Security Token Offerings 101

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The Traditional Initial Coin Offering

As people that possess an elementary knowledge of finance or have dabbled in investment, I am sure that you have heard the term Initial Public Offering (“IPO”). An IPO may be described as the process of a company raising capital through the issuance of shares. The goal of such an IPO is to perhaps expand a private company or even ambitiously spring a public one up from ground zero. In such an issue, the shares are taken to represent ownership in a company, which confer upon the holder certain benefits including, but not limited to; potential to increase in value at a later date, rights to dividend payouts, the right to control the trajectory of the company in certain circumstances, etc. Thus, as you have heard so many times in this industry;

“An Initial Coin Offering (“ICO”) is simply the cryptocurrency equivalent of the IPO!”

This is both factually accurate and false. Yes, no doubt an ICO can very much be likened to an IPO in the capital markets. However, the “tokens” issued do not possess many of the characteristics that an IPO share does. This is because the ICO token is designed to be utilized within a predetermined ecosystem with parameters designed by the issuer – for instance, Filecoin uses its tokens to pay users for offering up storage space. Hence, the utility of such tokens are extremely varied, contextual and subjective.

The definition of a Security Token Offering

On the other hand, Security Token Offerings (“STOs”) are more similar to IPOs in their legal definition and usage. STOs, as their name suggests, are cryptocurrency tokens representing, and backed by a security. Traditionally, securities may be categorized into three categories;

  1. Debt Securities – Banknotes, bonds and debentures
  2. Equity Securities – Common stocks
  3. Derivatives – Forwards, futures, options, swaps

As we can see from the above, security tokens represent the exact equivalent of what might be offered in a traditional IPO. Thus, this begets the next question;

Why should I choose an STO over an IPO?

While STOs and IPOs are similar in function, they differ in form. This is because an STO offers all the numerous benefits of a cryptocurrency: transactional ease, low transactional cost, high transactional speed, privacy and secrecy – all within a traditional IPO structure. As such, it is perfect for those who want to use the “tried and tested” route, but confer the technological benefits of cryptocurrencies within their initial offerings.

Below, we have created a chart for you to determine what’s best for your needs:

 

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