6 steps for a Security Token Offering Launch

Preface

A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose. A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose.

STOs would be a process to move traditional assets to blockchain & evolving the way assets are issued, traded, held & transferred. It’s a work in progress with blocks built around it to support the ecosystem.

There are many steps involved in security tokens but here are the 6 basic ones

1 – Asset

First step to find out the asset that you want to tokenize. They could be anything from gold to equity to real estate. For sake of ease, I’ll use the Real estate example since that’s the most lucrative asset class that can be used in STOs. There is an economy of scale that isn’t available to retail investors plus it’s considered to be the safest among majority. Results are not the greatest but significantly low risk/reward along with the perception of physical asset makes it the favourite.

Real estate is a 265 Trillion dollar asset class & only 1% of it is semi-liquid or available to retail investor through complex REIT structures

2 -Prospective

It’s combination of pitch deck & business plan. Once you’ve finalized an asset, you’ve to put down all the pros/cons, risks & rewards on paper. Make sure you’ve kept a contingency & buffer in all your calculations. Rewards always is late since things always cost more & take more time. Be super conservative while putting together the numbers. If you’re able to pull off better results, you’ll make your investors happier but if you’re not able to perform, you’ll have many unhappy customers. As they always say “under promise & over-deliver”. While you may have in-house capabilities, it’s very important to have an independent outside assessment of the project. Brand name accounting or valuations firms are expensive, but they’re well known & does add a high degree of trust in the offering.

3 – Technical

While Blockchain may looks like an alien term to many, it’s fairly easy to launch an STO from technical stand point. It’s almost like setting up an email account. You would need basic information & token platforms have written extensive guides on it. I’ll compare token platforms in a separate blog post. It would be good idea to connect with each of them & assess them. It shouldn’t take you more than 3-4 days in this step. Just make sure you’re credentials are protected

4 – Legal

This part should be taken super seriously since you can land into lot of trouble by not having proper legal advice on your offering. Security offering is overseen by multiple regularity bodies but the most important is Security Exchange Commision ( SEC). Ontario Security Commision ( OSC ) oversees activities involved in Ontario. There are similar organization in every jurisdiction. While offering Security tokens, you’re not just limited to your incorporation jurisdiction but also the investor or even the asset existance. Example is you’re a Canadian Citizen tokenizing a building in Sydney while you’re firm is incorporated in Singapore & your investor is an American Citizen based in Barbados. Now you’ve to make sure you’re not breaching terms of either of the jurisdictions, in this case Canada, US, Australia, Barbados or Sydney. To simplify it, you’ve to set a high bar for participants & a good security lawyer would be able to guide you through. Keep around 30-45 days for this step.

Here are couple of things that you would’ve to deal with while launching an STOs

  • Determine the best structure for the STO
  • Review & draft the rights, dividends language used
  • Preparing a compliant private placement memorandum ( PPM)
  • Preparing a purchase agreement for the buyers
  • Investor qualification questionnaire involving KYC/AML & accreditation process if required by the offering
  • Filing the report with the SEC or respective regularity authority

5- Marketing

Now you’ve to get people interested in your STOs. While you want to be aggressive in reaching out to as many people as possible, you may be limited by who you can offer this because of the accreditation limits imposed by SEC.

Here are the accreditation requirements

  • An annual income of over $200,000 individually, or $300,000 with a spouse, maintained over the previous two years and with the same expectation for the current year.
  • Net assets worth upwards of $1 million, excluding the primary residence (unless more is owed on the mortgage than the residence is worth).
  • An institution with over $5 million in assets — e.g. a venture fund or trust.
  • An entity made up entirely of accredited investors.

Recently few liberal policies have been introduced to allow non-accredited investors to participate, but it does have its own limitations. Transparency should be the top priority & there isn’t anything like limited information.

Investors are generally lazy & for REITS they’re fairly conservative. Your marketing plan should be so clear, concise that it doesn’t requires a PhD in finance to understand it. Provide as clear & concise information as possible. I’ll share some templates on building a good prospective, but here is a good guideline on what to include

  • Legal disclaimers and any other key legal notices
  • The details of your product
  • An overview of the industry you operate in
  • The architecture of your product (technical)
  • The model of your business and your structure
  • How you intend to market your solution
  • What your Tokens are backed by, including any other forms of security that are applicable
  • Details on how the Token can be used and the economics behind it
  • The members of your team and who your technical advisors are

6 – Fund raising

Once you’ve the marketing plan ready, you’re now ready to launch. While it probably be an online process, you should’ve built a momentum offline. There is nothing worse that launching an offering with 0 contributors. Good rule is to have at-least 25% capital committed before hand. Once you’ve launched it, there should be an influx of early contributors to build the momentum. More tips on this specific topic in upcoming blog posts. It’s very important to have a way for investors to ask questions. You can host webinars or Ask Me Anything (AMA) sessions. In case of ICOs companies were keeping a full time community manager to manage social media & messaging apps, but that may be excessive in case of STOs.

