Running a business is no easy feat. But it’s even more challenging when building it from the ground up. When you’re in a startup, there are many challenges you may face trying to build a robust business that will stand the test of time and become a profitable venture. One of the main challenges is funding.
Having no contacts, contracts, equity, and being seen as inexperienced can be difficult hurdles to overcome when trying to raise funds to help you evolve your vision. This is why you may want to seek innovative alternative ways of raising capital, including crowdfunding, Initial Coin Offering (ICO), Initial Public Offering (IPO), and Security Token Offering (STO).
While you may have other options, such as seeking angel investors and venture capitalists, you may want to have a bit more control of your startup and the funding process. Previous research shows that most venture capitalist-supported businesses fail. This article will help you understand STO and how it can benefit your startup.
Understanding Security Token Offering (STO)
What is STO? An STO represents an investment contract or investments backed by real-world assets with monetary value, including bonds, unit trusts, and stocks. In simpler terms, an STO is an electronic instrument representing asset ownership recorded on the blockchain. STOs work similarly to traditional investments such as stocks, where you transfer ownership through a written contract.
With STOs, it’s the same process but digitally recorded on the blockchain as a token. Initially, startups used ICOs to appeal for funding, but the security and accountability standard were wanting. This led to massive fraud and scams due to a lack of proper regulation and lower barriers when launching ICOs. STOs are backed by real assets and must follow and comply with strict regulations, making them a safer option for you and your investors.
Here are the four ways your startup can benefit from launching an STO when looking for funding.
One thing you want for your startup is to have more control of the direction you want to move with your visions. Seeking funding through venture capital, angel investors, or IPOs can limit you from doing what you want with your business. This is because you may need to go with the investors’ decisions as they also seek to control how you utilize funds.
STOs, give you more options than other funding methods. Why? Options like IPOs require you to give part of your company shares to a stock exchange and deal with investors and a board in each decision. On the other hand, STOs allow you to share only the part of your business you want. You don’t need to share ownership with anyone, leaving you in control of your business matters.
You can borrow against an asset and pay it back in the form of dividends without the need to share business ownership with them. In addition, even if you choose to use your entire business as security, you still have a say in voting rights and sharing agreements. Consequently, it’s unlikely that the investors will influence business decisions like angel investors and venture capitalists would. This means less pressure and the ability to move your startup to an established brand.
You can describe STOs as the sweet spot between IPOs and ICOs. While the ICO process is also cost-effective, it lacks the governance and regulation to protect investors. With IPOs, the process of selling shares in a stock exchange is lengthy and costly. The process requires a thorough audit to protect investors from financial loss and fraud.
When you’re a startup and require funding, you can’t go through such a process or even the time to wait for vetting and listing on the stock exchange. STOs use an automated process through smart contracts. It also allows you to go directly to the public and sell shares at a lower cost, avoiding long processes.
Compliance and transparency
As stated earlier, options like ICOs lack regulation leading to widespread scams and fraud. But security tokens are inherently compliant and come with rules about who can trade the assets in the token. The token code can also specify the voting rights of investors and other conditions. The STOs work on an open public blockchain that makes the process more transparent.
Therefore, auditing and compliance issues are taken care of as the transactions are visible to all participants. However, this doesn’t mean that your sensitive information, such as financial data, will be visible to the public. Data on the blockchain is encrypted, and you can’t directly identify owners using wallet addresses. But tokens can be tracked and verified at any time for external or internal audits.
More liquidity and accessibility
Tokenization allows your business to offer smaller fractional company shares that you can sell at lower prices to many investors. This breaks down the company shares to accommodate a broader range of investors. This, together with the ability to reach global investors easily, and access crypto exchanges and markets at any time, creates higher liquidity.
Security token offering is a good alternative for funding your startup if the benefits shared above are anything to go by. In addition, it offers a safer and faster way to raise funds while still giving you the control you need over your business. Since they’re secure and regulation-compliant, investors become more trusting and likely to invest their funds than in other methods.