You’ve heard of ICOs and IPOs, but what’s an STO?

Security token offerings are issued on the blockchain under the supervision of the appropriate authorities. Investors in a security token offering receive shares in blockchain-based companies.

This is not the same as a traditional IPO (initial public offering), in which companies are listed on the stock exchange. Instead, issuers can use smart contracts to launch a new business or expand an existing one. These self-executing legal agreements between two parties are typically stored on public blockchains. This reduces transactional friction, such as price fluctuations, fraud, and regulatory compliance issues.

Security tokens are also used in crypto-fractionalization, which involves tokenizing existing real-world assets. Tokenized real-world assets include real estate, capital markets, commodities, and equity funds.
It is important to note that security token offerings provide the same securities as traditional investment platforms. Tokenization has no effect on the underlying securities. STOs, on the other hand, offer a novel approach to investing.
Polymath is an excellent example of combining the power of blockchain technology and smart contracts to create security tokens (POLY). It provides a platform through which verified investors can participate in security token offerings.

Advantages of a Security Token Offering (STO)

Because proper due diligence and compliance are enforced before they can be issued, security token offerings are extremely secure. Furthermore, most security tokens are linked to real-world assets such as bonds, stocks, funds, or Real Estate Investment Trusts (REITs), making it easier for potential investors to determine the offering’s fair market value.

Because blockchains are immutable and transparent, all operations of a STO (issuing, trading, purchasing, and selling) are performed on the blockchain, which increases investor trust.

Security tokens are less expensive than initial public offerings (IPOs). Smart contracts eliminate the need for costly legal counsel while also eliminating traditional paperwork and significantly reducing processing time.

Security tokens provide crypto-fractionalization, which is a good entry point for new investors who may not have the capital to purchase an asset all at once. For example, a $1,000,000 artwork can be divided into 1,000 pieces and sold for $1,000 each, allowing everyone to own a piece. Asset fractionalization makes assets more accessible by dividing them into smaller units that more investors can evaluate.

Disadvantages of a Security Token Offering (STO)

One of STOs’ major advantages is also one of its major challenges: regulation. STOs are subject to stringent compliance and regulation, which slows the security token process. Platforms that issue STOs must constantly stay up to date on new and existing Anti-Money Laundering (AML), Know Your Customer (KYC), listing approvals, and other regulations.

Certain countries’ investor regulations also limit who can participate in STOs. This reduces the investor pool for the STO and the opportunities available to potential investors. STOs can also be costly due to the administrative checks required before issuing the security token.

STOs Can Have a Large Impact on Traditional Securities

STOs have the potential to influence the evolution of traditional securities for real-world assets. The ability of STOs to tokenize almost anything opens up new possibilities for trade and asset-backed securities management.

With the rise of security token exchanges, platforms, and marketplaces, the opportunities for investors are limitless. This provides investors with a wide range of security tokens that are widely available around the world.