Security Token Offerings Frequently Asked Questions (STO FAQ)

What is an STO?

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.

What is a Security Token?

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.

What is a White Paper?

“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.

What is SEC (U.S. Securities and Exchange Commission)?

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.

What is an ERC-1400 token?

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.

Requirements

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.

  • MUST have a standard interface to query if a transfer would be successful and return a reason for failure.
  • MUST be able to perform forced transfer for legal action or fund recovery.
  • MUST emit standard events for issuance and redemption.
  • MUST be able to attach metadata to a subset of a token holder’s balance such as special shareholder rights or data for transfer restrictions.
  • MUST be able to modify metadata at time of transfer based on off-chain data, on-chain data and the parameters of the transfer.
  • MAY require signed data to be passed into a transfer transaction in order to validate it on-chain.
  • SHOULD NOT restrict the range of asset classes across jurisdictions which can be represented.
  • SHOULD be ERC20 and ERC777 compatible.

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