A Security Token Offering (STO) is a type of public offering in which tokenized digital securities, known as security tokens, are sold in cryptocurrency exchanges, or token exchanges. Security tokens are essentially digital, liquid contracts for fractions of any asset that already has value, such as real estate, a car, a painting, equity shares, or a fund.
The process of an STO involves creating a security token with a blockchain platform. These tokens are similar to shares of a company sold in an Initial Public Offering (IPO), but they are recorded on a blockchain.
An STO is viewed as a hybrid approach between cryptocurrency ICOs and the more mature and regulated approach of an IPO. Unlike utility tokens issued in an ICO, which may not confer any rights or obligations, a security token usually provides the owner with various rights, similar to the rights shareholders have in a publicly-traded company. These could include voting rights, profit sharing rights, or even redemption rights.
The key advantage of an STO over an ICO is that it’s regulated. It’s designed to take traditional investment contracts and convert them into tokens that can provide the same rights as a traditional security but in a way that uses blockchain technology.
However, because security tokens are classified as securities, they are subject to securities regulations. These regulations vary significantly from country to country, but they usually involve requirements for disclosures and registration with a regulatory authority. For example, in the United States, STOs need to comply with SEC regulations.