A Brief Recap on STOs:
Let’s just have a brief recap on what Security Tokens are before we go ahead.
I will briefly touch on securities, as Security Tokens qualify as legitimate securities in their own right.
NOTE: If you already know the ins and outs of what a Security Token is, you can skip this section.
In terms of finance, a security is a certification or some other financial instrument, that has an intrinsic monetary value.
These securities can then either be traded by exchanges, who will broker the transaction or, they can be traded directly from peer-to-peer.
These securities are then broken down into two subcategories, equity, and debt securities.
This is in effect, owning part of a company, without actually taking it into your possession.
Companies use these methods so that they can raise capital from investors, to fund other parts of the business, such as expansion plans.
In return for their investment, the financiers are normally offered to make their money back, and make a profit through means such as dividends, interest rates or a share on the company profits.
Security Tokens are in essence, cryptographic tokens that can pay the owner dividends, entitle them to a share of profits, pay them interest, or, they can be used to reinvest into other Security Tokens.
There is a prerequisite to qualify a crypto token as a Security Token.
As a requirement, the token must pass the Howey Test, which was set out in the case ofSecurities and Exchange Commission (SEC) vs Howey (1946) in the United States.
This means that if the token aligns with the following rules, it will be considered a security token:
- -It involves an investment of money.
-The investment is in a common enterprise, where there is more than one investor.
-There is an expectation of turning a profit from the works of either a third party or the promoter of the token.
Should my Business Consider an STO?
One of the first things you should ask yourself before you sink any effort into creating an STO is whether or not an STO is actually right for your business.
Generally, there are certain, non-formal criteria that will help you to establish if an STO is a worthwhile venture for you.
If your business falls into one of the two following criteria, then an STO would likely be right for you.
However, if you’re business fails to meet these criteria, it may be worth reevaluating your situation, with a target of meeting these criteria in the future.
- Your business expects to have an annual turnover, exceeding $10M.
- Your business is a start-up with a large growth forecast.
- You conduct business in multiple countries.
- You have the design to issue asset shares, which are transferable.
- You wish to seek funding from individuals closer to your average consumer.
- You want a higher level of liquidity for your company shareholders.
A whitepaper is a critical document in the marketing of your STO. It is used to let investors know all about your product. The information contained in your whitepaper should be concise and to the point, whilst not leaving out any key info.
We have developed a list of things that should be in your whitepaper:
- Your legal disclaimer 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.
- You should not rush the creation of your whitepaper, as it is one of the most crucial components of your STO.
The Legal Side of STOs:
When you are planning to launch your own Security Token Offering, the preparation stage is absolutely pivotal. This is the phase that will ultimately make or break the whole process.
Because of this, it would be wise to expend as much time and focus on this stage as possible.
One of the first things you will want to consider when launching your STO is based around the legal procedures of the whole process
Because Security Tokens are classes as securities, they are bound by the securities regulations of your own country.
Let’s use the United States as an example.
First of all, you will need to ensure that your Token will fall under the precedent set out in SEC vs Howey (1946).
US-based businesses will have to face a key decision early on.
Do you wish to seek full SEC registration for your token?
Initially, this seems like a no-brainer, of course, you would want to.
This isn’t always realistic, as the whole process of becoming fully registered with the SEC is incredibly expensive and is mired in legal red tape, which can take a long time to be concluded.
To avoid this reality, most businesses opt to use an SEC exemption.
These exemptions can add additional barriers to your Offering however, they will be nowhere near as substantial as they would be if you chose to become fully registered.
The majority of businesses that launch STOs, choose to register under a Regulation D exemption.
This category prevents the business from selling to non-accredited US investors.
For an investor to be accredited in the United States, they must fall into certain categories, set out by law.
These are the categories, investors must have one of these apply to them, to be seen as an accredited investor.
- Have an annual income of $200,000 or above over the last two years.
- Have a net worth above $1,000,000 (not including the worth of his or her main home.)
- Be a general partner, executive officer, or director for the unregistered security in question.
Interestingly, there are also exemptions under Regulation A, which can be viewed on the SEC website, in complete depth.
At the time of writing, no company has ever made an STO under this exemption. However, Tripoint Global, a securities firm, are looking like they may be the first to do so.
The reason that Regulation A exemptions have not materialized, is due to the fact that they mean you have to jump through more hoops.
Due to this, you should know that for yourself, your target market is likely going to be a mix of accredited investors in the United States or non-accredited investors from other countries.
The most successful STOs market to these groups.
When you have a solid plan, outlining what your target market is, how you’re going to appeal to them and your legal approach, you will have passed through the preparation stage.
You will then move onto the Pre-STO stage.
Note: During this stage, you should ensure that your legal and financial support ie. lawyer and accountants are of high-quality. This is because you do not want poor professional advice to be the reason that your STO might fail. You would have wasted your time and money and we don’t want that!
Choosing Your Partner Exchange
Currently, a large majority of cryptocurrency exchanges do not exercise high enough levels of due-diligence surrounding whether or not individual users can invest in specific security tokens. Ie. a non-accredited US investor, trying to invest in a Security Token that falls under a Regulation D exemption.
Despite this, there are exchanges that have been set up, with the sole purpose of trading Security Tokens.
They are fully regulated by the SEC and seek to solve one of the main problems that are plaguing Security Tokens, their lack of liquidity.
The higher their liquidity, the easier and efficient it would be for them to be traded. As more exchanges for Security Tokens are established, their liquidity will increase in turn.
