Asset tokenization and security token offerings are gradually gaining popularity among businesses. More and more companies are interested in this approach to raising capital.
According to the World Economic Forum, the security token market is expected to reach $24 trillion by 2027. There are many reasons why you should use this investment tool for your business. Stoboxwhich provides tokenization to its customers worldwide, has chosen five main reasons for issuing security tokens and will discuss them in more detail in this article.
What are security tokens?
A security token is a digital asset that is created on the blockchain and certifies a certain share of ownership of a particular financial instrument. If we talk about companies, these tokens can be stocks or bonds transferred in the blockchain. The investor can obtain the rights provided by certain types of tokens. For example, it may be the right to receive dividends, to vote, etc.
This approach has many key advantages. For example, blockchain provides transparency, speed of financial transactions, reliable protection of personal data, etc.
What is the difference between security tokens and utility tokens?
Security and utility tokens are technically identical. The main differences are in the business model and the regulations. Utility tokens are issued under an ICO (initial coin offering) or IEO (initial exchange offering). In fact, their focus is crowdfunding for blockchain platforms. Therefore, the owners of these tokens receive certain opportunities within the same platform. For example, utility tokens can be exchanged for any good or service, voting rights, etc. At the same time, the crypto industry is becoming much more regulated. Now, even most transactions with utility tokens cannot be anonymous and require KYC/AML checks. Additionally, it will now be more difficult to sell utility tokens that have security token properties but do not comply with appropriate regulations in specific jurisdictions. Thus, it is now much more likely that companies will need to issue security tokens if they wish to enter the crypto asset sphere.
Security tokens are issued as part of an STO (security token offering), and from a legal perspective, they are entirely different financial instruments. First, these tokens are recognized as securities. Accordingly, the issuing company is required to comply with the requirements of the regulatory body in whose jurisdiction the STO is made. It provides vital protection for investors and helps prevent fraudulent activity.
STOs are much closer in nature to IPOs than ICOs. By buying security tokens, investors are actually buying a stock, bond, or derivative that is stored on the blockchain. These digital assets act de facto as an investment contract. They can guarantee the ownership of certain assets outside the network. If they do not guarantee ownership, holders receive other rights, such as the payment of dividends.
Five reasons to issue security tokens in 2022
Security tokens are gradually gaining popularity around the world. This technology is attractive to both issuers and investors. There are five main advantages that this technology offers. Let’s consider them in more detail.
Security tokens allow you to increase the liquidity of any asset. It also applies to shares. Security tokens are more liquid for two reasons.
Security tokens provide fractional ownership. If an asset is too expensive, a limited number of investors can afford to invest in it. However, if you divide this asset into several parts, even people with a small budget can invest in it. As a result, companies can raise funds from a wider range of investors. This is especially true for high-risk industries, such as mining companies. Tokenization allows you to attract investors who are inclined to high-risk transactions because they do not have to invest large sums.
In addition to fractional ownership, the liquidity of security tokens also increases the possibility of forming a secondary market. In the case of traditional stocks, they can only earn profits over several years. Security tokens can be monetized much faster. If their price rises on the stock exchange, the investor can sell tokens on a specialized platform (like DS Swap that Stobox develops for its customers) or on p2p platforms. From now on, private companies will become more attractive for investors, because it is possible to exit at any time. Businesses will have more publicity (because they monitor the tokenized share price) and it will be easier to grow small and medium-sized businesses.
Security tokens are programmable. All the most complex procedures can be simply programmed into the token. This makes it possible, for example, to automate the management of the rights of token holders. In fact, owners of security tokens are equated with corporate shareholders. In addition, smart contracts can be programmed in such a way that all obligations of the parties are fulfilled automatically. For example, if the holders have the right to vote, it is possible to hold general meetings online.
The settlement process can also be shortened. The transfer of shares in the traditional system requires proper documentation. The security token makes these procedures unnecessary. If there is a transfer of tokens to verified users via KYC/AML, the process may be simplified to the extent jurisdiction laws permit. Security tokens are a permanent record of ownership of an asset. Information on the blockchain cannot be deleted or modified. Thus, it reduces security risks.
3. Attract retail investors
Attracting retail investors is a big plus for companies managing expensive assets. For example, real estate investing is out of reach for many investors due to the high entry threshold. This seriously limits the circle of potential investors. However, even if you managed to find a buyer, you still need to agree with him on all the nuances. In turn, they may charge a lower price and the business will make less profit.
STOs solve these problems due to the possibility of splitting certain assets into shares. As a result, the entry threshold can be reduced by ten times. For example, if a standard asset is worth $1,000,000, it can be fully or partially divided into tokens worth $10,000. This solution considerably widens the circle of potential investors. Moreover, it attracts clients who are willing to risk a certain amount to make big profits. Another benefit of STOs for companies is that after a successful security token offering, the likelihood of successfully closing a funding round in the traditional way increases significantly.
Overall, businesses have an additional tool to connect with their community, integrate even closer to it, and become community-driven. As their stakeholders become shareholders with tokenization, this solves the dilemma of stakeholder supremacy versus shareholder supremacy and allows companies to better balance the interests of affected members and generally grow in a more sustainable way.
4. You don’t have to make your business public
The main difference between an STO and an IPO is that if a company goes public, it goes public. For STOs, this requirement does not apply.
Public enterprises are required to publish financial statements at least quarterly. It is necessary so that investors receive up-to-date information on the situation of the company and can make an informed decision. To conduct an STO, a company does not need to go public and disclose its financial statements. In addition, public companies have more responsibilities. LLCs that organize STOs can raise capital and avoid such complications at the same time.
You can now access capital and liquidity long before you enter centralized public markets such as the NYSE or NASDAQ, so these markets will become less and less relevant. Centralized exchanges are becoming obsolete and replaced by DEX.
5. Opportunity to attract capital from all over the world
STOs are not geographically limited. Companies can raise capital anywhere in the world. For example, if a company’s primary markets are the US, UK, and Germany, it can perform an STO for customers in those countries.
However, it is important to know that security tokens are recognized as securities. As a result, there is a difference in the approaches of regulators. If a company wishes to perform an STO in a particular country, it must ensure full compliance with the legal requirements. For example, if an STO is owned in 3 countries, it must comply with the regulator’s requirements in each of them. Therefore, it is better to get professional advice from companies that help companies to launch STOs before starting the whole process. Stobox employs experts with extensive experience who can advise you on all the legal nuances of issuing security tokens. By the way, now you have the opportunity to invest in a top tokenization company. Stobox has issued STBX tokens that give investors equity and dividends rights. You can invest in Stobox right now by buying STBX tokens.
Tokenization is a technology that opens up new opportunities for businesses to attract investment. It offers the convenience of digital assets while guaranteeing the same rights and protections for investors as securities. Security tokens make investing in all assets more accessible to retail investors, greatly expanding the pool of people who may be interested in your offering. STO has many advantages over traditional methods of raising capital, which is why it is becoming increasingly popular around the world.