Choosing Between ICO & STO

Security Token Offerings have rapidly become the talk of the day in the cryptocurrency industry. Venture capitalists all over the world have embraced them as they are cheap and viable means for providing security tokens. Private equity groups have not been left behind either. They are making the most of STOs in their bid to raise capital extensively. It is no wonder that the term is on the lips of every player in the industry. The growing interest in the security token offerings is warranted, and this trend is not stopping anytime soon. It is estimated that in the next two years the offerings will have hit the $10 million mark. Time will tell whether these predictions hold water.

The incredible capital raises from security ICOs make it a attractive solution compared to utility ICO’s. However, a number of regulations and legal requirements connected to starting an STO only warrant going through the complexity of raising funds in this way if some of the scenarios below are met:

  • Your company is growing exponentially.
  • Your annual revenue has hit and exceeded the $10 million mark.
  • Your business has broken into the international scene.
  • You are looking for funding from large institutions.
  • You have set high liquidity terms for your token.
  • A transferrable asset works better than a utility token for you.

Back in the day, an investor needed to sign a contract whenever they bought a security. The advent of security tokens has counted on the blockchain technology to provide a platform for the execution of the contract. The right of ownership is proven by a consensus that is set up in the blockchain’s protocol. Security token is backed up by a real-world asset. It can be thought of as bonds, company’s stock or a priced asset.

Dividends, revenue shares and profit shares are some of the benefits that investors accrued from traditional securities. Security token offerings work in the same way and offer similar benefits for the holders. Read on to find out how our STOs are modelled.

Why Do Founders Prefer Security Token Offerings?

1. They are a better source of institutional capital

For a long time startups and medium-sized companies had a hard time sourcing funds from international investors. Most of them had to grow organically and depended on local investors for capital. This meant that they missed out on the huge chunks of capital that overseas investors could offer. Established companies had the financial muscle to pursue foreign capital and enjoyed these to a great extent.

Security Token Offerings have provided private equity groups and institutions with a route into the STO market and subsequently into the global scene. The borders that had restricted the institutions from accessing large capital have subsequently been broken down thanks to the blockchain technology. Medium-sized companies no longer have to source funds from single limited jurisdictions. Founders are keen on making the most of this opportunity.

2. Marketing of Offerings is modernised

Local security laws had previously made the offering of regulated securities an uphill task. The legal and advisory bills only served to make matters worse as they included regulatory requirements that institutions had to meet before they were allowed to offer securities. When ICOs were introduced into the scene startups began receiving funds from international investors. Online advertising networks further supported this tremendous development in the industry.

The mid-size companies made it a point to reward key players who were involved in publicising their agenda and offerings in the global market. Affiliate programs have been heavily used to this end. The different brand ambassadors use different social media platforms and set-up meetings to make the projects known. Although Security Token Offerings require more legal work compared to utility ICOs, the tools for ICO capital raising has paved a way for STO’s as a fundraising tool as well.

3. Entry is less complicated

Security Token Offerings are widely lauded for their great versatility and flexibility. They are also cost-efficient as start-ups do not have to spend much of their capital on them. The small companies can take advantage of the funds and goodwill of seasoned investors as they grow their brand. STOs allows almost anything to be tokenised. The costs that one incurred on regulatory fees, travel and diligence costs and legal fees were all done away with. Traditional verification providers also introduced additional costs as they used AML and KYC in service delivery. The tokens made sure that founders no longer have to worry about such costs.

4. More for less

Aside from the cost implications, issuers of the tokens do not have to give up their privileges in their fundraising efforts. In the traditional VC deals, the voting rights and board seats were used in exchange for capital and could only be earned when the business got on its feet. The company’s decision processes were subsequently infiltrated by politics that led to compromised decisions. The STOs allow founders to maintain control of the business and they can steer their activities without external influence.

They also drive the growth of the business as the founders are not constantly looking over their shoulders. Their position and security on the company’s board is always guaranteed ensuring that they have less sleepless nights. Token holders are only entitled to dividends and a share of the profits. Founders can also trade the tokens for company shares further cementing their position and authority in the firm. All these benefits do not impede the higher valuations that are a guarantee when Security Token Offerings are involved.

5. They surpass traditional offerings greatly

Security Token Offerings are miles ahead of traditional securities thanks to their versatility. Different companies can customise their offerings to fit their brand and services. Depending on the creativity of the issuers, the tokens can offer benefits for long-term holders. Preferred platforms and accessible features can also be defined in specific tokens. At the end of the day, the risks one is willing to take will dictate the type of tokens that are offered.

The drawbacks of STOs

Although Security Token Offerings have great advantages, they may not be the best option for all fundraising projects. The major drawbacks arise from the fact that security ICOs have only been recently introduced to the market and very little is known and documented about them. Their long-term benefits and performance has also not been critically analysed. Founders require a lot of faith to venture into this strategy. The issuer only enjoys legal backing based on the fact that the offerings are highly regulated.

Malta’s Security Offerings

The Malta Financial Services Authority (MFSA) is responsible for receiving and approving applications from STO issuers. The issuers need to determine the category that the targeted vehicle lies in and make an application based on that. The documentation should include:

  • The line of business specific for the business.
  • The financial dynamics of the business.
  • The structure and mechanisms of the tokens.
  • The ownership of tokens, obligations and claims from ownership
  • Description of rights.


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