Do’s

  • Be transparent, conservative, concise & compliant
  • Over communicate with the buyers.
  • KYC/AML check on your buyer
  • 3rd party audit of your offering

Don’t

  • Use vague language,
  • Provide assurance of guaranteed result
  • Offer a high risk/reward ratio product
  • Solicit investment from non-accredited investor unless you’ve security clearance
  • Sell without legal preparation

Conclusion

I hope this’ll post would’ve helped you in getting ideas on process required to launch an STO. This guide isn’t extensive, but I am launching a podcast & book that would entail lot of information. Subscribe on my website to be informed when it does launch.

While the entire process looks fairly complicated, I am happy to give my feedback or chat about your ideas. Use the link below to contact me.

https://haseebawan.com/connect/

2019-01-14T14:58:25+00:00January 13th, 2019|

51% attack – Biggest Flaw of decentralized proof of work network

Biggest selling point of bitcoin & cryptocurrencies is decentralization & open contributor network (mining) where any one can contribute to the network hash power to reap the benefits, it does opens up the opportunity to bad actors who can take over the network & bend it accordingly. Once they’ve the control of network, they can pretty much do anything they want. These kinds of attacks are not easy in bigger networks such as bitcoin but smaller networks are very much vulnerable to it.

Imagine a single financial institute having control of the entire world ledger where they can manipulate the information & enforce new rules. They can send fake deposits that appear real or deprive any one of their balance.

Yesterday, Ethereum Classic suffered a 51% attack where approximately 1 Million worth of ETC tokens were fraudently transferred on the network. This fraud in specific is “double-spent”, where a single transaction is spent more than once. You can think of it as counterfeit currency that looks 100% as original. This devalues the existing token value since now you’ve more supply that was produced illegitimacy & negatively impacting the tokenomics.

Bitcoin so far has been safe from such 51% attach though there were many potential opportunities. It however has impacted coins with much smaller market cap, because it’s easy to control it. Again, take an example of taking over a small company vs large company. You can purchase a small company stake for much cheaper over large company. Protections in case of small networks are generally small as well.

Easier solution to avoid double spent is by having longer confirmation threshold. While speed is an essence & experience, at times recipients are okay with 1-2 confirmations, but in this case they’ve to rely on 6 confirmations in majority cases. If the network is busy, it may take hours or even days for a transaction to clear. Imagine every bill verified at a toll booth through counterfeit currency checker. There is a tradeoff between experience & protection.

Decentralized networks operate on a trust level where every contributor is expected to act in good faith & by design if 51% of the contributor decide to change something, rest have to follow. This is a limitation in any proof-of-work network. If you remove this clause, it pretty much removes the basic promise of proof-of-work network.

Going a bit deep, I’ll try to explain how it actually happens. Miners are the driving force in any proof-of-work (PoW) network. Their goal is to support the network by validating & storing every transaction on the shared network. This shared network is referred to as “blockchain”. If one of the contributors have got the 51% power, means he has simple majority on the network. He can now forge transaction history, add a new fake transaction or reject any upcoming transaction. Consider it as equivalent to a ruling party with simple majority in the parliament who can rewrite anything they want. Actually, worse than that because here you don’t even know who the ruling party is who can come, conquer & leave without any indication of their identity.

This forge or chain manipulation is also referred as “chain reorganization”. Every chain reorganization has two attributes. depth & length. Depth is number of existing blocks which were replaced & length is number of new replaced blocks.

In all honesty, it’s very difficult to carry on similar attack for long so generally they last anywhere between couple of minutes to hours with rare exception of more than 24 hours. Once there is any suspicious activity detected, major merchants or recipients stop accepting transactions on that network till things have figured out. Once the attack is over, blockchain is resynced excluding all the fraudulent transactions.

Victim in this case is the recipient if he delivered the product with the assurance that the funds are legit. Once the blockchain is reverted back to original form, that transaction doesn’t exist anymore. This also has a major impact on the confidence that users have on the network & can be used to manipulate the prices. Imagine you’ve a massive short position that’s not in your favor & you’ve to cover short. You may be better off by attacking the network rather than covering your short due to margin call.

With smaller networks, it’s very cheap to conduct such activity & interestingly in many cases it’s less than 0.1% of the network value that can bring it to knees.

This also may define a new model for valuations where networks would be valued at multiples of cost of 51% attack. I’ll cover cost of such attacks in next post along with the market cap they’ve. Subscribe to my mailing list to be informed.

2019-01-08T15:47:49+00:00January 8th, 2019|

Happy 10th Birthday to Bitcoin Genesis Block !

Today is the 10th anniversary of bitcoin Genesis block!!! Here is the screen shot

The first Bitcoin block of 50 bitcoins was mined on January 3rd, 2009 12:15 PM CST with the following hash.

