STO stands for security token offering.
Similar to an initial coin offering (ICO), an investor receives a crypto coin or token that represents their investment. But unlike an ICO, a security token represents an investment contract in an underlying investment asset, such as stocks, bonds, funds and real estate investment trusts (REITs).
A security can be defined as a "fungible, negotiable financial instrument that has some monetary value," i.e., an investment product backed by a realistic asset, such as a business or commodity. A piece of value.
Therefore, a security token represents the ownership information of the investment product, recorded on a blockchain. For example, when you invest in traditional stocks, ownership information is written on a document and issued as a digital certificate (for example, a PDF). For STOs, it is the same process, but recorded on a blockchain and issued as a token.
STOs can also be seen as a hybrid approach between cryptocurrency ICOs and the more traditional initial public offering (IPO) because of the overlap with both methods of raising investment funds.
How is an STO different from an ICO?
It is the same process, but the token characteristics are different.
STOs are asset-backed and comply with regulatory policies. In contrast, most ICOs position their tokens as a utility token that gives users access to the native platform or decentralized applications (DApps). The purpose of the token, they argue, is for use and not investment. As a result, ICO platforms bypass certain legal frameworks and do not have to register or comply with the strict governance of regulatory agencies.
Therefore, the barrier to entry for companies to launch an ICO is much lower because they do not have to do all the upfront compliance work. They are also able to sell their tokens (i.e. raise funds) to the general public.
It is much more difficult to launch an STO because the intention is to offer an investment contract under securities law. Therefore, these platforms must do the preliminary work to ensure that they comply with the relevant regulations. They would also typically only be able to raise funds from accredited investors who have themselves met certain requirements.
