Funding your start-up with an STO?

Initial Coin Offerings, or ICOs, have enjoyed some time in the spotlight, but as their downsides become much more widely known, more and more people are turning to STOs, or Security Token Offerings, when it comes to investing in startups using cryptocurrency. While STO investments offer more security, as the name suggests, there are still some legal issues surrounding the practice.

Blockchain is still a relatively new technology that many laws haven’t quite caught up to yet. With security tokens, however, there are laws in place that all participants have to consider before moving forward. Learn more about the legalities of STO investment, and discover what you have to do to successfully and legally launch an STO or invest in one.

What Are STOs?

Security Token Offerings are a method that startups and companies can use to get funding for their projects.Crowdfunding and personal donations are what most people think of when they consider funding, but blockchain technology offers tokenized alternatives. While ICOs offered tokens in the form of digital IOUs to investors, STOs tokenize parts of the startup itself.

Security tokens that you would receive in exchange for an investment can offer quite a few different perks. When you possess a security token, you posses a portion of the company, effectively rendering you a stakeholder. Because of this, you can often actively contribute to the business decisions of the company as well as its future as a whole. It’s helpful to think of STOs as functioning similarly to company stock of a publicly traded company.

Why Do STOs Need Legal Regulation?

The entire point of blockchain technology was to allow for a decentralized exchange of money that doesn’t have to go through centrally regulated banks or government entities. When you transfer money to a friend using conventional means, for example, the entire transaction is done through a bank, credit union, or other financial institution. With blockchain, the presence of the financial institution is done away with entirely.

While simple exchange of currency can get away with being deregulated in some cases, investment is a different story. Due to the inherent risk of investment and the potential for scams, investment is heavily regulated by most governments in some way or another. Since an STO is effectively a blockchain-powered investment, many governments like the United States and Switzerland have instituted regulations on those investments.

Working With Securities Laws

Securities laws regulate investments and issues of securities both outside of and within blockchain channels. Just because the medium by which the investment is taking place changes doesn’t mean that the laws surrounding those investments or security issuances change as well. One has to make sure they remain in compliance with the laws, and some companies are working to put that compliance into the security tokens themselves.

Thanks to blockchain technology, security tokens can check all the boxes of compliance. You just have to make sure all the necessary functions are implemented. First, you’ll need to decide what your security tokens are going to embody. In order to qualify, they need to represent a share of the company or accessibility for the investor to weigh in on business decisions. Additionally, these tokens also need to simultaneously serve as payment instruments that hold some sort of monetary value. Put simply, the issue of the security token would need to have legal liability towards the token holders.

Purchaser Protections

Primarily, the legal regulations around STOs are for the explicit benefit of the purchaser. Rather than buying some intangible IOU as you would with ICOs, a security token should be easy to liquidate. Unlike traditional venture capital or utility tokens, security tokens check all the boxes when it comes to token benefits. They are aligned with the issuer, the investor can liquidate them, they have access to expert networks, they develop communally, and they are in compliance with regulatory entities.

Obviously, purchaser protection laws are going to vary quite a bit around the world. If you’re looking to issue security tokens for your startup, you need to make sure you’re in compliance with your local laws whether you’re located in the United States, the European Union, or anywhere else. Additionally, investors will be protected by unique laws in their own countries that may differ from the country of origin of the security token.

Make Sure Your STOs Are in Compliance

If you’re thinking about issuing STOs for your startup, it’s essential that you remain in compliance with all securities laws no matter what country you’re located in. Investment is heavily regulated to protect investors from overly risky and fraudulent transactions. Fortunately, the security token itself provides all the compliance you need. Get started today on funding your startup with STOs or investing the smart way into a company offering security tokens.

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