A security token offering (STO) is a method of raising capital in which a company issues digital tokens that are legally recognised as securities. Unlike Initial Coin Offerings (ICOs), which typically offer utility tokens with limited regulatory oversight, STOs provide tokens that represent real financial assets such as equity, debt, profit shares, or ownership in real estate. Because these tokens qualify as securities, they must comply with relevant financial regulations in the jurisdictions where they are offered.

In an STO, the issuing company creates security tokens on a blockchain using smart contracts. These tokens can grant investors rights such as dividends, voting power, revenue sharing, or interest payments. The structure is similar to traditional securities like stocks or bonds, but the ownership records and transactions are maintained on a distributed ledger, improving transparency and efficiency.

Security token offerings emerged as a more regulated and compliant alternative to ICOs after many early token sales faced legal scrutiny. STOs typically require investor verification through Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. In some cases, participation may be limited to accredited investors.

One key advantage of STOs is fractional ownership, allowing smaller investors to access assets that were previously illiquid or restricted. While STOs offer enhanced transparency and regulatory protection, they also involve strict compliance requirements and legal complexity for issuers.