What are STOs?
A Security Token Offering (i.e. STO) is the procedure through which the public sale of financial instruments, represented by digital tokens on the blockchain, is carried out. The token is a digital tool representing a real underlying asset, that is, a security that entitles the holder to receive future cash flows and perfectly mimics its behavior. Through a STO an SME (i.e. small-medium enterprise) makes its assets liquid and encourages investment by the capital market, thus reducing its dependence on the banking channel, which today accounts for 80% of an SME's funding sources. On the other hand, the investor (professional and/or retail) has the opportunity to access alternative, liquid and highly profitable forms of investment. Corporate assets are sold to investors without them taking physical possession of them, as it is the case with futures contracts, for example. Unlike futures, however, contracts are based on smart contracts and the financial instrument is called token. Security token issuance, when applied to a commercial asset, represents an alternative and evolved form of financing to bank factoring.
ICOs vs IPOs vs STOs
ICO stands for “Initial Coin Offering” and represents a form of crowdfunding for a crypto-related project in its pre-launching stage. Thanks to ICOs, companies are able to raise funds for a new product or service by selling a new token to interested investors. In those cases, tokens represent essentially digital assets defined by a smart contract, built on a specific blockchain, which often have some sort of utility within the future product, even if sometimes participants are just gambling that the newborn worthless currency will later increase in value above its original purchase price and that’s how people ended up in scams investing in ICOs.
The company that chooses this form of fundraising will first publish a pitchbook, called “white paper”, which is a document that highlights the purpose of the project and gives investors technical information about its concept. Instead of buying traditional equities like the shares of a company, participants buy tokens to help the business raise capital. However, differently from what happens with IPOs, investors are not entitled to hold a stake in the company and participate in internal management decisions. Initial Public Offering, in fact, is the traditional way for private-owned companies to sell their shares to institutional or retail investors. By listing them on stock exchanges, the company makes the shares available for purchase by the general public. STOs feature aspects of both ICOs and IPOs. As explained before, what happens with security tokens is similar to traditional securities. Being based on a blockchain, the former are indeed digital assets within which traditional asset rights are represented, and through which the same can circulate. They provide token holders with the same economic entitlements, giving them rights over forms of equity, debt or ownership of a specific asset.
Legal Framework
Since the ICO phenomenon was observed as having speculative characteristics, a vigilance was developed with regard to risks and critical issues associated with these initiatives. What followed was a turnaround which led to the development of “Security Token Offerings”, that guarantees certain requirements and rules to be observed, minimizing the potential risk factors by increasing control and verification procedures. Security Token Offerings propose to investors the purchase of tokens in the form of "securities" that pass through the control of designated authorities, who are called upon to certify that they are tradable financial instruments and carry a monetary value.
The European Union with Regulation (EU) 2017/1129 of the European Parliament and of the Council of June 14, 2017, on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Prospectus Regulation), adopted a new scheme of rules, which exempts those who issue securities, from the obligation to prepare a prospectus if the offer is below a certain threshold. Since this is a regulation and not a directive, additional requirements are no longer necessary, but the regulation has automatically entered into force within national legislative systems, thus eliminating the risk of inconsistencies. The thresholds were decided by each nation respecting Article 3.2 of the Prospectus Regulation, which provides discretion for exemptions between €1 and €8 million.
Italy, France, Denmark, and Finland opted for the higher threshold of €8 million, a choice that may favor the development of STOs because this solution fits particularly well with the average cryptocurrency-focused startup. Due to the lack of a prospectus, capital raising within their home countries can be easier, but it will remain limited to that area for now. Under Article 15 (EU Growth Prospectus) of the Prospectus Regulation, European companies that do not meet the thresholds for exemption and that wish to issue security tokens will be able to do so using a new form of simplified prospectus, which is called a "Growth Prospectus," a straightforward and low-cost process when compared to the average ones otherwise required.
A real example of STO
With €70 billion in assets under management, Azimut is one of the largest independent asset management companies in Europe. AZIM tokens were issued through a Security Token Offering ("STO") that securitizes a financial asset available for investing in alternative credit. Azimut's token is licensed by the supervisory bodies of Switzerland (FINMA) and Singapore (MA), and digitally represents 5 million euro portfolio of loans to Italian small and medium-sized enterprises originated on the “Borsa del Credito” platform and guaranteed by the “Mediocredito Centrale” Guarantee Fund. Blockchain technology allows even usually illiquid investments, such as those in private markets, to become liquid and immediately transferable. This new process, which Azimut is first in Europe to implement on loans to small and medium-sized companies, will also bring direct benefits to capital markets, making them fairer and more efficient.
In addition, the ability to fractionate the right of ownership of a financial asset ensures its transferability to investors in an immediate way thanks to the activation of distributed ledger technology , also allowing to overcome the limitations and costs typical of intermediation. All of this led to an increasing transparency and to "democratization" of investments that are not divisible or whose value is often inaccessible to individual private investors, reducing in addition transaction risks for investors and asset managers. Token offerings are emerging as an alternative tool in raising capital for companies. In the three-year period 2017-2019 The number of digital asset offerings was 2,064 (compared to 4,233 equity capital raising transactions in listed markets through IPOs) amounting to more than $25 billion in fundraising. Some estimates predict that Security Tokens, digital securitizations of real and financial assets, will evolve on a large scale and with high growth rates forecasted by Chain Partners for about $2 trillion in 2030 from the capitalization of about $3 billion in 2020.
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