Preparing a Security Token Offering is a complex process that will shape the whole campaign for better or for worse depending on how you prepare. Those that fail to plan and prepare are planning and preparing to fail. In this article, we will go over the six essential preparation steps for a successful STO.
Step 1: Make Sure That The STO is Right For Your Company
That’s crucial. It is true that STOs have numerous benefits to traditional fundraising methods but for some companies, traditional solutions might be a better option. An STO is more flexible than traditional venture funding. Although token holders of your STO will expect returns, you’ll retain more control over the decision making process than if a venture fund were to provide an injection of capital.
With that being said, an STO is not necessarily the right choice for every fundraising scenario. Businesses with expectations of low initial growth or revenue will be less likely to attract investment. Therefore, if you are confident you can achieve a positive return for your investors within a reasonable time frame, and that your business would be well-suited for a model of transferable and highly liquid shares, then an STO could be the perfect fit. The other thing that is confusing for some people is that they think that STO is applicable for blockchain startups only which is completely wrong. Successful companies and traditional businesses can also leverage an STO to attract funds and maybe develop a new product, or expand their business line.
Step 2: Decide on Token Sale Terms and Requirements
It is important to decide on the key criteria of the campaign.
- Choose the financial instrument to be used beforehand;
- Amount to be raised (both Soft Cap and Hard Cap);
- Minimum initial investment amount;
Take a closer look at the first criteria as it will define relations with your investors. A common misconception about security tokens is that they always represent equity which is not always the case. Just like traditional securities, security tokens do not have to represent any kind of ownership in a company. They can relate to debt, revenue shares or other valuable assets.
Equity tokens allow token holders to become partial owners of your company. Here are the most important aspects:
- Token holders own a part of your company
- Token holders receive dividends
- Traditionally, in most cases, token holders can be able to influence the direction of your company by voting
Debt security tokens are tokenized assets that represent debt instruments such as corporate bonds. In most cases, interest payouts for bonds are regular despite companies performance. Typically, the behaviour of debt security tokens is dictated by two key characteristics:
Dividend: Debt security tokens are typically structured to generate a regular income based on the terms of the underlying debt instrument.
Risk: Debt security tokens are subject to the default risk of the debtor and risk drastic changes in the valuation of the debt.
Bonds are attractive to investors mostly due to their stability, as bondholders will get a payout no matter what. So in most cases, investors are unlikely to purchase bonds of a small company or a startup because investment in a small company or startup is riskier.
With stocks it is a bit different, investors expect the growth of the stock price which will guarantee higher profit for them.
Basically, when you choose the instrument for the issue, you choose which rights will token holders have just like on the traditional market. On Tokenomica it’s easy to choose the right financial instrument for the issue. All it takes is filling out a simple questionnaire, that intuitively guides you through all the options available and helps you decide on the outcome.
This choice will depend on your business model and your plans for generating revenue. It also depends on which stage your company is at the moment. Once you have chosen the instrument, it’s time for all the legal work.
Step 3: Choose Jurisdiction
Choosing the right jurisdiction is vital for your campaign. Strict regulation is one of the key features of security tokens and it will pretty much shape the way your campaign will be conducted. Let’s quickly go over different rules that exist in different jurisdictions. In the European Union, you must draft a prospectus and comply with security requirements. But it won’t be needed in case your campaign meets the following requirements:
- STO campaign raises less than €5 million in a year. (n some EU-countries, the number can get up to €8 million).
- Tokens are sold to 150 people or fewer.
- Each token is sold for at least €100,000 and at the same time, each investor buys at least €100,000 worth of tokens.
Malta is inarguably one of the best countries to go to in order to launch your STO campaign, especially considering that the country’s officials have repeatedly expressed their willingness to turn Malta into an international hub for STOs. The country has decided to establish a legal framework for STOs based on three acts that established the regulatory framework for cryptocurrency, blockchain and distributed ledger technology (DLT). Along with that, you will need to comply with all AML and KYC requirements.
Learn how to issue your security token Malta: a complete legal guide.
Switzerland is also one of the world’s best jurisdictions to launch an STO. STOs are regulated by the Swiss Financial Market Supervisory Authority (FINMA), which treats security tokens similarly to conventional securities such as stocks, futures, and bonds. As such, any company that is to conduct an STO has to comply with the security laws. Within the same vein, STOs have to comply with KYC regulations, in order to prevent various forms of fraud.
Moreover, STOs are also subjected to the Swiss “Big Five” Banking Regulations – The Anti-Money Laundering Regulations, the Stock Exchange Act, Financial Market Infrastructure Regulations, Banking Regulations, and Collective Investment Scheme Regulations. These regulations are formulated to promote a fair and ethical market environment and to protect investors.
Estonia is following in Malta’s footsteps via establishing a friendly legal environment for security tokens. The Estonian Financial Supervision Authority (EFSA) treats security tokens as traditional securities, according to the legal definition introduced via the Securities Market Act (SMA) and the Law of Obligations Act (LOA).
All STOs should be supervised by the EFSA, which requires the issuer of an STO to present a prospectus including all the information included in the Prospectus Regulation (Regulation (EU) 2017/1129).
Gibraltar’s government is another European supporter of tokenization. They have recently introduced an approach that would cater to “the promotion, sale and distribution of tokens.” The idea is to create a structured token-based secondary market and provide official advisory procedures for token sales within the jurisdiction of Gibraltar. The regulator has created specific criteria for distinguishing between security and non-security crypto coins.
Step 4: Plan Your Tokenomics
The other vital thing that you need to decide is how many tokens you wish to create and what price. Here are the main things you will have to choose:
- How many tokens are to be created.
- How many tokens will be held by your company.
- Vested schedule for seed investors and founders/team, lock period
- How much equity/revenue will be distributed per token.
- What price you expect the token to be sold at.
Step 5: Create a Whitepaper
An STO’s whitepaper is the main document to educate potential investors about the product. An effective STO whitepaper should be concise and precise while capturing most of the important information. It should be focused on a product and business as a whole but not blockchain. Usually, a whitepaper has the structure somewhat close to the one below:
- Legal Disclaimer
- Product Details
- Industry Overview
- Technical Architecture
- Legal Structuring
- Financial Model
- Go-to-Market Strategy
- Assets or another type of security associated with the token
- Tokenomics and Token Usage Details
- Team members and Advisory Board
Step 6: Marketing and Promotion
Finally, you’ll need an effective marketing campaign in place to launch your STO and get it in front of eligible investors who will be willing to fund your venture.
These steps might look a bit complicated but with Tokenomica’s Security Tokens Issuance Platform, we guide you during each step of the process, making STO preparation as easy as it can be. One other thing that you might’ve noticed, there were no tech details mentioned in the article: the reason for this is that our platform is completely automated. You don’t need to worry about it, all you need to launch an STO is a browser, we will help you with the rest. All projects will be listed in the same marketplace, therefore, we will take care of KYC and AML for you and help you manage all post-STO activities. Our legal partners will be able to prepare all the necessary paperwork for your campaign.
On June 11th, 2019 we will be launching the STIP Sandbox where you will be able to conduct your own virtual STO campaign on the Waves Testnet and create your security token.