STO or Security Token Offering is a process of selling Security Tokens – digital crypto analogues of shares or another tokenized assets. STOs are quite new thing, which was born as an evolution from ICOs (Initial Coin Offerings), which become very popular in 2017-2018. A lot of companies and startups all over the world were launching ICOs and selling tokens to investors. Such activity attracted a lot of money from private investors. And meanwhile helped to test all new blockchain and crypto technologies by accelerating its adoption.
However, IСO had a number of significant drawbacks: investors did not get a share of the project profit, did not have the opportunity to influence the company’s operation, and lack of control allowed conducting fraudulent IСOs. STO is supposed to amend all these issues while retaining all the advantages of the new investment tool. All the STOs will be under tight control of regulators monitoring law enforcement compliance. All the investors will get the common rights, including but not limited to ownership of shares, periodic dividends, voting rights etc.
Security Tokens - digital crypto analogues of shares or stocks. These analogues are called security tokens and connected to real securities that represent tokenized assets. In some cases, these tokens represent the real capital in the company, fulfilling the role of the "digital share". Security-token is not necessarily connected to the share in the company, they can be used to divide the owner's rights to a wide range of assets, from real estate to art. They can provide to the holder a number of rights. This can be the possession of shares, periodic dividends, the influx of finance, payment of debts, the right to vote and much more. All these rights are secured by a smart contract that manages tokens.
Tokens are built on blockchain technology. In most cases token issuers use one of already existing technologies to create their tokens. The most popular platforms for token issuing are Ethereum, NEO and EOS. These platforms allow anybody to make new token and smart contract with a basic knowledges in programming. Implementation of STOs required improving the token structure, so they can meet the requirements for the traditional securities.
One of the first of a kind security type token was suggested by Ethereum community and was named ERC-1400. ERC-1400 significantly differs from previous types.
"White Paper" (WhitePaper, WP) is a document that describes the key features of the investment project.
This document usually contains a detailed description of the main indicators and characteristics of the STO Project. The mere presence of a quality White Paper doesn't guarantee the success of the project, but without a properly designed "White Paper" project, it will be difficult to conduct a successful STO.
The United States Securities and Exchange Commission (SEC) - the US government agency is the main body that performs the functions of supervising and regulating the US securities market. The commission was established in 1934 under President Roosevelt. The purpose of the Commission was to restore investor confidence in the stock market during the Great Depression.
ERC 1400 token is a cryptotoken built on Ethereum blockchain. It differs from other tokens built on ETH (ERC-20, ERC-777), because of special requirements for Security tokens.
Accelerate the issuance and management of securities on the Ethereum blockchain by specifying a standard interface through which security tokens can be operated on and interrogated by all relevant parties.
Security tokens differ materially from other token use-cases, with more complex interactions between off-chain and on-chain actors, and considerable regulatory scrutiny.
Security tokens should be able to represent any asset class, be issued and managed across any jurisdiction, and comply with the associated regulatory restrictions.
Moving the issuance, trading and lifecycle events of a security onto a public ledger requires having a standard way of modeling securities, their ownership and their properties on-chain.
The following requirements have been compiled following discussions with parties across the Security Token ecosystem.
1. Profit Share Right
As partial owners of the company, common shareholders have the right to participate in a company's profitability for as long as they own the shares. Division of profits is based on the number of shares owned by a shareholder, and gains can be substantial to shareholders over time.
In addition to a share in profits generated by the company, shareholders also have rights to income distributions through dividend payments. If a company's board of directors declares a dividend in a certain period, common shareholders are in line to receive it.
2. Voting Right
ability to cast votes in a company's annual or general meeting. Major shifts within a publicly traded company must be voted on before changes can take place, and common shareholders hold the right to vote either in person or via proxy. Most common shareholder voting rights equate to one vote per share owned, resulting in greater influence from shareholders who own a larger number of shares.
3. Management Influence Right
Common shareholders also have the right to influence company management through the election of a company's board of directors. In smaller companies, the president or chairperson of the board is typically the individual who owns the largest share of common stock. Larger companies may have greater diversity in the common shareholder investor pool.
In either case, individuals in management of the company do not own enough of a stake in the company to influence who sits on the board of directors. Shareholders have the right to influence who holds management positions through control over election of board members.
4. Equity Ownership Right
5. Preemptive Right
A preemptive right is a privilege that may be extended to certain shareholders of a corporation that grants them the right to purchase additional shares in the company prior to shares being made available for purchase by the general public in the event of a seasoned offering, which is a secondary issuing of stock shares. A preemptive right, also referred to as preemption rights, anti-dilution provisions, or subscription rights, is written into the contract between the stock purchaser and the company, although a few states grant preemptive rights as a matter of law unless specifically negated in a company's articles of incorporation.
6. Redemption Right
A redemption right is the right of the investors to force a company to repurchase their shares.