STOs are actual financial securities backed by the tangible assets of a corporation. STOs may be backed by financial assets, shareholder rights (like voting rights), cap tables, and more.
The STO is emerging as a powerful and valuable alternative to private equity and venture capital financing for companies globally.
1. Access to global capital
Historically, accessing foreign investors has largely been the domain for established companies who could afford the associated costs and risks. However, security token offerings are not limited by geographic borders. This means companies, large and small, can present themselves to more investors over the internet. We saw the impact of this phenomenon in the recent ICO boom. Many service providers have since emerged to help companies market their offerings in foreign markets and different languages. This flexibility gives start-ups and growth businesses entry to deeper funding pools and broader brand awareness. The global nature of tokens also means a wider marketplace of buyers and sellers can interact post-STO, which can translate into greater market liquidity.
2. New ways to market your offering
Traditionally, fundraising in a global environment included an almost limitless price tag and mind-bending complexity. Some challenges have included facing localized securities laws and the need for language translations. The advent of the ICO brought about services and tools to support global token offerings. Advertising to the corners of the earth in multiple languages has become easier, and new techniques such as bounty programs enable companies to offer rewards to people globally in exchange for performing certain tasks, such as being active about a brand on social media. Translating content into foreign languages and posting to communities on Telegram, WeChat, and KakaoTalk is also becoming a successful marketing strategy for raising capital. Experienced agencies with specific skills to support global token offerings are emerging, and investor onboarding programs such as the services offered by groups like Lexico can enable an easy conversion funnel.
3. Better terms
STOs offer enhanced terms when compared to raising capital from VCs. Firstly, companies do not have to give up control of their company or a board seat. This puts management teams in a stronger position to make business decisions, and it reduces the risk of being removed from their own company. Next, for equity STOs, companies can sell common stock instead of preferred stock. This effectively lets management and other common stockholders retain a higher percentage ownership in their company, especially in downside scenarios. While dividend rights will be granted to common stock security token holders, STOs can be accomplished without offering voting rights to these investors. Again, this is another advantage that gives management teams more control over their company. Finally, STOs generally raise at higher valuations.