What You Need to Know About Security Tokens
The advancements in modern technology paved the way for several investment vehicles to emerge. You may have heard about the Initial Coin Offering (ICO) in recent years, which provide access to a specific blockchain platform but doesn’t offer any obligations and rights. In this case, you may have the impression that security tokens are just the same as these ICOs but this is not true because security tokens are very much different. To delve deeper into security tokens, below are some of the things that you need to know.
What are tokens?
In general, tokens are a mere representation of particular assets or utilities in platforms where the blockchain technology is implemented. Specifically, security tokens represent an investment in a company wherein the holders of these tokens are entitled to ownership rights like revenue distribution or voting. This sets them apart from ICOs which don’t offer any rights because they are not backed by any tangible asset.
Security tokens also come in various forms. One form is the debt token, which is a representation of assets such as bonds and loans that allows the bearer to earn dividends or interest based on the debt instrument represented. Another form is the utility tokens which represent future access or offering to the products and services of a certain company.
Howey Test
The Howey Test is a special kind of test developed by the United States Supreme Court to enable the Securities and Exchange Commission (SEC) to effectively identify security tokens from other types of tokens. During the test, you will be asked to determine whether the token works as a financial investment wherein voting rights are practiced. You also need to answer whether the investment will eventually go to a certain company or even a group of companies.
Another set of questions in the test will help you identify whether it is expected that the acquisition of the token will yield a certain profit or revenue and whether this profit is expected to be generated by third parties. For a token to be classified as a security token, it needs to meet all of these criteria. However, it doesn’t end there because the company offering the security token must be able to meet various requirements as well, such as prospectus requirements, ad hoc reporting, as well as liability for providing any false information.
Benefits of Security Tokens
For companies and investors alike, security token offerings (STOs) provide numerous benefits such as those listed below.
Cost-Effective
With STOs, there are fewer fees to pay because the smart contracts eliminate any intermediaries. Alongside this, there are also no administrative fees when it comes to the buying and selling of the assets. Aside from being cost-effective, the process of buying and selling assets to accredited investors is also done rapidly because the system is automated.
Global Adoption
Another advantage of going for security tokens is that these are eligible for global trading. This means that regardless of anywhere you are in the world, as long as you have your electronic wallet set up properly, you will be able to trade. Just keep in mind that in doing so, you need to comply with different investment laws and regulations.
Fractional Ownership
Security tokens can be broken down into smaller units, which makes it more affordable to more investors who cannot shell out a hefty sum to make a lucrative investment. This allows the company to offer the fragmented units to more investors who are willing to invest their money for partial ownership. Rest assured that these security tokens are transparent, which means that the holders of these tokens only need to show that they have the tokens in their wallets to prove ownership.
Since the security tokens are permanently stored through blockchain technology, they are fully traceable. This means that no matter how many times they are traded or no matter how long they have been in the system, the holder will be able to know its full history. Thus, it can be deemed that it is safer than traditional investment offerings that rely on centralized systems.
There are already several investment vehicles in the market today. However, it is important that you carefully scrutinize each one and take the time to learn whether the investment vehicle you are considering is worth the risk you are taking. Thus, make sure that you learn as much as you can about security tokens because this can just be the way for you to earn a decent revenue and grow your hard-earned money.
