Assessing Security Token Issuance Platforms.
As more mainstream capital begins to move towards blockchain investments in security tokens, infrastructure develops, and products get sold, promoted, and marketed, knowing how to evaluate requirements for services can prove trying. Here’s what matters.
Security Token Issuance Platforms
Broadly, the quality of a security token issuance platform can be assessed across five features, business model, licensing, technology, company, and intuition.
- Business Model
a. Is the investor or the issuer paying for the service?
Multiple models exist in the field at present, some charging the issuer and others the investor. Depending upon the token’s economics, purpose, and it’s underlying security, multiple models and variations can make sense.
b. Is the cost gratuitous?
As few options exist in the market, excessive fees for use of a relatively simple platform in most cases can make the entire raise of a security token a costly experience. If the issuer has tokenized equity in a business or some hard asset, each dollar and token paid in fees can cost the issuer in the long run, even if the allure of the raise can blind in the short-term. Additionally, excessive “on-boarding” fees signify misaligned incentives. Both parties, platform provider and issuer need to bear some of the risk and commitment in entering into an agreement together.
c. Is the fee structure and services model highly rigid?
Companies want to build replicable machines, not bespoke service lines. As such, some platforms refuse to budge and have the deal flow to remain obstinate. From an issuer’s perspective, this makes you a widget, not a human, raising capital for what may take up the next many years of your life.
a. Broker/Dealer? FINRA Licenses?
In relationship to the business model, most every platform of quality charges a % fee of funds raised one way or another. In securities markets, this is a commission, a success fee for the sale of a security. Couched in fancy language or legalese, long-term, the SEC isn’t stupid. Groups charging commissions without the proper regulatory licensing as a broker/dealer and FINRA Series 7, 66, 82 and potentially, 79 licenses operate in a grey legal territory at best. For a platform meant to provide compliance for a STO, this seems like a less than reassuring approach to the core service at hand.
Those with these licenses, can actually help to fundraise beyond just use of their technology as well. Without the fear of legal recourse, platforms that can offer more than just a commodity-type service will build relationships and ongoing businesses that last.
Groups have rushed towards acquiring or registering new ATS licenses as well. Those that possess these, allowing for the secondary trading of private securities, an provide a fuller suite of compliant services then those without.
c. No-Action Letter?
If a service provider has received a no-action letter relative to some service they provide from the SEC, they’ve done well. Essentially, a no-action letter provides the closest thing to “legal” that the SEC will provide. Not only does this require a lot of work and time to receive, but also signifies that the platform itself takes their service seriously and plans for the long-term.
a. Does it work?
It’s easy enough to talk over people’s heads in the blockchain space. When you add in regulatory compliance too, many groups have no idea about what really makes sense or how to assess. Here’s what a platform needs at its core to be an end-to-end Security Token Issuance Platform:
iii. Doc Viewing
iv. Electronic Signature of Subscription Doc
v. Record Retention
vi. The Actual Smart Contracts for Security Tokens with Appropriately Applied Code Corresponding to Exemption Utilized.
vii. Whitelist Wallet To Manage and Track Identity of All Holders of Securities
viii. Communications Function to Token Holders
ix. Ability to Accept Crypto and Fiat
xi. Escrow Solution
xii. Custody Solution
xiii. Tax Treatment and Doc Sharing
xiv. NAV Transparency
xv. Additional Fund Admin Functions
b. Is the solution all APIs and outsourced or in-house?
Teams with less developed technical capacities outsource the development and actual services listed above. This raises the question of what one is exactly paying for and also makes it unlikely that technical issues or future development will mature as well as groups that have in-house talent and tangible experience developing real software products.
c. Does It Look Really Cool?
If we have deal with this stuff, some consideration and pride in the UX/UI for these products speak to a higher level and longer-term mindset of a platform than those building little more than skeletons.
a. Does the company have partnerships with known groups in space?
If an STO does not own their own ATS license and has no partnerships with those that do, then where these tokens will ever become legally liquid and tradable remains a huge open question.
b. Values and Vision?
Why did the company come to be? Are these people that you would want to deal with for a long-time? Do they provide their names and faces on their website or do they seem to want to dissociate their personal identity for their activities?
Have they done past issuances that they can speak to? Can they provide references. Can they show you the code and explain it in human language for the smart contract design and architecture employed?
Nothing is more powerful than your gut. If something feels wrong, it probably is. Trust yourself.
Entering into discussions with these questions in hand will take you a long way in making a better decision for a major partnership. Though we remain in the wild-west in this industry, quality technologies, trust, integrity, and a little bit of magic do exist. Settle for nothing less.
Next week, we’ll cover the evaluation of the STO itself and introduce a framework tool for scoring quality.