No longer do startups have limited options for raising capital for their startups. In recent years, numerous new fundraising techniques have emerged and gained popularity due to their openness and responsible use of technology.
Every startup that wants to propel & expand its business will turn to crowdfunding. Crowdfunding is often viewed as a tool for raising a required amount of money from a large number of investors. It involves the participation of a large number of investors in order to raise funds. This is a similar situation in cryptocurrency crowdfunding.
Different Crowdfunding Techniques To Raise Funds
The blockchain serves as the host for crypto crowdfunding, and crypto tokens will be used to raise funds. In the crypto ecosystem, numerous crowdfunding techniques such as initial coin offering (ICO), security token offering (STO), initial exchange offering (IEO), and initial token offering (ITO) are prevalent.
Here, ICO is a completely unregulated method of fundraising that prohibits the involvement of central authorities, whereas STO is governed by the government and regulated by regulatory bodies. It is highly prudent to favor a protected method in financial sectors. In this regard, security token offerings are considered the most secure technique of crypto crowdfunding compared to all other methods.
This guide will walk you through interesting concepts like security token offerings, their challenges, and why STO is regarded as the future of fundraising.
Types of Security Tokens
Although there are several types of tokens available in the digital world, we will talk about four main types:
- Debt Tokens
Debt tokens are somewhat similar to short-term loans with an interest rate based on the quantity lent to a company. Debt tokens are categorized into two types. These are stable debt tokens, which represent debts with fixed interest rates, and variable debt tokens, which represent debts with fluctuating interest rates. Steem is an example of a debt token that is required to acquire Steem Dollars.
- Equity Tokens
An equity token symbolizes the possession of an underlying asset, such as stock in a company or organization. A token holder of stock may be qualified for dividends, voting privileges, or both. Similar to shares, a contract specifies the rules and regulations that apply.
- Asset-backed Tokens
Asset-backed tokens are blockchain-based tokens that are considered real-world assets. These assets can range from real estate to stock options, commodities, and even diamonds. They grant users ownership rights to valuable tangible or intangible goods, as well as digital assets.
- Utility Tokens
A utility token enables businesses, startups, and project development organizations to raise funding and capital for blockchain projects. These tokens can then be used to buy products or services from the cryptocurrency’s issuer.
What Is Meant By Security Token Offering?
Security tokens are issued and traded on security token exchanges as part of a security token offering (STO) service. STOs are a form of an initial public offering that enables the trading of financial assets through tokenized digital securities. A public distributed ledger or blockchain stores and verifies token transactions.
STOs are viewed as a safer alternative to initial coin offerings, which are vulnerable to fraud. Since tokens are considered securities, STOs are also controlled by rules, giving people who own tokens legal ways to invest their money.
In terms of context, initial coin offerings (ICOs) were all the rage in 2017, as they became a popular method for funding cryptocurrency initiatives. ICOs enabled firms to raise capital from investors in exchange for coins or tokens. However, ICOs were not governed by regulations, making them susceptible to fraud, fraudulent crowd sales, and airdrops.
Challenges Of An Security Token Offering
Both the advantages and disadvantages are two sides of the same coin. Similarly, security token offerings have some difficulties. Many people believe that building an STO token offering platform is a difficult task.
The biggest problem in STO is more regulation. If you choose STO as your fundraising technique, you will be subject to a slew of rules imposed by both the local government and the SEC.
Completing all of the SEC procedures, in particular, is a highly hard process. To advance with all of those requirements, you must be willing to abide by the legal norms and regulations. Another factor to consider is that it takes longer to build an STO platform due to all of the legal requirements.
STO eliminates any middlemen such as banks and brokerages, therefore the entire process falls solely on the shoulders of the fundraising startup to finish.
Certain jurisdictions may have tighter restrictions on who can participate in STO. As a result, the whole investor pool may be reduced.
Aside from these difficulties, there are various benefits to building a security token-providing platform.
