From a legal perspective it can be argued that any ICO is in fact an STO. The Howey Test defines a “security” as having the following attributes:
Any contract, transaction, or scheme whereby (a) a person invests money or anything else of value, (b) in a common enterprise, (c) and is led to expect profits, (d) predominantly from the efforts of others.
While Singapore is showing signs of not following the same definition of a security, the majority of the world is following the United States definition and interpretation of a security.
If you are considering any of the following you might want to consider an STO.
- Tokenization of real estate or other real world assets.
- Tokenization of traditional securities and companies. This behaves like shares of a corporation and are also be known as “Equity Token Offerings” or “ETOs”.
- Tokenization of venture funds or incubator programs;
- Tokenization of precious metals, oil, or other commodities.;
- Profit-sharing right in a business entity, etc.
Advantages of an STO:
There are numerous advantages to performing an STO. These are some of them:
- 24/7 liquidity.
- Simpler and more cost-effective than an IPO.
- Compliant for crowd-funding via certain SEC Exemption.
- Fractionalization of real estate, or other assets.
- Offers investors more transparency than an ICO.
- Less legal uncertainty than an ICO.
- Simpler management of investors with KYC/AML being baked into security tokens.
Disadvantages of an STO:
- Careful tax structuring is required.
- Legal compliance requires investment in reputable law firms.
- Limitations on resale such as 12 month lock-up period.
- Number of investors might be capped at 99 or some other arbitrary number depending on legal structure.
- Corporate structure may be complicated, and requires legal advice.
Executing an STO requires more legal and corporate work than an ICO, but the rewards are reduced legal uncertainty, and the ability to raise funds in a legally compliant manner. By following a strategy that is advised upon by proper legal council, your STO will be able to raise funds without jeopardizing the future of the founders or the corporate entity itself.