STO (Security Token Offering) is a fundraising in which a company sells blockchain tokens representing equity, debt, fund units or rights to an asset's income, and treats them as securities from day one. Unlike an ICO, the token is issued under a prospectus, registration or securities-law exemption, so disclosure, investor protection and transfer restrictions follow conventional rules. Smart contracts limit transfers to wallets that passed KYC and eligibility checks and can pay coupons automatically. In the US, offerings use exemptions such as Regulation Crowdfunding, Regulation D and Regulation A; in the EU they fall under MiFID II and the Prospectus Regulation, with trading under the DLT Pilot Regime. A MiCA CASP authorisation alone does not cover them.
How does a security token offering work
The issuer creates the instrument (for example a profit-participating note or a class of shares) and records ownership on a distributed ledger instead of, or alongside, a traditional register. A smart contract encodes transfer rules: only wallets that passed KYC and investor-eligibility checks can receive the token, lock-up periods are enforced on-chain, and coupons or dividends can be paid to holders automatically. Investors subscribe through a licensed intermediary, and secondary trading is only lawful on a venue authorised to trade securities.
Security token offering regulation in the US
In the US an STO uses the same exemptions as any private or small public offering. Regulation Crowdfunding allows up to $5 million in 12 months, Rule 504 of Regulation D up to $10 million, and Regulation A up to $20 million under Tier 1 or $75 million under Tier 2. On 18 August 2026 the SEC proposed Regulation Crypto Assets, with a startup exemption of up to $5 million over four years and fundraising tiers of $20 million and $75 million; the comment period closed on 20 October 2026, so the rule is not yet in force.
STOs in the EU
MiCA does not cover tokens that qualify as financial instruments, so an EU STO falls under MiFID II and the Prospectus Regulation. Trading and settlement of tokenised securities is enabled by the DLT Pilot Regime, which has applied since 23 March 2023. It admits shares of issuers with a market capitalisation below €500 million, bonds with an issue size below €1 billion and fund units with assets under management below €500 million, and caps the total value admitted on one DLT infrastructure at €6 billion. Operators need a DLT licence as a DLT MTF, DLT settlement system or combined DLT TSS.
STO vs ICO in practice
A company raising €8 million through an ICO in 2018 typically sold a "utility" token to anyone with a wallet. The same raise as an STO today would be a tokenised bond or share class sold to verified investors under an exemption or prospectus, with whitelisted wallets and a disclosure document. Costs and timelines are closer to a small bond issue than to a token sale.
For a buyer of a crypto or investment firm, the licences behind any STO work matter more than the tokens: placing, dealing or custody of security tokens requires investment-firm permissions, which a MiCA CASP authorisation alone does not provide.