A security token is a token that allows the owner of that token a (future) stake in a company or another asset such as a painting, a car or a building, whether it be in the form of dividends, revenue share, or a price appreciation. It constitutes an investment contract and, hence, attracts the attention of the Security and Exchange Commission (SEC). In November 2018, the SEC sent shockwaves through the crypto community by announcing it had charged two blockchain startups with conducting illegal digital token sales. The two companies, Airfox and Paragon, did not commit fraud, they simply did not register their tokens with the SEC (as is the case for the vast majority of token sales in the years 2015–2018). According to the SEC, most tokens can be considered securities and are, therefore, subject to regulation. Security tokens offer the buyer certain rights and obligations.
Most crypto startups aim to avoid being a security token as it means additional scrutiny by the SEC. However, most crypto startups sell their tokens before they have a product and, therefore, the value of the transaction depends on another’s, future, work. These tokens can be considered an investment contract, which further down the track can be changed to a utility token.