Complete Guide to Security Token Offering

Introduction

Any new technology will find its success when it has found a perfect way to balance the values of its traditional manifestation and the advantages of the new technology. Blockchain is one such technology that has been going through its adolescence of acceptance. When the Bitcoin was introduced in 2009, there was a lot of resistance. However, the world of technology has evolved to accept the advantages brought about by blockchain.

One of the manifestations of this new technology is its accountability. The accountability has led to the creation of tokens. Tokens simply mean a unit that represents something tangible in an ecosystem.

The word ‘tokens’ in the context of the blockchain immediately brings up thoughts about Initial Coin Offerings (ICOs). They were considered to be the most common method for raising funds for cryptocurrency projects and decentralized applications.

What is an ICO? 👈🏻👈🏻

An ICO is a fundraising method that involves distributed utility tokens to the investors. Utility tokens grant access to a utility of the project that is being funded. The tokens go on a crowd sale and they can be bought using either crypto or fiat currency. The token may be static in its pricing or it might increase or decrease depending on the intensity with which the sale proceeds. To ensure decentralization, it is to be kept in mind that a major chunk of the tokens should not be held by a single entity.

The process seems simple and straightforward. However, the lack of regulation has contributed to a lot of fraudulent crowd sale. This had not only tarnished the image of ICO but also anything involving blockchain tokens in general.

In all of these troughs, the utility value of the new technology remained strong. The transparency, security, and immutability of blockchain stood tall. The entire crypto world was on the lookout for a fine line where the value of traditional security flawlessly merged with the technological advantages offered by the blockchain.

The confluence of these two created the new kind of token called the security token.

What is a Security Token?

To understand security tokens, we have to first understand the two terms that make up the phrase. We already have a good idea of what a token is. Let us now look at what security is.

Whether or not a token qualifies as security is determined by the Howey Test. The test simply lists out the conditions for anything to qualify as a security. The conditions are:

• The security should involve an investment of money or some assets tangible in the real world.
• The investment should be done expecting profits.
• The investment should be in a common enterprise.
• The profit should not be determined by the investor but rather by promoters and third parties.

The Securities and Exchanges Commission (SEC) has always held this test as the litmus test for determining whether or not an investment in security.

A security token represents fractional ownership in a real-world asset. The real-world asset defined here can be either an equity or a profit share or a debt. Unlike a utility token, a security token represents a tangible fraction of an asset that has value even outside the crypto ecosystem.

A security token needs to comply with the legal and regulatory requirements of the SEC. They act as bridges between the legacy finance and the blockchain world.

How to Create Stablecoin?

Importance of Security Tokens

• Security tokens are bringing back the credibility that was lost due to the malpractices that tarnished the ICOs and blockchain tokens.
• Security tokens are serving more like augmentations of the traditional financial processes. They bring in more security and transparency without the involvement of third parties and the expenses.
• The elimination of third parties and middleman has resulted in the process of issuing security tokens relatively fast.
• Security tokens have made the world of investments more democratic and global. An investor in any part of the world can invest in a project in any part of the world. This directly translates into a greater number of investors and increased liquidity.
• Security tokens are not confined by trading a window. They can be treated at any time during the day.

There are experts who believe that intermediaries cannot be completely done away with. Without intermediaries, the onus of validating the company, the process of underwriting and preparation of marketing material falls directly on the buyer for the seller. It will only be a matter of time before we find a fine balance between the new technology and its traditional values.

What is a Security Token Offering (STO)?

A security token offering is a crowd sale that involves the selling of tokens that represent fractional ownership of a real-world asset in some form. The STO has to comply with the regulatory requirements of the SEC.

The security token needs to follow the following regulations:

Regulation D — This regulation will allow a particular offering to be exempted from being registered by the SEC, if ‘Form D’ has been filled by the creators, the form filling has to be done after the securities have been sold. An individual who offers this security might solicit offerings from investors in compliance with Section 506C. The section requires that the investors are accredited and the solicitation is free from false claims.

Regulation A+ — This regulation is more of an exemption that allows the creator of the broken to offer security for non accredited investors to general solicitation. However, the limit for the investment is set at $50 million. The issuance of this regulation takes more time and costs more than any other option.

