How do Security Token Offerings (STOs) work?
Security Token Offerings (STOs) are a fundraising mechanism that involves the issuance of digital tokens representing ownership or investment rights and are backed by real-world assets. Unlike Initial Coin Offerings (ICOs), which often involve utility tokens, STOs adhere to regulatory frameworks, ensuring that the tokens comply with securities laws.
1. Tokenization of Assets
STOs start with the tokenization of assets, whereby physical assets like real estate, stocks, or commodities are converted into digital tokens on a blockchain. This process enhances liquidity and fractionalizes ownership, allowing smaller investors to participate in high-value assets.
2. Regulatory Compliance
Before launching an STO, issuers must ensure that they comply with jurisdictional regulatory requirements, which may involve filing with securities regulators. This legal framework helps to protect investors and provides legitimacy to the offering.
3. Issuance of Tokens
Once compliance is established, the company issues tokens through a smart contract on a blockchain. Each token corresponds to a specific stake or ownership in the underlying asset, and these tokens can represent dividends, profit-sharing, or other rights.
4. Trading and Post-Offering
After the STO, tokens can be traded on regulated exchanges, providing liquidity to investors. This accessibility is a significant advantage as it opens up opportunities for continuous trading and valuation over time.