Should You Consider an STO?

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.

Summary:

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.