The ICO has come under a lot of scrutiny recently. In America, the SEC has tried to make startups who raised money via an initial coin offering return the cash to investors. The problem? The lack of a legal definition over whether a token is a security or a commodity has caused friction in the community.

Can the STO solve the problem? We find out below.

What is an STO?

STO stands for Security Token Offering. It’s a new, more regulator-friendly alternative to an Initial Coin Offering (ICO) that enables a business to sell shares of its company in the form of a tokenized asset. In an STO, investors purchase security tokens that represent an ownership stake in a company, like a traditional stock.

What’s the difference between an ICO and an STO?

An ICO allows a company to raise money by selling a “utility token,” which provides investors with access to certain products or services, without giving away a piece of its business.

Read more about the difference between a security and a utility token.

An STO allows a company to raise money by selling a “security token,” which represents an ownership stake in the company and may provide voting rights to the token holder.

ICOs are typically reserved for blockchain companies, since the utility tokens being sold must have a specific use within the company’s ecosystem or on its platform.

Security Token Offerings can be used by any company, since security tokens can be sold as shares of a business even if the business does not make use of blockchain technology.

ICOs have generally been open to any and all investors who meet an individualized set of guidelines outside of a standardized regulatory framework.

STOs meanwhile, are geared toward institutional and accredited investors and are designed to satisfy the requirements of global regulatory bodies, like the U.S. Securities and Exchange Commission (SEC).

Why are companies switching gears?

From a regulatory standpoint, the SEC has said it views nearly all tokenized assets, with rare exception, as securities.

Recently, companies that sold their tokens as “utility tokens” through an ICO, without registering these assets as securities with the SEC, have been forced to pay penalties and refund investors.

Unless a company can make a clear-cut case for its token being classified and sold as a “utility token,” like Civil. many companies are turning away from ICOs in favor of STOs to avoid running afoul of SEC regulations.

The future

So far, fundraising for blockchain companies has largely been unregulated. In future, that's going to need to change. There has been an evolution in the legal definition of tokens and many believe Security Token Offerings are a step in the right direction.