Security token offerings (STOs) are blockchain's hottest new topic, with some experts predicting that the fundraising vehicle will largely replace its predecessor, the ICO, and ascend to $2 trillion in market capitalization by 2030.
Security tokens can be used to represent stock, equities, debt, bonds or assets, much in the same way as traditional securities. However, since STOs are also subject to the same regulations as traditional securities, there’s much more terminology that security token buyers need to know.
Before jumping in feet first, make sure to read these five terms you’re likely to come across in any STO whitepaper. We’ll run through their meaning, and how to figure out their effect on your potential purchase.
Expel any notion you have about taking your money and running at the first opportunity – early accredited investors in STOs will usually find their tokens are locked into what is known as a ‘vesting period’.
Under Regulation D exemptions, which we’ll look at later, accredited investors who buy into token sales early will have their tokens locked for a 12 month period.
Literal Definition: Vesting will issue tokens to long-term investors at a designated rate per month, or alternatively locks tokens purchased at an early stage to be released at a pre-determined date in the future.
Practical Definition: You may not be able to trade tokens you bought during a security token offering on secondary markets straight after the token sale ends.
Similarly, it’s highly likely that accredited investors who have realized a significant return on their security tokens already will sell at least part of their holdings when their vesting period expires. This could cause a sharp drop in price for regular, unaccredited investors.
2. Preferred Shares
Like traditional shares, security tokens can be used to represent ownership or equity in a company, and when a company chooses to sell equity or ownership through an STO, they may designate certain tokens as ‘preferred shares.’
Preferred shareholders do have certain benefits over common shareholders, but they’re usually not given voting rights.
Literal Definition: Preferred shareholders, or token holders, take priority over common token holders when it comes to dividend payouts.
Practical Definition: Got common shares? Expect to receive less dividends than preferred shareholders. Preferred token holders will have a higher claim on dividend yield proportional to their stake, and also, during a liquidation event, they will walk away with a greater claim on assets.
3. Common Shares
Don’t write common shares off as a bad deal just yet. There’s plenty of ways common shares can perform well for their shareholders, and it’s just as well – because this is the type of ownership token which retail investors, like you and I, are most likely to be offered during a public token sale.
Common shareholders are usually granted voting rights, and likewise common shares have typically outperformed preferred shares in the long run. This is because common shares, due to their less stable nature compared to preferred shares, are more likely to increase in price.
Literal Definition: Security tokens sold as common shares represent ownership in the issuing company, allow voting rights and may pay share dividends.
Practical Definition: Investors with common shares are less likely to receive significant payouts during a liquidity event.
Exemptions, especially in the U.S., are regulations which allow security token issuers to bypass complex registration procedures traditionally involved with launching a public offering with securities.
But just because STOs can use exemptions doesn’t mean they’re not liable to their token holders whatsoever. Issuers are still required to perform due diligence and whitelist their investors.
Literal Definition: Through exemptions, like Reg D, security token issuers can raise capital without the requirement to register those securities with the U.S. SEC.
Practical Definition: While Reg D filing and other forms of exemption allow issuers to offer securities more time and cost effectively, token offerings must still comply with laws governing the sale of securities, and investors still have to be accredited.
5. Liquidity Event
It’s the day many founders have been dreaming of – another larger company wants to acquire their company. Alternatively, the company may be going public through an IPO. But what does this mean for you as a security token holder?
Most STO whitepapers which offer ownership or equity through a token will have a clause in place for liquidity events.
Literal Definition: Your security tokens for equity or ownership are now redeemable as cash, as the company you invested in has either been purchased or gone public (via an IPO).
Practical Definition: For early investors, this is the chance to sell their tokens which represent ownership or equity, and to do so at a price in line with the company's valuation. Conversely, large token holders may wish to stay on and collect dividends.
Know The Space Before You Buy Your Way Into It
Make sure you’re fully aware of all the key terms above, and what they could mean for your investment. When does the early-investor vesting period expire for that security token you’re thinking of buying? In every case, it’s important to read the STO’s whitepaper and other documents carefully, arming yourself with the best knowledge available.
Rocket, from Vanbex, not only lets companies and individuals launch the token sale they want but also provides a well-organized landing page where potential buyers can easily review a project’s vital information. It’s the quickest and easiest platform for ensuring you have all the intelligence you need to make informed financial decisions.
And finding the data needed to make informed financial decisions is what will let investors carve out of slice of the gargantuan STO market for themselves.