0x000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f

Here is the link to 1st transaction

Bitcoin Genesis Block

Concept of Bitcoin was introduced by a pseudo entity Satoshi Nakamoto through a white paper on 31st October 2008. This genesis block was mined on the principles laid out in that white paper

On 3rd Jan’09, The London Times ran a cover story entitled “Chancellor on Brink of Second Bailout for Banks”. This title was quoted and embedded into the very first transaction ever to be included in the new Bitcoin blockchain, by Satoshi Nakamoto.  The block containing this transaction is called “The Genesis Block”

The London Times – 3rd Jan’09

This note has been interpreted as both a timestamp and a comment on the instability caused by fractional reserve banking.

First recipient of the bitcoin transaction was Hal Finney, a cyberpunk who created the first reusable proof of work system ( RPOW) in 2004. He was probably the first person to download the software upon release & was transferred the first set of 10 bitcoins from Satoshi on 12th Jan’09. This was the first ever transfer that took place on bitcoin network.

Bitcoin has sparked a movement or a strong debate in existence of programmable money that leads to open & financial financial system.

It’s been a roller coaster ride. I got involved 7 years ago & thought late to the party. 10 years since first bitcoin transaction & I still think we’re early to the party

Industry has been growing daily defying any resistance internally & externally. This is probably the most undisputed financial technology innovation till date. It’s not just the tech, but combines economical, financial, political & philosophical movement.

Biggest strength of bitcoin is that it’s running now for 10 years in a row with 100% uptime, without a single fraudulent transaction that exists today & not deviating from its original monetary issuance schedule. Only 20% more bitcoins will be issued over next 10 years. In comparison, we’ve no clue how much of government issued fiat will exist even in next 12 months. I am really a fan of the transparency, where I can predict with a very high degree of certainty that every 10 mins, a bitcoin block will be created.

So unless the bitcoin network disappear which I find slightly hard to believe at-least over next 10 years or governments start putting a check on their money printing press, there will be a serious competition for storage of value. I suspect majority of the governments will give up on their currency & adopt another currency. It’s similar to languages where major languages have a network effect. With every passing day, confidence is bitcoin is growing & the pedigree that bitcoin has achieved over it’s competitors is unprecedented

Though we’re very far from where we should be, today’s the day to celebrate the bitcoin genesis block’s 10th birthday. Looking forward

#Happy10thGenesisBlock

2019-01-03T17:15:30+00:00January 3rd, 2019|

Bitcoin ATM ( BTM) – Killer Usecase for Bitcoin

5  years ago, we installed the first bitcoin ATM in Toronto at Decentral. These 5 years passed by quickly. I am humbled by the people I met, experiences I had & opportunities I got through that experiment. 

That venture started as a fun weekend project that turned into a business. Today it’s a thriving company. I’ll cover that story later but today I’ll write about why I think Bitcoin ATM is a killer use case for cryptocurrencies.

It’s fairly easy to buy bitcoins in today’s age & date however it wasn’t the situation in 2013. We had disasters like MTGox in addition to some shaddy exchanges which wanted you to transfer funds to an offshore entity. At time it used to take months before you can see your money in bank account. Bank accounts were also getting shut down for just dealing with an exchange.

Idea behind Bitcoin ATM was very simple. It’s a simple machine that converts fiat into bitcoins & vice versa. It was considered one of the most unpopular startups due to it’s nature. Like here everyone is building next generational cryptographic solutions & here we were cranking steel boxes with cash recyclers. In the utopia world of crypto, it was hard to make an impression & was laughed upon.

5 years passed by & today there are over 4,000 BTMs serving performing millions of transactions every year. For majority of people, their first interaction with bitcoin was through Bitcoin ATM. I do often come across stories of how people use these machines. It’s one of the most important component of the entire cryptographic currency movement. 

I still to date believe that one of the most weakest link in the decentralized financial world is traditional banking. Today if banks shut down any exchange bank account, they’re done. Building an exchange using a bank is like building an AirBnB in the lobby of Marriot

Here are some interesting use cases around how these Bitcon ATMs can do more than just 

  • Bank Account                                                                                         
  • People can buy stable coins through it & store it in their wallet. Banks are generally only interested in banking the top 1% so there is a big number that can be served.  
  • Infrastructure as a Service                                                                  
  • These BTMs can be used to offer services to unbanked directly from these machines. Companies can built applications targeting this market segment & BTM can serve as an intermediary 
  • Money Transfer                                                                                   
  • Despite digitisation majority of the money remittance is done in cash. 80% of the expenses for a money transmission company are due to location & KYC. BTM can slash these expenses by 95% 

If you look at any financial institute, they’ve to dependent on SWIFT or central bank network for transfer of fund. Through BTMs foundation of an independent financial system that be laid which can be built parallel to legacy. This system have it’s own rail tracks allowing more flexibility. There is a bigger opportunity to build a network of BTMs which can perform any function that any other financial institute can perform.  

These BTMs can have  cash recycler and in an ideal scenario there isn’t any need to replenish or fill up the cash. They can independently operate & replace any branch effectively improving profitability 5X. 

Have you ever used a Bitcoin ATM or is there a Bitcoin ATM nearby yours ? Also what else do you think these BTMs can do ? 

2019-01-02T17:33:34+00:00January 2nd, 2019|