Security tokens have become immensely popular in recent years. Contrary to ICOs and IEOs, an STO has a lot more legitimacy associated with it. Now is a good time to look at what makes these security tokens so interesting to investors.
Security Tokens can Have Utility
To a lot of people, the difference between a utility token and a security token may not always be that clear. A utility token is a “digital currency” backed by a project. It is the model utilized during Initial Coin Offerings and Initial Exchange Offerings. Whether the project backing this currency is legitimate or not, is an entirely different matter. After all, most of these tokens are sold by projects that have yet to be fully developed.
Security tokens, on the other hand, represent a share in the company or project issuing these assets. A security token can have utility, but it is not required. In the industry, an often used term is equity token, which properly represents the concept of what security tokens bring to the table. It is not too different from buying company stock to achieve partial ownership of a company.
Regulation is a Crucial Aspect of Security Tokens
Contrary to what the industry has seen with ICOs and IEOs, regulation is paramount where security token offerings are concerned. Government officials, and agencies such as the SEC, are closely monitoring the STO industry. As these are effectively company “shares’ being sold in digital format, there are very strict requirements and guidelines to adhere by at all times.
One can argue that extra regulatory scrutiny is a good thing. Otherwise, any company would be able to create a digital token and claim it represents a share of their stock. Thanks to the involvement of governments and regulators, that cannot be the case. Security tokens are better off due to the stricter regulation, especially where institutional interest is concerned.
A Different Investor Perspective
Those who invested in ICOs or IEOs have often been the “get rich quick” chasers. These unregulated tokens can explode in value and collapse shortly afterward, with no repercussions whatsoever. This is clearly not the case where security tokens are concerned. Their entire business model, as well as investor expectations, are completely different.
Considering how the value of a security token is tied to a company’s valuation, there will not be any “moon shots” whatsoever. It is true the token can appreciate in value, but that will always be in a rather limited fashion. If the company performs well, the token will appreciate in value. Otherwise, it will lose value, just like traditional stocks.
An Efficient Way to Raise Capital
Perhaps the biggest selling point of security tokens is how it is a more efficient way for companies to raise capital. Due to all of the regulatory red tape, as well as the tokens being issued by reputable companies, a very interesting situation is created.
For companies that need extra capital, issuing security tokens is a viable option. It is also a good alternative to more traditional solutions, such as VC investments. The big question is whether more companies will explore this option in the future. Predicting this industry’s traction remains very difficult right now.