Security Token Offerings – How Do they Work + Examples

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Security token offerings (STOs) advance traditional investment opportunities through safeguarded and transparent asset ownership using blockchain.

Imagine owning a fraction of a real estate property worth millions without needing to invest six figures in the whole asset or owning a shielded ‘IOU.’ STOs make this possible through legal frameworks and smart contracts that fractionalize digital assets for part ownership.

STOs are regulated for fundraising compared to initial coin offerings (ICOs), which are also used for raising capital but are more loosely governed.

According to Fortune Business Insights, the tokenization market worldwide was valued at $2.81B last year, and it’s predicted to reach $3.32B in 2024 and $13.20B by 2032 – a CAGR of 18.8%.

In our research, we explore all things STOs: what they are, how they function, and their pros and cons.

What is a Security Token Offering?

STOs represent investment ownership clearly and transparently through blockchain technology.

Through security token offering services, entities like businesses and governments can issue STOs that serve the same purpose as bonds, stocks, and other equities.

Knowledge surrounding tokenization is essential in understanding the concept of STOs. Tokenization consists of converting real-world rights or assets into digital tokens, which can then be transferred or traded onto a blockchain network.

Almost anything has the potential to be tokenized. For instance, real estate can be fractionalized into tokens to enable numerous buyers to own a stake in the property.

Consequently, these security tokens legally signify ownership and can be traded just like any other asset.

However, STOs are only recognized in certain jurisdictions, with the US, Germany, and Switzerland at the forefront.

The US is a prime choice for most STO offerings because of its stringent regulatory standards in relation to the issuance of securities, including:

Moreover, instead of companies issuing paper stock certificates to investors to represent rights and ownership, each STO’s ownership is recorded on a public blockchain ledger, which presents the owner’s blockchain address to ensure security and transparency.

Regulators oversee STOs to ensure they meet the specific criteria of the Howey test, which assesses whether or not a financial investment, expectation of profit, and joint enterprises are present in an investment.

There are three types of STOs that prove beneficial across industries: equity tokens, debt tokens, and asset-backed tokens.

What is an STO and How Does It Work?

Current investment methods are renowned for involving barriers to entry like limited accessibility, and requiring complex paperwork. For example, foreign investors struggle investing in Indian government bonds due to heavy paperwork being necessary.

STO in business offers a modernized approach when compared to conventional investment methods. Advantages include:

Examples of STOs

There are countless examples of successful STOs – each of which showcase diverse use cases and the ability to innovate capital markets globally. Here are some key examples.

Aquarius Fund

The Aquarius Fund is a premier security token for professional investors partially owing to its minimum investment limit being €125K.

For those seeking high-yield investment opportunities, balance sheet management, and cash savings, the Aquarius Fund is a viable option.

Aquarius Fund focuses on risk management and liquidity by introducing easy access to stablecoin yields without the complexities often associated with direct crypto investments.

It ensures reliability and simplicity for investors wanting robust returns amidst traditionally low-interest environments.

USDT is the chosen stablecoin for the STO because it provides an inexpensive, highly secure, and fast exchange value. Stablecoins do not come with the volatility like other cryptocurrencies due to their value typically being pegged to the US dollar.

The Fund is tokenized on the sidechain of Bitcoin, Liquid Network. Investors can securely hold parts of the Fund within approved blockchain wallets to diversify investment opportunities.

Investors can also peer-to-peer trade their fractionalized funds, with exchange listings also poised for the future for passive income.

Blockstream Mining Note

Blockstream Mining Note (BMN) gave investors the opportunity to invest in Bitcoin mining without having to purchase managing hardware through security tokens.

BMN operated as a registered security and offered fixed upfront costs, removing typical hurdles faced when maintaining and purchasing mining hardware.

The project raised a whopping €40,256,200, with a total of 77 investors involved, who committed themselves to their investments for three years.

Blockstream Asic

Blockstream Asic – a leader in Bitcoin infrastructure – is offering a distinct investment opportunity via Blockstream ASIC Note (BASIC Note).

The STO initiative enables investors to have a stake in the Bitcoin mining equipment (ASICs) sector.

Rather than directly buying Bitcoin, investors can invest in Bitcoin minings machines at a discounted rate. By doing so, they can resell them once the market rebounds for potential financial gain. The minimum investment to partake in Blockstream’s STO is $115K for at least two years.

By leveraging its connections and experience to offer ASICs to investors, it has already raised $5M and is halfway to achieving its ambitious target of $10.1M.

La Boulangerie

Although this security token is no longer available, La Boulangerie is a fantastic example of a successful STO initiative.

In 2022, La Boulangerie raised $261,497 to fund its French bakery in Dubai. The main aim of the security tokens funding was to bring new food and beverages to Dubai and ‘quality and standards unseen.’

Each investment multiplied depending on when the investments took place. Those involved received more when holding onto their investments for a longer period of time.

Infinite Fleet

Despite this fundraising initiative also being shut down, Infinite Fleet is worth highlighting owing to its unique use case.

