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Security Token Offering


A security token offering (“STO”) is the tokenisation and offer to the public of certain rights or obligations over something tangible.

Security tokens have similar characteristics to traditional securities and are thus considered financial instruments subject to existing securities laws and regulations.  Differently from traditional securities, the ownership is however passed using blockchain.  They are programmed to act in a certain way, without the use of a third party, this rendering their acquiring, transfer, disposal and corporate actions easier, quicker, safer and usually cheaper.

Rights and obligations on securities can be tokenised, these including the right to participate in a company’s profits in case of equity or to receive a coupon payment or interest in case of debt.

Voting and co-determination rights can also be tokenised and this can result in situations in which, for example, seed investors in an investment vehicle will have an attached voting right as to where the initial pool of investment will be allocated and at which portion.

STO Contracts

Ethereum Smart Contracts, or more precisely Chain Codes, are also used to issue securities and other similar assets over the internet. These Chain Codes were however not intended to serve this purpose since they are not human readable, and their legal binding is questionable.  If anything goes wrong, it is hard to prove a case against fraud or scam in a court of law.


Ricardian Contracts address the limitations of these Chain Codes in that they are:

  • Available in printable form and are thus human readable;

  • Program writable;

  • Signed by the issuer and other parties.

The following are some essential contents of Ricardian Contracts:

  • The Parties;

  • Definitions and interpretations;

  • Place and date of issue;

  • Clauses and conditions, as in written legal contracts;

  • Governing law & jurisdiction and how to tackle disputes;

  • Signatures.

They are also smart and efficient in that they can:

  • Enable control on the transfer of a backing asset from the Originator to the STO Issuer to the Investor, such as for example, the transfer of real estate property backing a STO;

  • Enable control on transfer of investment consideration (fiat or crypto) from investors to the wallet address of the STO Issuer;

  • Have logic algorithms to monitor:

    • if soft caps are reached and if so the corresponding number of tokens to be automatically transmitted to the investing wallet addresses on the specified date; or if not reached or the hard cap exceeded, it will also specify the necessary actions;

    • “Whitelisting” and “blacklisting” criteria though which investors or investments are allowed or disallowed;

    • Time, for example, deal needs to be reached within 3 months, otherwise contract becomes null and void;

    • Exceptions;

  • Enable automated corporate actions, such as payment of dividends or coupons to cum-div shareholders or bondholders, respectively.

Issuers which are not using Ricardian Contracts might not be serious enough to offer their STO investors a legally binding contract or worse, they might be a possible fraud or scam.

STO Vehicle, Form & Advantages

The vehicle from which the STO will be issued and its form is important since it will have an impact on the marketability and legality of the STO as well as its future net asset value.  Things such as, type of target investors, assets being tokenised, rights to be allowed, timeframes, jurisdictions of investors, assets and issuer, will all play their part in the determination of the type of vehicle and its form. 


The following are amongst the advantages of STOs, the extent of which will also be determine by the type of vehicle from which they are being issued:

  • Issuers of STOs are in effect issuing securities from their company and are therefore legally and regulatorily bound to security holders. Much like traditional investment contracts, investors can receive an asset-backed token in return for their investment with the attached rights and obligations as specified in a prospectus;

  • STOs require compliance with established laws and regulations and thus the potential for scams is drastically reduced, particularly when using the right vehicle, contracts and jurisdiction;

  • The process of issuing STOs is cheaper and easier than issuing equivalent IPOs, although it may arguably be costlier than ICOs;

  • STOs offer the liquidity of a secondary market;

  • Through centralised records, the problems associated with lost keys, hacking and theft can be reduced.

Once the preparation stage is over, one should be looking at ways to increase the buzz surrounding the STO.  It is easier to market an STO than an ICO because STOs offer the best of ICOs and traditional stocks. 


The jurisdiction chosen is also an important factor and master-feeder structures in different jurisdictions can be an option to attract investors which would otherwise be difficult to reach.

STO Jurisdiction

When shopping for a jurisdiction from which to issue the STO, the following are amongst the factors to consider:

  • Technology-friendly government policy - governments which harnessed blockchain, digital assets and tokenised securities will provide the necessary blockchain legislative framework to work on.  Some will also be promoting the establishment of blockchain companies, though public speeches, fiscal and other incentives;

  • Established financial legislation – STOs are essentially securities governed and regulated by existing laws and regulations.  Technology-friendliness is not enough and this needs to be backed by the necessary legislation and experience in the financial and capital markets;

  • Fiscally friendly environment – taxation is one of the main costs and can wipe out 20% or more of issuer’s profits, in some cases approaching a total 50% in the hands of investors.  It is thus important to manage taxation, including on the following:

    • investors’ subscriptions, liquidations, income and capital gains;

    • service providers, including the issuer, promoter, asset manager or investment advisor;

    • the vehicle which holding assets backing the token.

  • Approachable and knowledgeable Regulators – there are jurisdictions with a reputation for having an accessible Regulator who welcomes a consultation with them at the planning stage and remains open for further discussions during the licensing process. Blockchain is a new area and approachable Regulators who can provide guidance when needed and who are not there just to rubber stamp issues are the ones to look for;

  • Good reputation, consistency and quick to adapt to changing needs and technology.

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