2019 has been a big year for Security Token Offerings (STOs) so far. In the first five months of this year alone, there have been eight STOs which raised a combined US$97.56 million. STO market activities have ranged from equity fundraising exercises with capital funding of US$2 million to institutional investment deals with a market value of US$1 billion. So, what precisely is an STO?
An STO is basically an Initial Coin Offering (ICO) involving security tokens i.e. tokens whose features and functionalities render them akin to investment contracts. An investment contract is generally understood as an arrangement which entails an investment of money carried out as a common enterprise with an expectation of profit based solely on the effort of others. This definition has been laid out by traditional investment securities laws and the legal precedence set by the U.S. case of SEC v Howey, which has since been accepted by most jurisdictions as the foundation for their respective securities investment laws.
As security tokens generally amount to investment contracts, STOs are invariably subject to regulations in most jurisdictions. Nonetheless, there are quite a number of advantages in using an STO as opposed to the traditional securities issuance framework. These advantages include enhanced liquidity, global connectivity, 24/7 trading, asset interoperability, and, perhaps most importantly, programming flexibility. Programming flexibility enables automated regulatory compliance and addresses a critical issue faced by issuers of securities, particularly those which are offered on a cross-border basis across multiple jurisdictions.
The IMF’s Global Real House Price Index has estimated that the global prices of real estate properties have increased by more than 60% from 2000 to 2018. This has resulted in an illiquid real estate market, where the majority of the world’s population cannot afford to invest. The STO, with its concept of asset tokenization, has brought about a paradigm shift to the real estate market by allowing for easier access to investing in the market.
Asset tokenization refers to the conversion of the financial value of real-world assets into blockchain-based digital tokens. The process of tokenizing a real-world asset results in the production of blockchain-based digital tokens, which are functional representations of the financial value of the relevant asset. In the context of real estate STOs, security tokens function as units of representation of the market value of tokenized real estate properties, thereby allowing fractional ownership of such properties.
Unsurprisingly, the blockchain-friendly island country of Singapore, where land is scarce, is leading the way for Southeast Asian countries in terms of real estate STO development. There is REIDAO, a real estate tokenization platform through which real estate security token holders can trade their tokens. On the other hand, Fundplaces’ Tile tokens allow holders to invest in real estate properties in Australia, the United Kingdom, Germany, and other countries for as little as US$1,000.
In terms of financial security and stability, the real estate market as an investment platform is second to none. However, the exorbitant prices of real estate in most countries have kept property investments out of reach for most. With the advent of real estate STOs, things are about to change for the better, and blockchain will fulfill its role as a tool for democratizing investment by opening the door to the real estate investment market to the masses.
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