What is a Security Token Offering – STO?

The increasing popularity of security tokens (or ‘investment tokens’ as stated by EU regulation) seems to have no limit. From 2020 to 2021 the market capitalization of secondary markets went from 200 million dollars to 700 million dollars, an increase of 250% over a single year. Even more impressive, the market capitalization of security tokens in March 2022 surpassed 4 billion dollars, 20 times the value starting in 2020 (STM, 2022).

This increase is partly due to Security Token Offerings, a secure and reliable solution for issuing securities. Every day more companies, financial corporations, institutional investors, and asset managers trust this process while reducing costs, increasing transparency, and automatizing their settlement process with the help of Blockchain Technology.

From the preceding, two common questions arise on the minds of newcomers: What exactly is a Security Token Offering? And what processes does it entail? We will discuss this in the following section.

What is an STO?

A security token offering (STO) is the initial offering of regulated securities in the primary market using blockchain technology. It differs from Initial Coin Offerings (ICO) given that security tokens are intended to comply with applicable regulations on securities, which at the same time protects investors and other participants from risks inherent to the blockchain.     

Security tokens can represent a pre-existing real asset or can be security tokens native to the blockchain.   

 

What is the difference between an ICO and an STO?

 

STO

 

Stages of an STO issuance

Depending on the jurisdiction, type of asset, and the size of the issuance, processes might differ. However, there are common procedures to them all ( Deloitte, 2020):

  1. Preparation. The issuer prepares investor information aiming at its target investors (e.g prospectus) if required by the jurisdiction where the issuance takes place.
  2. Structure of the offering. Issuers define the token type, the quantity, and price of the token, soft capitalization, embedded rights, and duration of the offering.
  3. Selection of service providers. Issuers must face a broad selection of service providers as a blockchain platform, financial intermediaries, legal advisory, payment, wallet, and custody providers. micobo’s enterprise tokenization platform provides an entire software toolkit -suite- as a customizable white-label solution that allows issuers to issue tokenized securities efficiently. Issuers that work with micobo choose from a range of trusted service providers.
  4. Issuance of the token. The security token is created, deployed in the primary market, and delivered to investors.
  5. Capital raising. With the assistance of brokers, the issuer identifies the target investors, holds meetings, and distributes the “deck” (e.g. the prospectus) to target investors. Certain jurisdictions might require pre-approval from the relevant authority.

 

With micobo’s suite, you can safely and fully compliantly manage the digital investment process and engage with investors to unlock more liquidity.

 

About micobo

micobo GmbH is a leading European software company for Security Token Offerings and Blockchain Software Development (DLT). It provides fully compliant software solutions for Security Token Offerings and advises on structuring DLT- and Blockchain-based Securities. micobo empowers financial institutions with state-of-the-art technology focusing on providing a better customer experience and achieving measurable results.

Authors

Laura Andrade (la@micobo.com)

 

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