What is STO? Is it legal? Differences between STO vs ICO

Posted on February 25, 2020 in Articles, Digital Assets 101
What is STO? Is it legal? Differences between STO vs ICO
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You are in the right place if you want to find out what STO is. Let’s see how STO works and how it is different from ICO. 

What is ICO? 

ICO stands for Initial Coin Offering. ICOs are a way for entrepreneurs to take a different approach to raise capital. Traditionally, raising funds was done through an IPO (Initial Public Offering); however, with digital assets, the funds are instead raised by launching a new coin through an ICO.

What is STO?

An STO is a security token offering, which is an asset-backed security token. STOs are fungible, meaning they hold monetary value. Once an investor invests, they receive either a coin or token similar to an ICO. However, the coin or token represents an investment contract into a real-world asset such as gold, stock, or bond. STO is designed to bridge the gap between ICO and IPO. STO offers a more secure way to raise funds publicly that comply with regulatory governance while still having the ease of being able to do so digitally. 

How does STO work?

When you invest in a stock, the ownership is transferred to you and recorded on a document. This transaction will also be written on a certificate. The STO process is very similar to buying traditional stock, but instead of on a PDF file, the transaction is recorded on a blockchain. You will also receive a digital token instead of paper saying you own a share or a right to certain assets

What is the difference between STO and ICO? 

The process of STO and ICO is similar, but the token objective is different. ICO projects could say that their token is not for investment, but utility. So you can use some ICO tokens to buy products or services once the project is officially launched. In most countries, an ICO is also not heavily regulated under the security law like STO, so the process is usually faster and more flexible. In Thailand, however, all ICOs have to go through an ICO Portal which is regulated by the Thai SEC. 

On the other hand, an STO usually requires a lot more upfront compliance work to comply with the law. It also represents the value of some assets.  Investor-wise, STO normally raises funds from accredited investors while ICO is more open to any public investors. 

What is the difference between STO and IPO? 

The STO process is similar to an IPO, but the process is done electronically. Instead of a traditional document, you are issued a token, and all transactions are recorded on the blockchain. IPO also is an investment in exchange for stock, while STO can represent anything that has a value such as shares, gold, or bonds. 

STO process is much more cost-effective than the traditional Initial public offering. The company does not need to IPO as a whole and can choose to just list a part of their business, for instance, a certain development project during a STOP. STO-incurred fees are much cheaper than that of an IPO, and the whole process is more flexible as well. 

Is STO legal? 

The US SEC has been very vocal and active about STO. STO is regulated under the securities law, which comes with many restrictions such as only accredited investors with $200,000 in annual revenue or net worth of more than 1 million dollars,  can participate in the fundraising. 

Switzerland’s Financial Market Supervisory Authority (FINMA) has an STO guideline back in 2018. STO is also legal in Singapore

In Thailand, the SEC foresees STO to be under the security law, not the digital asset law. SEC is in the process of changing the law to support STO and generally seems to have a positive approach. 

What is IEO?

IEO is the initial exchange offering. Although ICO is very popular in the blockchain world, it caused many issues in some countries, particularly in China, where they were banned. Therefore generating capital through an ICO was impossible. For new startups to raise money, they had to find a legitimate way – through an IEO. Rather than raising funds by themselves through an Initial Coin Offering, entrepreneurs approached digital assets currency exchanges to host their launch instead. By doing this, exchanges would take a fee before distributing the coin to investors. The IEO process is much faster and more flexible compared to STO. Investors can also feel reassured that the exchange running the IEO will list that token and provide a secondary market, so that they may continue to buy/sell that specific token or eventually convert their investment back into fiat money.

We now know what an STO is. Please do your due diligence before investing in any asset, whether through ICO, IPO, IEO, or STO. Security token offering is still early compared to the traditional stock offering, and we will need to wait and see how STO will shape the financial industry. 

At Zipmex, we are open to any token that is trustworthy, legit, and legal. We always do our best due diligence to verify all the tokens we list so all of our investors can trade on Zipmex with peace of mind. As we are regulated by the SEC, our listing procedure has undergone approval; soon will be ready to launch our best digital asset trading platform! Follow us on  Facebook or Twitter for our latest updates.