What does the term Security Token Offering (STO) refer to?

Security Token Offering (STO) is often referred to as the evolution of the traditional token. But what is it, and why is it so important?

What is an STO?

STO is an acronym for Security Token Offering. It is a process similar to an ICO in which an investor exchanges money in exchange for currencies or tokens that are the investment itself. However, unlike the ICO, the STO goes a step further and represents a token that falls under the title status.

The STOs are connected to the investment asset in the same way as shares, bonds, real estate investment funds (REIT) or other funds would be. Therefore, STO offers are actually security offers. Exchanges with security tokens must be fully compliant with regulations, must be subject to in-depth investigations of token lists, data sharing and investor onboarding procedures. The STOs are therefore only moved through specialized exchanges.

What are the advantages of an STO?

During the 2017-2018 ICO-mania, many token developers sold tons of tokens to investors with no value or economic right under existing laws.

The sale of security tokens is intended to be an alternative to common token sales, compliant with regulations. In particular, we want to correct the disparities that penalize investors, such as the granting of dividend rights or other predefined revenue streams to security token holders.

Other advantages are:

• Credibility. The STOs follow all the current regulations and allow the blockchain and cryptocurrencies to restore a certain credibility.
• Improvement of traditional finance. While traditional stocks are slow and expensive due to their old infrastructure and multiple layers of intermediaries, STOs simplify services at a lower cost.
• Programmability. STOs can be programmable and applied via smart contracts.
• Free market. STOs are not limited by local borders or regulations.
• More investors. Traditional security regulations only affect people who are in the relevant jurisdiction, while security tokens are open to anyone on the Internet.
• Reduced institutional manipulation. The free and open market with fewer brokers should reduce market manipulation, at least in theory.
• More liquidity. STOs will be traded on specialized security exchanges so that investors have a convenient way to liquidate their assets.

How to tell if a token is an STO

The most common method of differentiating STOs from normal tokens is the Howey Test. According to this test, we talk about a transaction in STO when the following criteria apply:

1. It is an investment of money.
2. The investment is a collective enterprise.
3. There is an expectation for a profit generated by the work of promoters or third parties.

A token that passes the Howey Test is considered an STO.

How can you invest in STO

In the United States, STOs are for accredited investors only. But if you live outside of the United States, this rule does not apply and you can invest in most existing STOs. However, more specific restrictions may apply, so be aware of local regulations before investing.