What to Consider When Buying Security Tokens
Security tokens are digital assets that represent ownership in a company or a financial asset
"What to Consider When Buying Security Tokens"
Security tokens are digital assets that represent ownership or other rights in a company or a financial asset, such as stocks, bonds or other securitized assets. For example, instead of issuing stock or through debt financing, a company looking to raise capital can decide to issue fractionalized ownership of their company through a process called security token offering (STO). The company could then offer this token on an exchange or other appropriate investment platform that allows digital security tokens, and ownership would be recorded on the blockchain.
If you are considering buying security tokens, it’s important to carefully evaluate the risks and potential rewards, keeping the following in mind:
- Availability: Security tokens are not yet available to retail investors, but a number of companies are working to develop and offer them.
- Regulation: The SEC must approve security tokens, which will be subject to federal and state securities laws. Make sure the company issuing the security tokens is following all relevant regulations and is transparent about its operations. Outside the United States, the process and laws are varied. In Europe, for example, the structure might be a DAO (Decentralized Autonomous Organization) where decisions and voting power are distributed to the community.
- Investment potential: As with any investment, it's important to carefully evaluate the potential return on investment. Research the company issuing the security tokens and its financials to determine whether the investment is a good fit for your portfolio. How? By asking for prior projects the company has completed and the ROI on those projects.
- Liquidity: Liquidity refers to the ease with which an asset can be bought or sold. Security tokens may not be as liquid as publicly traded stocks, so it may be more difficult to sell them if you need to. Consider this when deciding how much to invest. You should also do some upfront research on the marketplace where the tokens will be trading so that you understand how easy or difficult it’s going to be to trade securities.
- Custodianship: Since security tokens are digital assets, it's important to consider how they will be stored. Look for a platform that uses secure, reputable custodians to ensure the safety of your investment.
- Due diligence: As with any investment, it's important to do your due diligence. This means thoroughly researching third parties involved in the STO process, in addition to the company issuing the tokens. Make sure you understand the risks and potential rewards of the investment.
By considering these factors, you will be better equipt to make informed decisions about whether security tokens are a good fit for your investment portfolio.