Blockchain Platform Selection for Security Token Offering STO Using Multi-criteria Decision Model SpringerLink

The country has also developed the Virtual Financial Assets Act, under which it makes use of a financial instrument test to assess investments and determine whether they can be tokenized. Initial public offerings involve lots of intermediaries, investment banks, and brokers, that take care of different procedures and issues. Inevitably, a lot of financial resources are needed to cover the costs of their services.

STOs were introduced with the purpose of bringing institutional investors on board in the crypto and blockchain era and allowing them to enjoy unprecedented levels of transparency and convenience. The emergence of security tokens does not stop with only liquidity and revenue distribution frameworks. Small investors of specific security tokens could sell off either the dividend portion of full equity or a small part of their interest in a secondary market. Brokers, on the other hand, can bundle up the voting security tokens and sell them seamlessly. Decentralized autonomous organizations (DAOs) could include human shareholders coding voting choices into their smart contracts. Large institutions across banking and technology, such as JP Morgan, Square, and Facebook, have already entered the blockchain space.

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Exchanges exist for investors to trade security tokens, enabling better access to capital, enhanced secondary liquidity, and democratized investor access to securities. TZero is a high-profile exchange that recently went live, backed by Overstock. Company A’s security tokens can trade on exchanges like tZero where investors undergo KYC/AML verification. STOs function as digital representations of real-world assets, like bonds, stocks, or even gold. Because of this, security token offering services enable asset tokenization for many businesses.

However, unlike other countries, Malta believes in a technology-first approach. The authorities need to consider the technology behind the project and if it is feasible or not. The AMF requires to offer additional advice related to the law’s provisions in General Regulation (RG AMF). Issuers have the right to submit a disclosure document to the AMF so that buyers can make the right decision while buying tokens. Chapter 2 of Title V (Token Issuers) specifies the token’s definition that can be registered, issued, transferred, or conserved via a shared electronic registration mechanism.

What are IPOs?

Expert opinion is essential for determining the way in which the digital tokens are sold, whether through a centralized or decentralized exchange or directly to investors. These options are commonly referred to as an initial exchange offering, initial coin offering, or a security token offering. The development of blockchain technology offers a different method of generating cash that you might wish to take into account in order to finance business growth and development. This process involves raising capital by selling digital tokens to investors. The discussion that follows will look at how digital securities can be used to raise funds.

• In 2019, for example, ICOs managed to raise $14.8 billion for the cryptocurrency industry, which is undeniably impressive.
• Astonishingly, this figure represents nearly 50% of the total TON supply, which is a significant milestone for the project.
• Security Token Offerings (STOs) are a relatively new form of raising capital through blockchain and cryptocurrency.
• Issuers need to work with the three rules, Rule 506 (b), Rule 506 (c) and Rule 504.

Companies, for instance, are required to disclose their STOs to the SEC and potential investors. While ICO’s also observed twice the growth in 2018 as compared to 2017, the report reveals that the global trend is inclining towards STO’s. The increased attention towards STO’s was contributed to factors including the regulatory aspect and the shifting trends towards the tokenization of assets. The test to determine a security in Canada is identical to the Howey test followed under US law. The token sale, which is under Canadian law, then it should be registered and complied with a securities regulatory authority and should have a prospectus.

The Rise of Security Token Offerings

The Israel Securities Authority (ISA) established a committee in August 2017 to examine the applicability of existing Israeli securities laws to the sales of tokens. The AMF then checks the disclosure document, and any advertising or promotional content circulated and published by the token issuer. Therefore, the content should be clear, accurate, devoid of false information, and should mention the risks that can be faced by investors when buying tokens. Performing a legal activity in France is usually prohibited until the specific person is exempt or licensed. AMF (Financial Markets Authority) had earlier identified the absence of ICO regulations as a risk inherent to ICOs.

Evaluating which markets emerge as the most popular in the early stages of security tokens should reveal which sectors STOs afford the best advantages. Both SMEs and REITs are clearcut applications of STOs, but there are numerous other opportunities available for the issuance of security tokens that are practical, cheaper, and regulatory compliant. Harbor has already hosted an STO for a South Carolina residential building with a significantly reduced investment minimum compared to typical rates. Custodians are popular for storing digital tokens in secure cold-storage –, particularly with institutions.

STO in Singapore

Moreover, tokenizing an asset entails various benefits including extracting the optimum value of an asset. The utility tokens were distributed as a way to raise capital from potential users. In turn, the native token enables users to access products or services offered by the platform. The ICO mechanism also facilitated for investors to directly interact with their potential buyers. While the mechanism garnered massive success, it also resulted in a debacle. One of the major drawbacks to ICO was that they weren’t subject to legal regulations.

The above platforms are like blockchain platforms required to launch an ICO, for example, Ethereum, Neo, EOS, or Hyperleder, but these blockchain platforms are not well-designed for the security tokens. Securities as equity can represent ownership in a company (stock), where owners can profit from capital gains on the asset or even receive dividends payments in specific cases. Equity security holders ico vs sto can either be in public or private companies, and owners are usually entitled to some form of ownership in the company. Security tokens are regulated financial securities, the same way as stocks are. People dealing with securities don’t have to worry about transparency or regulations. In a traditional ICO, tokens or coins are offered by companies for purchase as a form of crowdfunding.

Quick Insight Into Smart Contracts

The thing that distinguishes STO from ICO is the inclusion of several rules from regulators and auditors. The control by regulators and auditors will generate a trade-off between control and decentralization of the STO. We did a simulation for selecting the most suitable blockchain platform for the STO process using the Multi-Criteria Decision Model simulator to cover this issue. The simulation result shows the relation between the selected features, software quality, and the most suitable solution for STO. Ensure to confirm if the legal advisor has in-depth knowledge of the Security Token Offering and what all is required to launch a token legally.

It also means that not only your own administrative costs increase, but also your risk of errors. Blockchain developers keep their fingers crossed, hoping that government’s do not move with a heavy hand in regulation, potentially squandering innovation. Last but not least, STOs are a recent phenomenon, and it is unclear how they will change over time. STOs might become more regulated in the future, which might reduce how effective they are as a fundraising tool. Build your identity as a certified blockchain expert with 101 Blockchains’ Blockchain Certifications designed to provide enhanced career prospects.

STO Vs ICO: The Difference Between The Two

STOs have opened an opportunity for businesses to raise funds by issuing digital security tokens to investors in a regulatory-compliant manner. The advantages exist for both the investor and the issuer, while also providing much better assurances against fraud compared to an ICO. Issuers can come from a variety of areas, including commercial real estate, venture capital firms, and small and medium enterprises (SMEs). An initial public offering is the process by which a private company first offers a share to the public. Both STOs and IPOs can represent an investment in a company, although STOs have more flexibility to represent assets beyond just company shares.