost. Because the SEC is limiting individuals and corporations that can invest in securities to more than a certain annual income and those with high net worth, if that provision is adapted for STOs the likelihood is small investors will not be able to participate.
Unlike ICOs issuing under the fear of being subject to harsh regulation, by issuing a security token conforming to regulations from the beginning, that should be enough to suggest investment is safe but also regulations need improvement. STOs are an effective way of eliminating the Scam projects. On the other hand, because there is no regulation on how to handle security tokens, the fear is that the restricting investors element will lead to a loss of freedom and the crowd funding effect. Let’s see how STOs develop in the future, along with the flow of regulations.