What is a Security Token? The Two Minute Explanation…

And what is a Security Token Offering (STO)?

Security tokens are a way for companies to raise capital by selling tokens to investors instead of traditional forms of stocks, bonds or equity. Businesses do this by conducting security token offerings (STOs), a type of blockchain token sale that is typically regulated by the United States SEC (regulation D, regulation A+ or S) and the European Union as well as other jurisdictions as a security.

This is in contrast to an Initial Coin Offering (ICO) which is unregulated and offers only “utility” tokens to investors, which are meant only to allow access and usability of a digital platform or application. Utility tokens work kind of like stamps you use for postage; you buy them to use the postal system, not to make a lot of money.

Security Token Offerings collect funds in exchange for predetermined financial rights for token holders. Like a stock, security tokens can offer investors equity, dividends, revenue/ profit sharing and voting rights. Tokens are secured via a blockchain and can be traded much like a traditional stock or bond.

Security tokens offer several advantages over traditional securities.

For companies, tokens are a low-cost way to access funding from accredited investors across the globe and can help management retain more control of their company than would be possible through an IPO.

Token holders can see more dynamic benefits, from discounts on the company’s services to financial incentives for customers that hold their token for extended periods of time. Additionally, tokens can be exchanged 24/7 by any token holder with very low settlement costs and near-immediate settlement times.

Tokens can also offer increased liquidity since security tokens of even private companies can be sold, and allows a mechanism for community-based companies to crowdfund through fractional ownership of their members. This last form of ownership is called tokenization… where an asset like a condominium, online platform or local restaurant might conduct equity crowdfunding through token sales to its members or customer base.

Many financial experts consider security tokens to be the new security for the digital age combining the technical advantages of blockchain trading with the regulatory oversight of traditional securities. While still in its earliest days, security tokens have the potential to revolutionize securities for both companies and investors, offering benefits to both parties that traditional securities just can’t provide.

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