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