STO stands for security token offering.
Similar to an initial coin offering (ICO), an investor is issued with a crypto coin or token representing their investment. But unlike an ICO, a security token represents an investment contract into an underlying investment asset, such as stocks, bonds, funds and real estate investment trusts (REIT).
A security can be defined as a “fungible, negotiable financial instrument that holds some type of monetary value,” i.e., an investment product that is backed by a real-world asset such as a company or property.
Common misperceptions around security tokens are that they are different from securities. Although they exist on a blockchain, they are ostensibly securities, subject to the same regulations and case law precedence as traditional securities.
However, security tokens offer some unique advantages — particularly in improving secondary market liquidity, reduced compliance costs, automating trade restrictions, providing fractional ownership, and enabling asset interoperability.
An SME (i.e., Company A) wishes to issue security tokens representing equity in their company, they can do so with the help of multiple market participants including:
- Issuance Platforms
Company A can formally issue their security token to investors via an issuance platform, which is integrated with service providers like custodians, broker-dealers, and legal/compliance entities to facilitate a secure and regulatory-compliant process.