What Are The Requirements To Do A Security Token Offering?
Security token offerings (STOs for short) are fundraising tools that are similar to ICOs and are quickly gaining a lot of popularity in the business world. The difference between the ICOs and the STOs is that there are specific regulations that hold token issuers accountable when actions are taken.
The STOs are different than the utility tokens as they generate specific security tokens that operate completely within legal boundaries and are digital assets.
The Security Token
In order to properly understand what an STO is and the associated requirements, we have to first understand what the security token is.
The token is official security in the event that profit is expected from the effort put in by others. When an ICO does not follow specific regulations, penalties appear. In the event that all regulations are met, tokens become highly usable.
At the core, a security token is a contract, an investment that shows legal ownership of a digital or physical asset, like ETFs, real estate and so on. Ownership has to be verified through the use of blockchain technology and even KYC (Know Your Business) technology. When ownership is verified, the holder of the security token is allowed to:
- Trade tokens in exchange for other assets.
- Store tokens in another wallet.
- Use tokens as collateral in the event a loan is desired.
A security token’s true value can be found in how ownership is redefined. Assets can be democratized and then distributed among people. As an example, instead of one person owning a single gold coin, which is really expensive for most people, 1000 people can own different fractions of the coin.
Security Token Regulations
Security tokens are almost always subject to strict federal security regulations. Because of this, compliance always exists. In the US, three regulations have to be respected by security tokens: D, A+ and S.
Regulation D is all about checking investors to be accredited. At the same time, provided information during solicitation has to be completely free from misleading or false statements.
Regulation A+ is an exemption that allows creators to offer security that is SEC-approved to investors that are non-accredited. This is possible through general solicitation of up to $50 million.
Regulation S is activated in the event that the STO appears in a country that is not the USA. In this case, registration requirements that are needed for the US companies do not have to be respected. Even so, the creators have to follow security regulations that are issued by the country where tokens are to be executed.
Keep in mind that all the regulations mentioned above are just summaries and there are many other things that could be mentioned. There are some really strict regulations and laws that are associated with STOs and blockchain technology. Because of this, you need to get deeper and analyze everything that is associated with STO compliance. In so many situations people invest without knowing anything about the company they choose. This is a huge mistake. You should only invest when you are sure the STO respects all mandatory regulations.