What Are STOs? Definition, KYC/AML Compliance, and More

You know how when you buy a house, there are like three to five different people who need to verify you’re not laundering money? Your bank, the title company, the realtor – everyone’s checking the same stuff with various systems that don’t talk to each other.

STOs are trying to fix that mess but for securities. Instead of having multiple intermediaries perform separate compliance checks, everything is integrated into the digital token itself.

But hey, it’s not as simple as the crypto bros make it sound, and it’s not as complicated as traditional finance makes everything, either.

Let’s now walk through what implementing this would actually require.

What Is a Security Token Offering (STO)?

Security Token Offerings, short for STOs, are a fundraising method where companies issue tokens that represent actual ownership of tangible assets. So, when you buy an STO token, consider yourself buying a piece of real estate, stock, equity, bonds, or debt.

And now comes the USP factor: only authorized government bodies and blockchain enterprises issue them.

ICOs and STOs Are Nothing Alike

Remember 2017, when Initial Coin Offerings (ICOs) were everywhere? Companies raised billions selling tokens that were basically digital lottery tickets. Most of those tokens are worthless now because they weren’t backed by anything real.

But STOs are a bit different, and they can hold value. Below’s how both stack up against each other.

Aspects	ICOs	STOs
Asset Backing	Utility tokens with no asset backing	Security offerings are backed by assets such as equity and debt.
Regulatory compliance	Built on an unregulated foundation and often exploited for loopholes	Subject to the security laws of your region
KYC/AML required	Rarely enforced, often anonymous	Yes. Investor identity must be verified before participation
Risk level	Volatile & high (remember the 2018 crash?)	Low volatility
Investor rights	Typically none	Includes voting, dividends, or revenue-sharing

How Do STOs Work Exactly?

Let’s say a real estate company in Texas wants to raise $10 million for a new property development. Instead of going through an IPO, they went for STO.

If John, an investor in Singapore, wants in on this deal. Here’s precisely how it will work:

Step 1: Company prepares a compliant offering

As a real estate firm, you must conduct thorough research and:

• Properly register the offering with the SEC, or another authorized US body.
• Build in KYC checks to filter legit investors from fake ones
• Decide the number of tokens to offer in proportion to the investment received
• Figure out what each token stands for (whether it’s equity, intellectual property, or revenue share)

Once that’s done, the company launches the STO.

Step 2: Investor signs up and gets verified

John finds the offering but can’t just send crypto and disappear. He submits his government ID and proof of address and fills out an investor form. The platform checks him against sanctions lists and verifies he’s actually allowed to invest.

Once John passes these checks, he’s whitelisted. The tokens he gets represent real ownership – rental income, voting rights, and legal claims if the company sells the property.

💡 Quick Facts ●     STOs require a whitelisting process where investors register through the issuer’s website, create an account, and provide needed documentation regardless of jurisdiction. ●     The whitelisting process remains a requirement throughout the entire token lifecycle, including secondary market trading. ●     Investors who haven’t successfully completed KYC/AML processes can’t buy tokens during the initial offering, nor can they trade with other parties unless both have been cleared.

Step 3: STOs issuance and trading allowance

After John gets his tokens, he can:

• Hold for income – Get rental payments sent directly to his wallet
• Trade on exchanges – Sell to other verified investors when secondary markets open
• Use as collateral – Borrow against tokens without selling them
• Vote on decisions – Participate in major project choices

The smart contract handles everything automatically throughout the process. Only verified investors can hold tokens, transfers are tracked, and geographic restrictions are built into the code. No paperwork for every trade.

STO Regulations and Legal Framework in the US

When talking about US specifically, you have two legal paths:

Path 1: Full SEC Registration

This is the same process as a traditional IPO. You file extensive paperwork, get audited financials, submit to SEC review, and if approved, you can sell to anyone – retail investors, institutions, whoever.

The upside is broad market access. The downside is it costs millions and takes 12-18 months minimum.

Path 2: Regulatory Exemptions

Here, you skip the whole registration process but accept certain restrictions on who can buy your tokens and how you can market them. Companies must file Form D with the SEC after their first sale but don’t need pre-approval.

The main exemptions are:

• Regulation D (Rule 506b) – Raise unlimited money from accredited investors plus up to 35 “sophisticated” non-accredited investors. No public advertising is allowed. Most private placements use this.
• Regulation D (Rule 506c) – Raise unlimited money but only from accredited investors, and you must verify they’re actually accredited. You can advertise publicly, which is enormous for token sales.
• Regulation A+ – Raise up to $75 million from anyone, including retail investors. Requires SEC qualification (like mini-registration) but much faster and cheaper than complete registration.
• Regulation S – Sell to non-US investors outside the US. No SEC registration is needed, but you can’t market to US persons or use US infrastructure.

KYC/AML Requirements for STOs: Who Sets the Rules and What They Expect

Unlike ICOs, where companies could wing it and hope for the best, STOs fall under the same KYC and AML requirements as traditional securities.

The difference is how these checks get implemented and who’s responsible for what.

The baseline for verifying STO investors includes full name, date of birth, residential address, citizenship, and whether they’re US persons for exemption rule purposes.

• Identity verification – Submit a government-issued photo ID (passport, driver’s license) from an independent, reliable source
• Address verification – Recent utility bills, housing insurance documents, municipal tax records, or bank statements
• Source of funds – Documentation showing proof of income (i.e., where the investment money is coming from)
• Accreditation status – For Rule 506(c) offerings, issuers must take “reasonable steps” to verify investors are actually accredited.
• Sanctions screening – Checking names against OFAC and other watchlists

Getting Started with STOs the Smart Way

Most STO launches fail because founders underestimate the compliance complexity. You can’t just hire a developer and hope for the best.

Here’s what actually matters when you are starting out:

• Get the right legal help – Find securities lawyers who’ve actually done STOs before, not someone who’ll figure it out while billing you
• Choose your tech carefully – Whether you build custom or use existing platforms, make sure your system can handle compliance automation from day one.
• Sort out KYC early – Manual identity checks will kill your momentum and create compliance headaches down the line.

The KYC piece is where a lot of teams get stuck. You need systems that can verify investor identities, check sanctions lists, and confirm accreditation status without creating weeks-long bottlenecks.

For those looking for solutions, Signzy’s verification platform can help you automate a big part of the process (while keeping you compliant, of course).

If you want to know more about how we can help, book a quick demo here today!