Abstract
This paper highlights the importance of distinguishing Security Token Offerings (STOs) from Initial Coin Offerings (ICOs) in entrepreneurial finance studies. We provide a working definition of security tokens and present an overview of the STO market using a unique sample. Key findings include:
- STO activity emerged after the ICO market bubble burst
- The STO market remains nascent but promising
- STOs are geographically dispersed but concentrated in jurisdictions with accommodating securities laws
- Various issuer and offering characteristics significantly impact STO success
- Good governance practices correlate with successful STOs
Introduction
The evolution of external capital sources for entrepreneurs has accelerated dramatically in recent years. Notable developments include:
- Crowdfunding (2010s): Enabled online capital raising from the public
- ICOs (2017-2018): Facilitated substantial fundraising through token sales
- STOs (Post-2018): Represent the next generation of blockchain-based securities offerings
Key differences between token types:
| Token Type | Purpose | Regulatory Status |
|---|---|---|
| Security Tokens | Investment products | Subject to securities laws |
| Utility Tokens | Ecosystem access | Typically not securities |
| Payment Tokens | Digital currency | Covered by payment laws |
What Are Security Tokens?
Definition
"A security token is a digital representation of an investment product recorded on a distributed ledger, subject to regulation under securities laws."
Key characteristics:
- Digital representation of traditional securities
- Recorded on blockchain/DLT
- Compliant with securities regulations
- Can represent various asset types (equity, debt, funds, etc.)
STO Process Overview
The STO process typically involves six phases:
- Preparation: Business case development and advisor selection
- Offering Design: Security structuring and documentation
- Technology Decisions: Blockchain platform selection
- Service Provider Selection: Legal, financial, and technical partners
- Capital Raising: Investor outreach and token sale
- Listing: Secondary market trading (optional)
👉 Learn more about blockchain-based securities
STO Market Analysis
Market Composition
Our sample of 183 "true" STOs reveals:
Geographic Distribution: Concentrated in favorable jurisdictions
- Top countries: USA (36), Cayman Islands (11), UK (11), Switzerland (10)
Security Types:
- Equity tokens (44%)
- Debt tokens (9%)
- Income-share tokens (31%)
- Fund tokens (15%)
- Others (2%)
Key Success Factors
Research identified several critical factors influencing STO success:
- Voluntary Disclosures: GitHub presence positively correlates with funds raised
- Governance Practices: Voting rights significantly impact success rates
- Offering Characteristics: Target amount, duration, and softcap usage matter
- Jurisdiction: Incorporation location affects investor perception
STO Success Factors Analysis
Quantitative Findings
| Average | Median | |
|---|---|---|
| Amount Raised | $6.1M | $13K |
| Success Rate | 40% | N/A |
| Duration | 144 days | N/A |
Key correlations:
- Voting rights → +43-51% success rate improvement
- GitHub presence → Positive fundraising impact
- High target amounts → Reduced success likelihood
👉 Discover security token investment opportunities
Future of Security Tokens
The next evolution includes Native Digital Securities (NDS), offering:
- Primary record status on blockchain
- Full lifecycle representation
- Reduced fork risk
- Programmable features
Potential impacts:
- Enhanced transparency
- Simplified corporate actions
- Improved governance mechanisms
Conclusion
STOs represent a significant development in entrepreneurial finance with:
✔️ Distinct advantages over ICOs
✔️ Growing market potential
✔️ Important success factors to consider
✔️ Promising future with NDS technology
As the market matures, understanding the interplay between tokenization, governance, and fundraising will become increasingly important for entrepreneurs and investors alike.
FAQs
What's the difference between STOs and ICOs?
STOs represent regulated securities offerings, while ICOs typically involve utility tokens not classified as securities.
How long does an STO typically take?
The STO process averages 24-56 weeks from preparation to completion.
What are the main types of security tokens?
The primary types are equity tokens, debt tokens, income-share tokens, and fund tokens.
Why do governance practices matter in STOs?
Good governance (like granting voting rights) builds investor confidence and increases success rates by 33-37 percentage points.
Which jurisdictions are most STO-friendly?
The US, Cayman Islands, UK, and Switzerland currently lead in STO activity due to favorable regulations.