Predictions and strong claims about the future of the Security Tokens have flooded the internet these days. Some say that it is the next thing that the future of fundraising needs. And some say that it is just a brittle bubble about to pop. What should you believe? Should you go by the hype? Should you stay at the shore and deal with FOMO? Well, don’t get overwhelmed, this article is your reliable insight into the world of security tokens, and by the end of the article, you will be in a position to make up your mind about them. So, let us begin!
The background of tokens-
Before diving into the advantages and disadvantages of the security tokens, let us briskly walk through its concept. Talking at the fundamental level, tokens can be categorized as- ‘utility tokens’ and ‘security tokens.’ Utility tokens are usually based on Ethereum and offer some kind of utility in terms of benefits such as access to any system, or some service is offered, such as cloud space.
Security tokens, on the other hand, are not compulsorily developed around utility as the driving force. A security token often offers a share in a company who offered it. They have much in common with equity tokens. The major difference between a security token and a utility token is around the amount of regulation regulated by the govt. Security tokens are far more tightly regulated. And that is why they offer strong legal protection as well.
So, what are Security tokens?
Security tokens are digital assets based fundraising instruments. STO or Security Token Offering is tightly regulated by regulations, and therefore, the token issuing company is made accountable for the sale, and the related actions.
Security tokens are like investment contracts that vouch for legal ownership of any asset or commodity, which is verified in the blockchain. It can be used for token trading, collateral services, storing of funds, and so on. A traditional example may help in clarifying the concept in a better way. For instance, gold can be owned by the people who can afford it. But what if we tell you that a few people together can own the x amount of gold in fractions? That is what security contracts allow you to do. The decentralized quality of security tokens allows ownership of assets or commodities all over the world.
Regulations around Security tokens-
Security tokens are highly reliable ones, given the fact that they are highly regulated by the local regulations of the particular country where they are offered. For instance, in the United States, security tokens have to comply with Regulation D, Regulation A+ and Regulation S. Let us understand these regulations in detail-
Regulation D requires filling up of the ‘Form D’ by the creators of the security token sale after the securities get sold. This regulation also frees up the creator from the compulsion of registering with the U.S. SEC (Security and Exchange Commission.) Further, the offerings also need to be solicited as per the Section 506C, which verifies the accreditation of the investors and the information supplied by them.
As per this regulation, the creator can offer security that is allowed by the SEC. The security is offered to non-accredited investors. The upper limit of this solicitation is 50 M U.S. Dollars in investment. This regulation takes more time than other regulation and is also more expensive than the others.
When the creator wants to offer security token outside the U.S., then he or she needs to comply with this regulation. This regulation frees up the creator from complying with Section 5 of the 1993 Act. Under this regulation, the creator has to follow the regulations of the country in which he or she intends to offer the security token sale.
Above was a simple layman explanation of the respective regulations and should not be considered at par to the legal definitions. For a detailed perspective, it is strongly advised to consult legal authorities.
Conclusion- Finally, Security Token Sales are far more regulated in comparison to the Initial Token Sale. This ensures clarity, security, and legal back-up. Other benefits of the security tokens are more liquidity, global access to the security tokens, 24/7 trading possibilities, inter-operational assets, strong regulation compliance, fractional ownership, and so on. Yes, Security tokens have gained a lot of limelight lately, but it’s not because of any hype, but solely on its merit!