Security token offering

Emirex Group | Dec 12, 2019 1:16:58 PM

What is a security token offering?

 

The name says it: security token offering or STO is an offering of security tokens. Security tokens are the tradeable and regulated blockchain tokens allowing the investors to hold a digital representation of equity shares or assets and to receive anticipated dividends/profit shares, as well as appreciation.

The value of a security token is derived from the assets behind it. The only downside - and a blessing, at the same time - is that security tokens are bound to be regulated, which, on the other hand, makes them more secure and very attractive for institutional investors.

 

Below are the types of security tokens:

Debt tokens: a type of security tokens that allow the issuer to put assets as collateral and obtain liquidity against it. The asset is frozen on blockchain until the obtained money is returned.

Equity Tokens: another way to tokenize a business is by issuing equity tokens, whereby the shares of a company are represented by blockchain tokens. This model is similar to the conventional company shares. Imagine a situation, in which a gold miner from Africa issues 10 tokens, each representing a portion of the equity in his mining business to be held by 10 investors. Each of the investors buys $500,000 worth of tokens. With the generated $5 million the miner buys new lands and equipment, which results in his production volume increase. With the growth of the business, the value of the equity tokens grows, too.

Profit-Share and Cash Flow Tokens: in this scenario, the gold miner issues 10 tokens, each

one representing a certain fixed percentage of profits of the business. The token holders will be entitled to receive regular payments which represent a fixed percentage of profits of the miner’s business. These tokens do not increase in value when the overall value of the business grows.

Real Asset Tokens:  ownership of real-world assets, such as gold or real estate is represented by these tokens. The blockchain allows us to eliminate complicated processes, trust issues and simplify transactions. Keeping track of records, logistics, is possible in a safe and transparent way. It is possible to use these tokens as tradeable coins, as they are backed by the stable real-world value of commodities.

 

What is the difference between the STO and an ICO?

ICO is a fundraising model that has been losing trust due to widely spread fraud in the ICO space. ICOs are not regulated and the investors are unable to control what the company does with the investors’ money. In this case, the money is collected upfront by unregulated startups, before the tokens are launched. The ICO companies do not normally have assets to back their tokens, and here is no guarantee that the tokens will be minted at all.

 

STO is a totally different story: there are assets to back it up and the companies offering STOs are normally well-established, fully compliant businesses with a proven track record and, of course, assets that are being tokenised in this scenario. On top of that, STOs are regulated by authorities and the companies must comply with strict rules and regulations in order to be allowed to go ahead with an STO

 

Emirex Advisory is leading the Middle East’s tokenisation market and has consulted numerous clients with regards to tokenisation of their assets. Being an expert in the field, we love sharing our knowledge with our readers. In the following articles, we will take a closer look at the differences between STO and other coin offering models.

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