Chapter 3: The Key Benefits Of Security Token Offerings


There’s a lot of hype around STOs, with many blockchain enthusiasts and cryptocurrency thought leaders calling it the next big thing. And there’s a lot to be excited about: low cost of entry, seamless transactions, integrated compliance, and global access. All of these factors have a significant chance of drastically impact the way investors can invest and how companies can raise capital.

STOs are presently making their way out of the infancy stage. In the US and other major global markets, they are still only available to accredited investors. But many industry professionals expect this to change in 2019 when this opportunity will open to the general public.

When STOs are available to everyone, we expect to see a dramatic shift in the way things are done. After covering the 101 of security token offerings, we’ll dive into the most important question of all: why should everyday investors care about STOs?


The benefits of security token offerings

It’s generally a struggle to invest.

Consider the stock market’s fluctuating highs and lows, an IPO drained of its value by the time it reaches the retail investor, and the Wild West nature of ICOs. It seems as though investing is safer with a menial 401(k). But investing doesn’t have to be this way. It can be much easier with STOs.

STOs have a low barrier to entry.

Investing has gotten easier in the past few years, but there’s still a long way to go. STOs stand to make investing in a company as quick and easy as ordering something from Amazon.

STOs are available around the world.

STOs advance financial inclusion because they are available to everyone. They open up the possibility for someone in Africa to have the same access to opportunity as someone in Miami. The technology makes it possible for anyone in any location to trade securitized assets with ease.

This is quite unlike how conventional stock market exchanges operate. Those are highly localized and have significant barriers for international investors.

STOs represent a new class of investment.

Despite being home to 32 million businesses, America only has 4,000 public companies to its name. The high costs associated with the process of taking a company public makes it unlikely that these companies will IPO any time soon. The opportunity to invest in them will never be available to the average investor. STOs offer a way for companies to raise capital without going the IPO route.

This means investors aren’t limited to investing in the few companies that go through the expensive, time-consuming IPO process. Their valuations are often based on hype and buzz — think when Snapchat went public as Snap, Inc.

Investors will gain the ability to invest in smaller companies with established business models, proven cash flow, and consistent profits without those companies ever going conventionally public.

STOs offer increased liquidity.

Security tokens are well-positioned to provide liquidity to investments that would otherwise be difficult to trade in the everyday stock market. Security tokens have a global reach that lets investors anywhere in the world buy, sell, and trade tokens. There are far more options to liquidate investment here.

STOs offer better investor protection.

The simple truth is that STOs are regulated and ICOs are not. This means investors in an STO enjoy all the benefits of an ICO without any of the scammy drawbacks.

STOs are a more affordable investment vehicle.

It’s extremely expensive for a company to go public on a major exchange, it’s not just a one-time expense. Costing $750,000 and taking 18 months to complete, the typical IPO process, it costs $1 to 1.9 million per year just to be a public company.

Cutting these costs may sound like a perk for the company alone. For the investors backing these companies, it begs the question: would you rather have this company spend its resources on compliance and legal expenses, or on marketing, sales, research, and development?

STOs let companies offer themselves as investments to the public at a cheaper cost than a traditional IPO. It’s a win-win scenario for the company and its investors.

STOs are hard-coded to be compliant.

Blockchain technology makes it possible to design a digital ecosystem that automatically follows all the rules, no matter what. This reduces the need for a company to devote its resources to lawyers and other contractors that might have previously performed these functions.

STOs represent partial ownership in a company or project.

Suppose you were investing in an 18-unit apartment building worth $3 million. This type of investment would usually go through an investment fund or a collection of entities coming together to invest. Let’s say this apartment complex is owned by six investors who all contributed $500,000 each.

An STO would make it possible for the same apartment complex to have many more investors on top of these six. One thousand investors might contribute $1,000 each. These shares in the apartment complex could then be easily traded like shares of stock to anyone no matter where they were in the world.


STOs face unpaved roads ahead

Just because there’s a lot of promise here doesn’t mean there aren’t any challenges ahead.

To live up to their full potential, STOs need to become accessible to less technologically sophisticated investors, as well as investors less tolerant of risk. But the reward of an open investment market is worth the uphill climb. Once this happens, STOs will be in a position to make the financial world more inclusive than ever before.

In the next post, we’ll dive into the challenges STOs need to overcome on their way to meeting their potential.