Regulation S — This regulation applies to a security token offering that is executed outside the United States. However, it still requires the company to follow the regulatory requirements of the country where it is supposed to be executed.

Types of STO

As discussed, security token should represent a real-world asset and any security token offering or STO should be backed by something tangible. Based on that, Security Token Offerings are classified into three types:

🔵Equity tokens that represent the value of shares issued by the company on a blockchain. The key difference between an equity token and the traditional stock lies in how the ownership is recorded. The equity token is recorded on an immutable blockchain.

🔵Debt tokens represent debt instruments like corporate bonds and real estate mortgages. The place of these tokens is determined by risk and dividend.

🔵Real assets broken represent ownership of an asset like commodities, real estate or even art. Blockchain technology facilitates transparent record-keeping up of the transactions which help in reducing fraud.

What is the Launch Process?

There are four stages in launching an STO.

⭐ Preparation

⭐Pre-STO

⭐STO for Accredited Investors

⭐Post-STO

• The first step is to come up with an idea and to consult a legal advisor. This will help decide how a token can gain value.
• There are different regulatory requirements when it comes to different geographies. The requirements have to be taken into consideration in line with the place where you are launching your STO. There are some countries like Switzerland and Malta that have been quite flexible and accommodative towards STOs.
• You will need to choose the right security platform. There are a few established security issuance platforms like Polymath and Harbor which can help you launch your STO with the utmost ease.
• Create a compelling white paper. The white paper determines the validity and the value of your STO. All the vital aspects will need to be covered in this comprehensive document. It would not be an exaggeration to say that a white paper has the capacity to kill your offering even before it enters the market if not done properly.
• Gather a team of STO experts to ensure that all the processes are in place, including the creation of the white paper. It is quite known and understandable that STO is relatively new and not everyone might have the expertise it takes to create either the offering or the white paper. Professional help would be of great use at this juncture.
• Create a compelling and convincing marketing website. The website should give all the bits of information that will entice your customer into investing in your token. It can also include elements like sale countdown and support links.
• Herald your offering to the market. There are a lot of websites that have been dedicatedly created for the purpose of listing ICOs and STOs. Listing your offering on this website will help you catch the attention of the right people who are into crypto investments.
• Choose the right partner exchange. It is to be understood that the partner exchange has to comply with the regulatory requirements. For example, an exchange should only allow non-accredited investors from the United States to invest in an STO that falls under the Regulation D exemption.
• Fix the custodians to collateral assets for security tokens. At the time of the organization, it is essential that the assets that are being tokenized is kept under the custody of third-parties. It can be done by using mechanisms like Special Purpose Vehicles (SPVs) or Trust Companies.
• After all the processes above are done, you can create your security token. The technology involved will be discussed later.
• Marketing an STO involves building trust by reaching the right crypto investors. You will need to have a separate fund dedicated to marketing you are offering. In addition to sticking to classical methods like running ads and using social media accounts, you can also consider using the alternatives. You can create Telegram, Slack for Twitter accounts for communicating with groups. You can also target influencers who will catalyze your marketing efforts.
• Crowdsale is the climax of your STO. The sale has to be simple enough like having a button on your website from where investors can buy their tokens after passing the KYC/AML (Know Your Customer/Anti-Money Laundering) checks.
• After the launch, it is essential to provide ongoing support for addressing the various issues that are faced by your customers. Having a ticketing channel and an emergency helpline number will be of great help.
• After the launch of your STO, it is essential to build a product that will support your security token. It is to be informed that the value of your token depends on this product.

Blockchain App Factory Services & Security Token Packages

Blockchain App Factory specializes in 👌🏻 launching a successful STOs. We follow a meticulous process that takes care of every aspect of the STO.

• We carry out the due diligence for tokenizing assets.
• Our consultants for auditing, finance, and legal requirements will ensure that all the regulatory requirements are met.
• Considering the gas prices and the congestion of networks, we build customized blockchains with inbuilt smart contracts.
• We provide a user-friendly dashboard for issuing and fund management.

Conclusion

It can be understood without an iota of doubt that security tokens and STOs are the future of investments. It could be either crypto or real-world investments or even both! If you would like to take advantage of this new technology and launch your own STO, you can get in touch with us. Our dedicated and diligent team will gather your requirements and launch perfectly compliant STO for you.