In opposition to tokens offered in an ICO which do not give any rights or obligations, and instead provide access to a specific network, platform or service, tokens offered in an STO are actual financial securities that are backed by something tangible like the assets, profits, or revenue of the company, and which offer legal rights such as voting or revenue distribution.
A security token performs the same function as conventional security, except that it confirms ownership through blockchain transactions and also make fractional ownership possible. Security tokens are subject to federal laws that govern securities, protecting investors on some levels. Security tokens are programmable. Since these securities are tokenized on a blockchain, “smart contracts” can make them act in a certain way, without the use of a third party. For example, a loan “tokenized” on a blockchain could automatically make payments without the use of a traditional middleman like a bank.