Five Reasons to Issue Security Tokens for Your Company
Asset tokenization and security token offerings are gradually gaining popularity among businesses. More and more companies are interested in this approach to raising capital.
According to the World Economic Forum, the security token market is projected to reach $24 trillion by 2027. There are many reasons why you should use this investment tool for your business. Stobox, which provides tokenization for its clients worldwide, has chosen five main reasons to issue security tokens and will tell about them in more detail in this article.
What are security tokens?
A security token is a digital asset that is created on the blockchain and certifies a certain share of ownership of a particular financial instrument. If we talk about companies, these tokens can be stocks or bonds transferred to the blockchain. The investor can obtain the rights provided by certain types of tokens. For example, this may be the right to receive dividends, vote, etc.
This approach has many essential benefits. For example, blockchain provides transparency, high speed of financial transactions, reliable personal data protection, etc.
What is the difference between security and utility tokens?
Security and utility tokens are technically identical. The key differences lie in the economic model and regulation. Utility tokens are issued as part of an ICO (Initial Coin Offering) or IEO (Initial Exchange Offering). In fact, their goal is crowdfunding for blockchain platforms. Therefore, the owners of such tokens receive certain opportunities within the same platform. For example, utility tokens may be exchanged for any goods or services, the right to vote, etc. At the same time, the crypto industry is becoming much more regulated. Now even most transactions with utility tokens cannot be anonymous and require KYC/AML checks. Moreover, it will now be more difficult to sell utility tokens that have security token properties but do not comply with the appropriate regulations in specific jurisdictions. Thus now it is much more likely that businesses will have to issue security tokens if they want to enter the crypto assets sphere.
Security tokens are issued as part of an STO (Security Token Offering), and from a legal point of view, they are entirely different financial instruments. First of all, these tokens are recognized as securities. Accordingly, the issuing company is obliged to comply with the regulator’s requirements in whose jurisdiction the STO is conducted. It provides vital protection for investors and helps prevent fraudulent activity.
STOs are much closer in their nature to IPOs than to ICOs. By buying security tokens, investors actually buy a stock, bond, or derivative that is stored on the blockchain. These digital assets de facto act as an investment contract. They can guarantee ownership of certain assets outside the network. If they do not guarantee ownership, the holders receive other rights, such as the payment of dividends.
Five reasons to issue security tokens in 2022
Security tokens are gradually gaining popularity all over the world. This technology is attractive to both issuers and investors. There are five main advantages that this technology provides. Let’s consider them in more detail.
High liquidity
Security tokens allow you to increase the liquidity of any asset. It also applies to shares. Security tokens are more liquid for two reasons.
Fractional ownership
Security tokens provide fractional ownership. If an asset is too expensive, a limited number of investors can afford to invest in it. However, if you divide this asset into several parts, then even people with a small budget can invest in it. Due to this, companies can raise funds from a broader range of investors. This is especially true for high-risk industries, such as mining companies. Tokenization allows you to attract investors prone to high-risk transactions because they do not have to invest large amounts.
Secondary market
In addition to fractional ownership, the liquidity of security tokens also increases the possibility of forming a secondary market. In the case of traditional securities, they may bring profit in several years only. Security tokens can be monetized much faster. If their price rises on the exchange, the investor will be able to sell tokens on a specialized platform (like DS Swap that Stobox develops for its clients) or on p2p platforms. Now private companies will become more attractive to investors, because it is possible to make an exit at any given time. Companies will have more publicity (because they monitor the tokenized share price), and it will be easier to expand small and medium-sized businesses.
2. Programmability
Security tokens are programmable. All the most complex procedures can be simply programmed into the token. For example, this allows you to automate the management of the rights of token holders. In fact, the owners of security tokens are equated to the companies’ shareholders. Furthermore, smart contracts can be programmed so that all obligations of the parties are fulfilled automatically. For example, if the holders have the right to vote, it is possible to hold shareholders’ meetings online.
The settlement process can also be shortened. The transfer of shares in the traditional system requires appropriate documentation. The security token makes these procedures unnecessary. If there is a transfer of tokens to verified users through KYC/AML, the process can be simplified as far as the jurisdiction laws allow. Security tokens are a permanent record of ownership of an asset. Blockchain information cannot be deleted or changed. Thus, it reduces security risks.
3. Attracting retail investors
Attracting retail investors is a significant advantage for companies that manage expensive assets. For example, real estate investment is out of reach for many investors due to the high entry threshold. This seriously limits the circle of potential investors. However, even if you managed to find a buyer, you still need to agree with them on all the nuances. In turn, they may demand a lower price, and the company will make less profit.
STOs solve such problems due to the possibility of equity division of certain assets. As a result, the threshold for entry can be reduced tenfold. For example, if a standard asset is worth $1,000,000, it can be fully or partially divided into tokens worth $10,000. This solution greatly expands the circle of potential investors. In addition, it attracts clients who are willing to risk a certain amount to make big profits. Another advantage of STOs for companies is that after a successful security token offering, the probability of successfully closing a funding round in the traditional way increases significantly.
Overall, businesses get an additional tool to build relationships with their community, integrate even closer to it, and become community-driven. As their stakeholders become shareholders with tokenization, this solves the stakeholder supremacy vs. shareholder supremacy dilemma and allows businesses to balance the interests of relevant members better and generally grow more sustainably.
4. You don’t have to make your company public
The key difference between an STO and IPO is that if a company conducts an IPO, it becomes public. For STOs, this requirement does not apply.
Public companies are required to publish financial statements at least once a quarter. It is necessary so that investors receive up-to-date information about the state of affairs in the company and can make an informed decision. To conduct an STO, a company does not need to go public and disclose its financial statements. In addition, public companies have more responsibility. Limited liability companies that conduct STOs can raise capital and avoid such complications at the same time.
You can now access capital and liquidity long before entering centralized public markets such as the NYSE or NASDAQ, so these markets will become less and less relevant. Centralized exchanges become obsolete and replaced by DEX.
5. Opportunity to attract capital from around the world
STOs are not limited geographically. Companies can raise capital from around the world. For example, if a company’s main markets are the US, UK, and Germany, it can conduct an STO for customers in those countries.
However, it is important to know that security tokens are recognized as securities. Because of this, there is a difference in regulators’ approaches. If a company wants to conduct an STO in a particular country, it must ensure full compliance with legal requirements. For example, if an STO is held in 3 countries, it must comply with the regulator’s requirements in each of them. Therefore, it is better to get professional advice from firms that help companies launch STOs before starting the whole process. Stobox employs experts with extensive experience who can advise you on all the legal nuances of issuing security tokens. By the way, now you have an opportunity to invest in a top-tier tokenization company. Stobox has issued STBX tokens that give investors equity and dividends rights. You can invest in Stobox right now by purchasing STBX tokens.
Summary
Tokenization is a technology that opens up new opportunities for companies to attract investments. It provides the convenience of digital assets while guaranteeing the same rights and protections for investors as securities. Security tokens make investments in any assets more accessible to retail investors, which significantly expands the pool of people who may be interested in your offering. STO has many advantages over traditional methods of raising capital, which is why it is becoming more and more popular worldwide.
