IPOs are an expensive, time-consuming way for companies to raise money. They're also limited to specific, localized markets. Good thing there's another way.
Security token offerings (STOs) are getting a lot of attention from finance and crypto pros because of their global reach. ICOs sparked their attention over the past two years, only to land as an unregulated Wild West of investing. STOs are solving all the problems that plagued these ICOs: they ensure accountability from companies and investors alike.
So what's all the hype about? We'll explore why STOs are the new ICO and why entrepreneurs should consider them as a powerful way to raise capital from new markets around the globe.
What are the benefits of STOs?
Many startups wanting to raise money found value in ICOs at first. Their low barrier to entry was a total boon to startups that couldn’t cover the astronomical costs of just going public, let alone stay public. But the lack of regulations seriously hindered how much ICOs could accomplish. There needed to be a better way. STOs bring five big benefits. Here's more about those benefits.
The average company spends between $1 million and $1.9 million to go public. This sum covers fees for the investment bankers, underwriters, lawyers, and auditors that have a hand in taking any company public. After all these pre-IPO fees, there are also the ongoing cost of staying compliant.
STOs cost much less. You don’t need a team of underwriters to set up your STO because compliance is programmed into each token. These anti-money laundering (AML) and know your customer (KYC) guidelines help ensure that all investors are approved and adhere to legal standards.
There’s a certain amount of liquidity to everything, but not all assets are equal. Real estate is a classic example of an illiquid asset because it's generally difficult to turn it into cash. But stocks are highly liquid because they are bought and sold every day.
Security tokens make it easy to bring liquidity to any real-world, tangible asset. The only challenge right now is in finding compatible exchanges. There are only a few players here today, but for true liquidity to become practical, a few big, highly useable exchanges need to take root. More exchanges in the market will not only increase liquidity but will also expand access to new investors around the world.
Access to new markets
Prior to an IPO, most companies deal solely with investment banks and their customers. It's not exactly "going public," because the true investing public only get access to shares after everyone else has already taken most of the value for themselves through early funding and special discounts.
STOs are different. They have a low barrier to entry like ICOs, and you don't need to be an investment bank just to buy in. But quite unlike ICOs, STOs are regulated to ensure everything stays fair and legal. After completing regulation and compliance guidelines, you only need access to an approved exchange to start investing.
STOs are for everyone, not just accredited investors (depending on which regulation you choose to operate under).
ICOs are unfortunately associated with a lack of responsibility, and it's one of their biggest downfalls. Too many companies packed up and ran with their ICO funds, leaving discouraged investors holding the bag. It's relatively easy to buy into an ICO, but you have exactly zero guarantees that you're buying into something real. It's a potent reminder that investing is risky.
STOs are different because investors contribute capital in exchange for partial ownership of something. There's a sense of accountability on both sides – the investor wants to see the company succeed, and the company wants to repay the investor for their early support. There's mutual responsibility to one another.
ICOs operated in a crypto-financial gray area that was still unregulated. But STOs are fully legally compliant, regulated from the start with a clear roadmap of what they have to do to stay compliant. These regulations vary depending on the country where a company launches an STO.
Security tokens need their own global regulations
The regulatory concerns behind ICOs spelled out why compliance is important. Security tokens embrace compliance head-on. But before they can make a global impact, they need specific global regulations.
It's easier said than done, but once we get the world's regulatory agencies working together to agree on one set of universal rules, then security tokens will reinvent how small businesses raise big money and how everyday people invest.