Issuance: How to raise capital with a STO
Interview with Darren Marble — CEO of Issuance
1. Which problem is Issuance trying to solve?
Our team believes that digital securities are the next mega-trend in capital markets, and that deal marketing and capital raising will be the single biggest challenge in the years ahead. Therefore, Issuance is developing a modern marketing platform for digital securities.
2. Why should I tokenize my company shares in order to raise funds?
You shouldn’t. You should raise funds first, and then tokenize after you close your round. This is a common mistake being made by STO issuers. Tokenization is a process: there is cost, time and effort involved, all of which delay capital raising, which is ultimately what the issuer wants. Also — and of equal importance — I think more investors in this space prefer buying equity, not Security Tokens.
So my advice to STO issuers is to raise capital first, then tokenize, and then list their Security Tokens to a secondary trading platform. You accomplish the same objective — providing liquidity through tokenization — through a streamlined process that prioritizes capital raising.
3. What is the biggest challenge doing an STO?
The biggest challenge in executing an STO is crafting a compelling narrative, and presenting that narrative to the right group of investors. Our vision at Issuance is be the leading platform connecting STO issuers to authenticated, interested investors.
We are developing a proprietary matching technology that will allow issuers to target investors who have explicitly expressed interested in receiving certain deals. This will benefit both issuers and investors, ensuring that our investors will, at a minimum, receive targeted deal flow that matches their investment thesis.
Until our platform is live (Q2 2019), we are signing standard marketing agreements with STO issuers, and providing strategic introductions to crypto hedge funds. It’s relationship marketing engagement.
4. How expensive and time consuming is it to do a STO?
Legal costs for a standard Reg D offer shouldn’t be more than $50K, and we’d recommend at that whatever you spend on legal, you should have at least double ($100K) for marketing. It’s kind of the movie business: for every dollar that is spent on production, two dollars are spent on marketing. I think this is roughly how STO issuers should be thinking about their offerings.
The beauty of US securities laws is that several securities exemptions, like Reg D 506(c), Reg A+, and Reg CF, all permit general solicitation. Therefore, your ability to effectively market your deal to likely investors is critical. Don’t expect to succeed without a proper marketing budget and experienced team to support you.
5. What is the most important thing your clients should know about Security Tokens?
Here it is: Just because you launch a STO, doesn’t mean you’ll succeed in raising capital. There are no guarantees on the bleeding edge of capital markets. Secondly, just because you run an STO doesn’t mean you can raise capital at some absurd valuation (ie., $100 million pre-money on your 3-person, non-revenue generating DApp). Lastly, know that if your underlying product is weak, or your team is weak, running an STO won’t fix these problems.
The STO issuers who are successfully funding in this space have incredible teams and are building incredible products. The market is still extremely competitive.
6. What is your best advice to companies considering doing an STO?
My best advice for STO issuers is to hire a savvy securities attorney, and then formulate a thoughtful marketing and distribution strategy.
Importantly, issuers should know that broker-dealers aren’t necessarily the answer to raising capital in this space. In fact, most broker-dealers are struggling to raise capital for their STO clients, because they simply don’t have access to the right network of investors. I’ve seen issuers who spent three or four months working with a broker-dealer, only to come back to us and ask for a marketing contract because their broker-dealer wasn’t effective.
7. Does offering a Security Token have any major impact on future funding rounds for a company, or present any issues with regard to M&A of a company when the Security Token holders may be distributed around the world?
This is to be determined, because we don’t have enough hard evidence to make any confident statements yet. That said, I think if tokenization is done right, and if the issuer is effectively executing on their business plan and growing, then naturally, they will attract capital for later rounds, and some of these companies will be acquired.
8. When will we see the first exchanges enabling trading of Security Tokens?
OpenFinance is currently the only US approved Security Token trading platform. They have two Security Tokens trading now, SPiCE VC, and BCAP (Blockchain Capital). Other Security Token trading platforms will follow, including tZERO. Over time, I believe Bakkt will trade Security Tokens, and ultimately NASDAQ will launch their own regulated exchange, which will surely trade Security Tokens.
9. What was the biggest learning you made during the last year?
You still can’t polish a turd.
10. Where do you see the Security Token Ecosystem in 5 years?
Security Tokens will eventually replaces shares of stock, because Security Tokens will function more efficiently than shares. I believe this will happen over a ten to fifteen year horizon, but it feels inevitable. The world will be tokenized, whether you like it or not.
Thanks for the interview.
Note: This interview was conducted on 24.10.2018