Infinite Fleet is a massive multiplayer online game (MMOG) that raised capital on STOKR through its security token ‘EXOeu.’

The STO – also held on the Liquid network – gave investors the rights to a 20% profit share and an exit payout. Players of Infinite Fleet were able to become investors of the game and receive a share in its profit through the security tokens.

EXOeu was a success, raising over $4.8K from 935 investors in total.

Cluster Farming

Coming up on STOKR is Cluster Farming, an STO initiative dedicated to promoting socio-economic and agricultural progress in Western Africa.

With the capital made from the upcoming security tokens, it will support independent farmers involved in poultry cultivation and catfish with technologically equipped hub farms.

It’s looking to raise $2M through the distribution of debt securities and provide a 4x return by the sixth year of the offering. Though, details currently remain scarce.

The STO Process

The STO meaning in business includes opening promising opportunities for entities wanting to fundraise in a regulated and transparent manner.

However, creating these safeguarded tokens involves technical know-how, legal expertise, and strategic planning to achieve a beneficial outcome.

Security tokens usually undertake numerous phases that boon projects and businesses raising capital, as well as their participating investors. Such phases include:

Phase 1: Preparation

To get started, STO developers typically create a business plan and develop a deck, which generally consists of funding requirements and market valuations to attract investors.

During this phase, STO creators need to check out necessary compliance, which changes depending on the tokens’ jurisdiction and its nature.

Phase 2: Creating the Offering

During the offering phase, issuers normally define the token’s structure, including elements like its quantity, value, rights, capitalization, and market duration.

During this time it’s important to select the token’s jurisdiction while considering the legal guidance and progressions necessary for regulatory compliance.

Phase 3: Selection of Service Providers

Phase 3 is a good time for STO issuers to select their security token offering platform and its preferred blockchain to develop and issue their STOs.

At this stage, service providers are usually appointed to custody underlying assets, distribute tokens, and manage cash flow.

Two notable examples include Daura, which targets small and medium enterprises in Switzerland, and Capexmove, which specializes in digitizing debt.

Brokers play a critical role in executing due diligence on the STO creator’s and investors’ information to ensure precision and completeness for a successful outcome.

Phase 4: Fundraising

Issuers can engage and identify investors through meetings, roadshows, and deck distribution by working closely with brokers.

Marketing regulations will likely need pre-approval from authorities in accordance with their governance laws during this phase.

Phase 5: Trading Listings

After issuance, the STO is usually transferred to a ‘Special Purpose Vehicle’ (aka SPV) to be listed on a trading platform.

Additional marketing efforts may be undertaken to enhance liquidity.

Security Token Exchanges

There are many exchange companies with a variety of STO opportunities, including:

Securitize

Securitize pioneers digital securities. With 500K users and counting, it tokenizes leading assets for BlackRock, KKR, and SPICE, among others.

In 2021, the platform expanded by debuting ‘Securitize Markets,’ which offers both a primary market and a secondary market that operates like traditional exchanges for peer-to-peer trading.

It is notably registered with the SEC and FINRA to safeguard market integrity. It is a member of SIPC, a non-profit organization that has been protecting investors for over 50 years.

INX

INX is the first platform for trading security tokens in the US. SEC-registered tokens are available for trading on a liquid market 24/7.

It opens exclusive STO opportunities for investors before hitting the secondary market and works alongside some of the largest financial institutions, including Barclays, Morgan Stanley, and JP Morgan Chase & Co.

MERJ

Merj is an international securities exchange held in the Republic of Seychelles since 2011.

The platform combines traditional and digital securities while ensuring each asset is regulated.

It supports numerous asset classes, bridging conventional assets with the digital world through blockchain technology for transparent, secure trades worldwide.

STOs vs ICOs: What’s The Difference?

People typically confuse STOs with ICOs. However, ICOs address utility tokens while lacking governance, while STOs are governed by security regulations, making them a safer option for companies wanting to attain financial backing.

STOs were designed as a response to the ICO bubble burst in 2018. When the market cap of cryptocurrencies fell by over $750B, regulatory bodies began looking into more secure legislation for STO blockchain tokens.

Pros and Cons of STOs

STOs offer numerous benefits for businesses and investors alike, owing to reshaping asset ownership and fundraising. While their advantages are far-reaching, STOs are not without their challenges:

Challenges of STO Development

Simply put, STO development involves more strategic planning, effective investor engagement strategies, robust technological infrastructure, and regulatory compliance.

The Future and Growth of STOs and STO Platforms

STOs innovate conventional investment strategies through the tokenization of real-world assets via tamper-proof blockchain technology.

Security tokens provide shared ownership in a diverse range of assets, including real estate, commodities, and art. They make investments easily accessible to investors worldwide.

The STO sector is poised for growth, with current security token initiatives like Blockstream Mining Note and Aquarius Fund demonstrating thriving capital rises through their tech-savvy investment models.

As more STO initiatives arise, they aim to reshape capital markets through blockchain’s security and efficiency, potentially making investments of traditional assets more seamlessly managed, traded, and secured digitally.

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