Security Token Offerings
12.12.2018
Author- Rashi Aggarwal
“Virtual Currencies may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”- Ben Bernanke, Chairman of the Federal Reserve 2006–2014
One of the most important discussions hovering the internet nowadays, is the emergence of the security tokens. These tokens are financial securities that are backed by tangible assets, equity, and/ or profits/ revenue of the company.
But first, it is important to know what a token is exactly.
A token is a representation of something in its particular ecosystem. A token has a scope of fulfilling a lot of roles in its native ecosystem. Tokens are vastly different from cryptocurrencies, which are independent of a platform, i.e., can be used as a form of currency outside their native environment. Whereas, tokens only exist on a particular platform. Tokens represent an asset or utility of a company, which is given away to its investors during a public sale, called ICO (Initial Coin Offering).
Cryptocurrencies and STOs have a different consideration in the market. Cryptos like Bitcoin, are considered as “programmable money”, whereas STOs are considered as “programmable equity”. These tokens are subjected to federal securities, regulations and derive their value from an external, tradable asset.
A token has 3 parameters to gain its value, a. Role, b. Feature and c. Purpose. Each token has to fulfill as many properties to have a greater valuation.
The structuring of tokens can vary either on the stage of the company and the capital being raised or a common approach of a 3 tiered structure, being;
- Private Pre-Sale: Open to tier-1 investors at a discount to the main token sale price, often 20%.
- Pre-Sale: Open to tier-2 investors at a lower discount rate than previously mentioned tier-1 investors, often 10%-15% on main token price.
- Main Sale: Open to accredited investors globally at no discount.
It’s essential to know the importance and significance of a particular subject, and in this case, it is the need of the hour to know why are STOs important.
STOs, act like a bridge between legacy finance and blockchain world, hence are improving the sector of traditional finance. They are bringing credibility back in the market, leading to speeding up the execution, and exposure to free market. Security tokens bring liquidity to investors and enable them to participate and trade across the globe.
The regulations incorporated on STOs vary across the globe. Most jurisdictions have laws enforced against fraud that does not provide full regulatory certainty for security tokens.
Discussing about the different laws individually, every state, country deals with STOs in a distinct way. One of the first countries to set up regulations on STO, is Australia. Whereas, Africa does not enforce many laws on the use of cryptos, hence is generally quiet.
Asia on the other hand, has the most mixed views on the regulations on cryptos, but is placing strict rules and regulations either for or against cryptocurrency. Countries like Japan that support the use of these digital assets, have already started setting up STO regulations.
The European Union has formally accepted altcoins for financial purposes but with proper registration and licensing. In Europe, cryptocurrencies must abide AML/KYC policies before being used in any business transactions. In UK, all cryptos are considered as private currencies. As some countries there have introduced STOs as taxable assets, they have created a platform for their citizens to pay taxes in the form of cryptos.
Regulations for STOs are must in North America. Many countries there enforce strict laws on monitoring, supervising and using cryptos. They are also notioned as viable assets for investment. Whereas in South America, many countries use these digital currencies as money, i.e., a person can buy/sell items with tokens, but cannot use them to pay off debts.
Polymath, a platform for trading security tokens is looking forward to create the process of tokenizing securities market in a legal and compliant fashion. To exchanges who wish to issue their security tokens, and to the ones who wish to purchase those securities, polymath offers a suite of services, where the primary development will be with their blockchain, the POLY token and the creation of smart contracts. One of the most viable processes is the KYC, which is critical to purchase securities. KYC is important for both individuals and institutions which wish to get involved into the securities market.
There are a lot of essential steps that an issuer of security tokens requires to go through before launching STOs, like getting the Whitepaper reviewed by unbiased third parties. Launching STOs should cover the basic, major agenda and answers to all questions for the investors to know the reason and the stability of the company before putting in their money. The business plan and model should be kept in the forefront, to differentiate the product/ service being offered by the company from that of the competitors’, to receive enough engagement from the investors.
Assuring the formation of the corporate entity correctly is essential, as it is important and cost effective to be legally compliant from the beginning that to change and reform the corporate structure later. This will in turn ensure the authority for all shareholders and other entities to perform investment.
It is important to run background checks of management and shareholders, prepare essential documents and agreements, which include articles of incorporation, bylaws and minutes of stockholder meetings. Performing proper KYC and AML is to be ensured for the jurisdiction that a company operates in, and based on where investors are headquartered.
As we all know that STOs allow any and every company to tokenize their equity and are not just limited to blockchain companies, these token offerings also provide regulatory compliance.
According to various studies, researchers believe that, STOs are creating a significant impact on the market, will show a growth of the capital market industry in the near future, and will strengthen the blockchain industry gradually.
The introduction of security tokens, is now becoming the “talk of the town”, and everyone is quite eager to know how do these tokens plan to bring around a change in the crypto community. When everyone has a say, there are different opinions, but one fact remains unchanged. STOs are planning a progressive future in the sector with an escalation in growth, perhaps marking its quintessential factor in the blockchain industry.