Why Are Companies Moving Towards The STO Revolution?
STOs outperform both conventional security offerings and ICOs in terms of features and security. The following are some benefits of STOs over other forms of funding:
Huge Transparency
As security tokens (or any other cryptocurrency) are created using blockchain technology, the transactions including these currencies are open and transparent. Such transactions have the advantage of being simple to verify in the event of a dispute.
Faster Execution
Traditional investments, such as securities, require middlemen, such as banks or stock authorities, to execute transactions, which increases transaction processing time. Without middlemen, security tokens execute faster and process faster.
Credibility
Because utility tokens are unregulated, ICOs have lost investors due to a lack of accountability. This is why fraud has increased in this space. Investors prefer STOs, which are safer.
24/7 Instant Trading
Security tokens can be traded 24/7. Security token holders can trade at their leisure since cryptocurrency trading is global and online.
More Liquidity
Security tokens are regulated, so only licensed token trading platforms can accept trades. This simplifies token liquidation and maximizes value. Security tokens can liquidate illiquid markets.
No-Lawyer Smart Contracts
Security tokens use blockchain smart contracts to automate transactions and other functions, like other cryptocurrencies. This will increase security and lower transaction costs since no lawyer is needed.
Investors from around the world
Traditional ways of investing are limited to certain reasons, but STO investments can be made all over the world. This means that organizers can market their products/deals on a global platform and investors can invest in new projects all over the world. This gives the underlying assets more exposure and increases their value.
Low price
In traditional finance and investments, the appearance of middlemen raises the cost of trading, which makes it harder for investors to make money. There are no middlemen in security token offers, so there are no transaction fees and the process is simpler.
Automatic (No Third-Party Manipulation)
Security token transactions have no middlemen, so fraud is unlikely. STOs reduce financial institution interference in the investment process, increasing end-user profitability and security.
How is STO the Future of Fundraising?
As previously stated, security token offering has numerous advantages. Now we’ll go over some advantages.
- Security tokens have a high level of liquidity in the crypto space.
- They are simple to program.
- Security tokens can be tracked and regulated.
- These tokens are more widely available in the crypto market.
- Security tokens provide ownership rights.
With these benefits in mind, entrepreneurs prefer to build a security token-selling platform for their cryptocurrency firms. People used unregulated crowdfunding methods before learning about security token offerings, and they were subjected to a variety of malicious acts.
Many people have converted to the safest means of crowdfunding, i.e., STO, after examining the security aspects. In this regard, while being closely monitored by regulatory authorities, STO has captured the attention of many investors. Every fundraising startup or token developer believes that starting a crowdfunding campaign will help them collect enough funds. In a security token offering, the projected range of funds can be obtained more safely.
Not only that but there are other advantages to security token offering platforms that have led to their popularity over other traditional fundraising techniques.
How Can You Choose The Best STO Development Service?
In the crypto space, there are several security token development service providers. However, selecting a reputable STO development service provider is in your hands. To select the best provider, thoroughly examine the company’s profile. Check it carefully and analyze their security token offering process roadmap.
Examine their level of experience, industry presence, expertise, successful projects, and so on. Check the number of smart contracts they made for their clients as well as the skill set of the professionals working there. If any errors occur after the project has been delivered, they should be able to correct them quickly. So, conduct a thorough examination of the service provider who will be developing your STO platform.
Conclusion
Security tokens, which are regulated and significantly more secure than utility tokens and fiat currencies, are quickly becoming the preferred option for investors and corporations wishing to tokenize their assets.
Overall, both investors’ and companies’ interest in security tokens is growing and will continue to rise in the future, as security tokens are more liquid than any other cryptocurrency version while being less dangerous. Their digital tokens appear to have a bright future.
Do you want to launch your own Security Token Offering? Netset Software provides expert STO development services. Our experienced blockchain developers can assist you with tokenizing any of your company’s assets.
