‘Security’ is any financial instrument that acts as a guarantee of something. It can either represent equity or debt. For, e.g., a stake in a company or a loan offer. Security is a fungible tradable, i.e., security offering from one entity is interchangeable, and the value resides with the bearer of the ‘security.’
Furthermore, ‘security’ serves two purposes. It provides the necessary financial support to projects and firms, and it provides an avenue for investment. However, a Security is purchased on the assurance that the project or the firm backs the value of the security.
The firm must meet the required requisites to make a ‘Public Offering’ of their shares as ‘security.’ The pre-requisites are defined by the Financial Regulators of the respective country, e.g., SEC (Securities Exchange Commission) in the US. Only after obtaining a license from the regulatory body, a security offering can be made to the public.
A Security Token Offering
When a ‘security’ is offered as a cryptocurrency token, it is defined as an STO. SEC Chairman Jay Clayton had made a straightforward analogy of ICO with a small business. According to the SEC, decentralization and autonomy are the two conditions that must not be classified as a ‘Security.’
”Lets say you’re a producer of a play, and you invite 10-15 investors to invest in that play for a certain amount of tickets for the play… that is a Security…”
Advantages of an STO
An STO is similar to a Public Offering except it has a lot of added advantage to it:
- As an STO is a based on Blockchain, its value ‘token’ is a cryptocurrency; which can be sent and received anywhere in the world. Hence, STOs can attract investors from all over the world, while an IPO can be limited inside the country.
- The transparency and immutability of the blockchain provide an added layer of trust for the investors. The blockchain implementation also reduces the operating costs for the security issuing organization.