The security token is a comparatively new idea within the domain of blockchain. When a token has mandatory federal security regulations and derives its values from an external asset that can be traded, it is classified as a security token.
Security tokens differ from utility tokens in that they are indicative of ownership in an asset, the tokens possess actual tangible value. Holders of security tokens have the authority to receive shares in profits, dividends, equity, vote and buy-back rights.
Putting an STO (security token offering) is not very different from the process to release an ICO (Initial Coin Offering).
Security tokens also provide a host of other advantages like enhanced market efficiency, reduced issuance fees, and fractionalization of bigger assets. If a startup fulfills necessary regulatory obligations, the STO has wide potential for a large range of applications.
The various security tokens explained
- Debt tokens - Debt tokens are like the short term loan on an interest rate on the amount loaned out to a company
- Equity tokens - these are indicative of ownership in an asset like company stock
- Asset-backed tokens - This is a token developed on the blockchain platform connected to tangible/intangible articles of particular value
- Utility tokens - Utility tokens give users access to a specific item/service
Launching your own STO
The security token offering launch process can be thought of as consisting of four important phases:
- The preparation phase - During this very crucial phase, the idea for your STO is formulated, developed, and projected to prospective investors. As STOs are subjected to specific regulations, it is best to employ a team of legal consultants that can assist you with regulatory requirements in different countries.
- The pre-STO phase - At this juncture, it is best to put your STO out into the wild by introducing it to the market. The choice of partner exchange, and identifying custodians to collateral assets for security tokens are also critical considerations during this phase.
- The STO phase - This is the primary phase of an STO project where a firm puts out its tokens publicly in exchange for funds.
- The post-STO phase - During the post-STO phase, developing a product that is supportive of the newly launched security token becomes critical. Handling investor expectations is very important, the business plan should be executed without running into any sort of legal issues.
Considerations for the healthy functioning of an STO
The following factors are important considerations in executing an STO properly
- Technological infrastructure - The blockchain your token is going to exist on should be considered prior to the choice of the technological stack. How should development take place to ensure security and interoperability? Developing a token with the interoperability factor built-in is crucial. Opting for the incorrect standard means that investors may not have several options to record the tokens securely and secondary markets are incapable of hosting your token.
- Regulation - The objective behind security token offerings is the raising of funds from a set of investors. As tokens might be appealing to different sets of investors, it does not imply that regulation can be overlooked. Regulation is dependent on the individual you want to raise funds from, the funds that you want to raise, and how you are planning to obtain those funds.
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