Security Token Offering Will Be The Next Fund Raising Method?

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Security Token Offering Will Be The Next Fund Raising Method?

Earlier the start-ups and entrepreneurs have only way available is to connect with angel investors or VC (Venture Capital) to get seed funding for the new business ideas.

However, established businesses have the option to connect with IPO (Initial Public Offering) to raise fund for the company. Then Crowd Funding comes.

Though every way to collect fund to the business has associated benefits and limitations, but none come close to the amount crowdfunding has been able to raise. ICO (Initial Coin Offering) – the project leverage the advantages of blockchain development services has raised crowdfund in a matter of a few weeks and even in days.

Now we have Security Token Offering (STO) that is available with features of traditional fundraising methods such as ICO and IPO.

What is an ICO? To understand why we needed Security Token Offering when we have ICO to raise crowdfund, let's recall ICO and how does it work?

ICO or Initial coin offering or utility token are distributed as tokens to the general public at a specific price point. ICOs are also known as utility token because these do not hold any value. ICO promise the future adoption of product, meaning when a considerable number of the user use the token. However, the true value of the token determined only then. In simple words, the true value of the token is based on its future utility.

The project team decides the base price of the token considering the future market and size of potential market.

However, there is no specific regulations and defined rules to determine the value of the token. That is the thing which attracts start-ups lacking in a proven business model, customer base or a working product. Therefore, these companies do not adhere to regulatory rules that calls to time and money to achieve compliance.

Lack of regulations and compliance to conduct ICO invited fraudulent activities. Using fake social media profiles, a detailed whitepaper, a super impressive website and putting money in promotion, start-ups have raised millions and then run away with all the crowdfundings. In 2017, 80% of ICOs were scams. This makes investors skeptical about investing in ICO.

Then, what is a Security Token Offering?

Instead of utility token, STO tokens are distributed. STOs are secured with tangible assets such as real estate, stocks, bonds and others. When these tokens are backed by stocks and bonds, these are recognized as equity tokens because these are entitled to a stake in the business.

These tokens are also classified as 'securities.' When STOs are launched in any country and are targeted to, they come under the securities regulations to that country.

For instance, STO must adhere to regulation imposed by the American Securities and Exchange Commission (SEC) in the U.S. STOs always come under rigorous auditing by legal authorities; thus it reduces the chances of an STO being a scam is almost zero. Due to the regulations, the investors that participate in STOs have to prove identity, thus only accredited investors will be allowed to buy security tokens.

Conclusion If you want to develop an STO, then you can opt for the services of Daffodil Software. We have both technical and legal expertise to make your STO event a success. For a complimentary consultation session, click here.

STO or Security Token Offering is developed using the features of ICO and IPO. You can hire blockchain developers and since STO development is not very costly and time taking as compared to launching an IPO. On the other hand, it provides better security and authenticity to the investors as opposed to an ICO.

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