Guide To An STO: Types Of Securities
The definition of a ‘security’ differs from state to state. For instance, the European Union (EU) considers the securities to be either shares in enterprises or bonds issued by these enterprises. These would be equity securities and debt securities, but we’ll get to that later. In the US, however, a wider range of subjects falls within the definition of a security.
The so-called Howey Test is commonly used in the US to define whether something is a security or not. To be labeled security, the asset has to meet 4 criteria:
1. It is a financial investment.
2. The investor is expecting profits from his investment.
3. The money is invested in a common enterprise.
4. The profit comes solely from the efforts of a third party.
You’re probably thinking: ‘Hey, but then literally every ICO token falls under these criteria!’ And you know what, you’re generally getting it right! That’s why we at Priority Token strongly recommend our clients to opt for an STO. Otherwise, an ICO can become subject to claims from regulators like the USA SEC for trading unregistered securities.
Therefore it is wise to choose an asset to tokenize in advance so that your crowdsale would look solid from a legal perspective. And this brings us to the types of STO security tokens.
Equity tokens are security tokens that state a holder’s ownership of a share in the underlying enterprise. As with a regular market stock purchase, equity token holders own their given percent of the company. In other words, they are entitled to a share of the company’s profits alongside with a right to vote on the significant decisions concerning the company’s future.
Security tokens don’t give its holder any ownership in the underlying company, but they are backed by the value deriving from this company. This value is based on some metrics related to corporate performance. Investors are buying security tokens with an anticipation that they will increase in value. And when it happens, they can sell it and get a profit.
► Asset-backed Tokens
An asset-backed token is associated with a tangible or intangible object of certain value. It can be essentially any valuable property in the possession of the enterprise, e.g. real estate, a supply of goods, etc.
► Debt Tokens
Debt tokens are mostly equivalent to the short-term loans with an interest rate. By purchasing debt tokens, the contributors essentially lend money to an enterprise with the hope to redeem their funds later with an interest rate added.
Which type of tokenizing is the best for your project? You cannot fly blind here. This has to be a matter of discussion with legal advisors and industry experts. Many details have to be taken into consideration, and we recommend you not to rush into a decision. And of course, if you want a word with us, we are always there to deliberate on your project.
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