A security token offering (STO) is a sale of securities, such as shares, bonds or fund units, where a blockchain records and transfers ownership as tokens. An STO accepts from the start that securities law applies, so the token itself enforces investor checks and transfer limits. This guide covers the legal routes in the US and EU, the steps of STO development and what the first offerings taught issuers.
STO, ICO and IEO compared
An ICO sold tokens to anyone. Most ICO projects claimed that their tokens were utilities, not investments, and regulators often disagreed. US enforcement in the late 2010s applied the Howey test, under which a token sold with an expectation of profit from a team's work can be an investment contract, and therefore a security.
An initial exchange offering (IEO) moved the sale onto a centralized exchange but did not change the legal analysis. An STO starts from the opposite assumption: the token is a security, so the offering follows a securities route. For the other two models, read the guides to ICO development and initial exchange offerings.
Legal routes for a security token offering
United States
| Route | Who can invest | Raise limit | Main conditions |
|---|---|---|---|
| Reg D 506(b) | Accredited investors, plus up to 35 sophisticated non-accredited investors | None | No general advertising. Form D filing. |
| Reg D 506(c) | Accredited investors only, with verification | None | General advertising allowed |
| Reg S | Non-US persons, outside the US | None | No selling efforts aimed at the US |
| Reg A+ Tier 2 | Anyone. Non-accredited investors face investment limits unless the security is listed. | $75 million per 12 months | Offering circular qualified by the SEC, ongoing reports |
| Reg CF | Anyone, with limits per investor | $5 million per 12 months | Sale through a registered funding portal or broker-dealer |
Securities sold under Reg D are restricted, and resale usually waits until Rule 144 conditions are met. After that, trading usually runs through a broker-dealer or an alternative trading system (ATS).
The SEC changed its approach to crypto in 2025 under a new chair, dropping several enforcement cases and starting a program to update its rules for tokenized securities. On 17 September 2026, the SEC issued an exemptive order for tokenized versions of exchange-listed stocks, which lets qualifying venues trade those tokens for five years without registering as exchanges. The order does not cover new issuance, so an STO still needs registration or an exemption under the Securities Act. Check the SEC's current guidance before you plan an offering.
European Union
MiCA has applied to crypto-asset service providers since 30 December 2024. MiCA excludes tokens that count as financial instruments, so security tokens fall under MiFID II, the Prospectus Regulation and the other rules for transferable securities. The DLT Pilot Regime has applied since March 2023 and lets authorized market infrastructures run trading and settlement systems on distributed ledgers with specific exemptions. In December 2025, the European Commission proposed to raise the Pilot Regime's size limit per infrastructure from €6 billion to €100 billion and to remove the time limit on permissions. Germany's law on electronic securities lets issuers record some securities on a crypto ledger.
Other countries
Switzerland's DLT Act recognizes securities that exist only on a ledger. Singapore treats most security tokens as capital markets products under the Securities and Futures Act. The UK regulates them as specified investments and runs a Digital Securities Sandbox for market infrastructure. The country guides cover local regulators.
STO development: the lifecycle
- Structure. Choose the issuing entity, the terms of the instrument, the legal route, the target investors and the countries.
- Documents. Prepare a private placement memorandum or an offering circular, a subscription agreement and token terms that describe the on-chain controls.
- Technology. Build a permissioned token from the ERC-3643 or ERC-1400 family, an identity registry, an investor portal and audited contracts. The tokenization platform guide describes this stack.
- Service providers. Appoint a transfer agent or registrar, a custodian and a KYC provider, and add a placement agent or broker-dealer where the route needs one.
- Marketing. Market only within the rules of the chosen exemption. The STO marketing guide covers those limits.
- Subscription and issuance. Check each investor's identity and eligibility, take payment, mint tokens to verified wallets and file the required forms.
- After issuance. Report to investors, pay distributions, handle corporate actions, approve transfers and arrange secondary trading on a licensed venue.
What the token contract enforces
| Control | What it does |
|---|---|
| Identity registry | Links each wallet to a verified investor |
| Transfer rules | Blocks a transfer to a wallet that fails the eligibility checks, such as country or investor type |
| Lockups | Blocks transfers during a holding period |
| Forced transfer and recovery | Lets the issuer or agent move tokens after a court order or a lost key |
| Pause | Stops all transfers during an incident or corporate action |
Lessons from the first STO wave
- A token does not create liquidity. Many STOs from 2018 to 2020 found few buyers on secondary venues. Issuers now plan for holders to keep the token until maturity or a defined exit.
- Small raises cost too much for their size. Legal and servicing costs stay roughly the same for a small raise and a large one. STOs have worked best for instruments that already had investors.
- Open standards help. Early issuers with custom token designs were tied to one vendor, and ERC-3643 and similar open standards make tokens easier to move between platforms.
- Institutions lead the current growth. Tokenized funds and debt from established asset managers grow faster than tokenized startup equity.
Frequently asked questions
Can a startup raise its seed round as an STO?
Yes, usually through Reg D or Reg CF in the US, but tokenization adds cost and work. An STO suits a startup that expects many investors and many later transfers, because a token register makes those transfers simpler.
Do security tokens trade on crypto exchanges?
Not on ordinary crypto exchanges. Security tokens trade on licensed venues, such as an ATS in the US or a multilateral trading facility or DLT market infrastructure in the EU, and only eligible holders can trade them.
Is an STO cheaper than a traditional private placement?
Rarely at first, because the legal work is similar and the issuer adds technology and audits. Savings come later, in administration and transfers, when the issuer has many holders.
Does MiCA cover security tokens?
No. MiCA excludes crypto-assets that count as financial instruments, so those tokens stay under existing EU securities law.
Did the SEC's 2026 order make STOs easier?
Not directly. The September 2026 order covers trading of tokenized exchange-listed stocks on qualifying venues. The order does not cover new issuance, so an STO still needs registration or an exemption.