These platforms will help make the process of releasing your Security Token incredibly easy and almost seamless.
They will also provide you with help so that you do not clash with securities law within your country. They will also help you to comply with Know-Your-Client (KYC) and Anti-Money-Laundering (AML) regulations in your country.
At the time of writing, there are only a few regulated exchanges for Security Tokens.
These are; Polymath, tZero, Swarm, Harbor, Securrency, and Securitize.
Personally, we would recommend using Polymath to assist with forming your STO.
This is because they are considered the industry leader in Security Token trading.
They have very recently formed a partnership with tZero, another Security Token trading platform, this is with the aim of increasing Security Token liquidity, for the benefit of the market as a whole.
They claim to have aspirations as the “Ethereum of Security Tokens”, having developed a new Token standard the ST-20, using the Ethereum blockchain.
Furthermore, they have their own Token, the Poly, for use in all economic dealings on their own platform.
They have the ability to provide all of the legal and technical support that is required to tokenize assets that can be traded on their blockchain.
Setting up your STO
Using Polymath as an example, we’ll now walk you through how to actually set up your STO.
- Firstly, you need to add funds to a Metamask Wallet, provided by Ethereum. You can download this extension, using the following link.
- Next, go to the Polymath website and select “Create your Security Token”.
- Then, you will have to create your account. Firstly, you will need to login to your Metamask Wallet so that you can sync it to your Polymath wallet after you have finished creating your account. To create the account, you will need to provide your name and email.
- After this, you will need to select the name and symbol (abbreviation) for your Security Token. Then, you can select to reserve these choices. You will be given a 15 day period to seek advice from your legal team, once you’re satisfied, you can reserve your choices. NOTE: You will be required to confirm your email address. You will receive payment confirmation for your registration through email.
- You will now be able to select the partners who will help you throughout your STO journey, these can range from legal advisors to AML and KYC professionals. Once these professionals have advised you, you will be able to select an option to create your Security Token.
- After having created your token outright, you will have the opportunity to add additional information, such as a link to the website for your STO.
- Be sure to click the “submit” option on your Metamask wallet, to notify them that your Security Token has been issued. This will cause a copy of the transaction hash to be sent to your registered email address.
- Finally, you will be able to launch your offering to the general public, the moment you’ve been waiting for. If you select the button saying “set up your offering details”. From this, you can select the number of tokens for sale, the price of each token, the dates where investment will be accepted, and which currencies will be accepted.
All that you need to do now, is select “confirm and launch STO” and you have finally, successfully launched your STO.
- The last thing you will need to do for your STO is to create a whitelist, to set out the types of individuals who will be eligible to invest in your STO.
ie. Accredited US investors and foreign investors only, if you are a business launching a Security Token with a Regulation D exemption.NOTE: You should rely on your legal team to create your whitelist conditions, to avoid violating any securities regulations.
Marketing Your STO
Once you have completed the preparation stage, you really should start looking at ways to increase the buzz surrounding your STO. Thankfully, it can be a lot easier to market an STO than it would an ICO. This is because STOs are a happy medium for investors, between Initial Coin Offerings (ICOs) and traditional stocks.
STOs are a lot less likely to be illegitimate and subject to fraudulent activity, due to being backed by tangible assets and their requirement to be registered with the SEC, they also lack the regular administrative costs which are associated with traditional stocks.
This lowers the barrier to entry, whilst providing great levels of security for investors.
You should then enlist the assistance of a specialist marketing firm, who can help you to generate maximum exposure for your STO (That’s what we do, just saying).
Whilst you may be tempted to do all of this by yourself, the benefits of enlisting expert help will outweigh any of the costs that may be involved.
A good marketing plan for an STO will involve numerous different factors.
Firstly, when designing your listing and web pages that seek to advertise your STO, you should pay a lot of attention to Search Engine Optimisation (SEO). Having a good SEO plan in place will help to keep your pages listed highly on a variety of different search engines. It goes without saying that if you have great SEO and a high listing on search engines, you will find a bigger pool of investors for your STO.
Next, you should start to think about the themes for your marketing content. (Again, we can help with this). It’s no secret that great content helps to drive customers to businesses. Businesses who have brilliant marketing teams, generally perform much better than their competitors.
Your content will depend on your industry and the type of investors that you wish to target. For example, if you are a pharmaceutical company, your target investor would probably be a mix of high-net-worth individuals and high-seniority medical professionals.
In line with this, your marketing content will need to be clean, sleek and professional, which reflects their own industry standards.
Ultimately, the more buzz you create, the more investors you will get!
STOs for Accredited Investors
We’ve already briefly touched upon accredited investors in this guide. However, now we’ll go into a bit more detail and their roles and limitations as investors in Security Tokens.
By definition, to be an accredited investor in the United States, an entity must have a net worth of over $1,000,000, this does not include the worth of their main home. Alternatively, to be an accredited investor, a person can qualify by having an income of at least $200,000 in the previous two years, if the person is married, this number increases to $300,000 as a combined income.
Other entities that can qualify as an accredited investor can be viewed in Rule 501 of the previously mentioned Regulation D of the SEC.
Though, we have compiled the list below for ease of viewing.
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited, investors;
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
Furthermore, in 2016, the Congress of the United States expanded the definition of “accredited investor” to include both, registered securities brokers and investment advisors. Finally, if an individual can show that they have a sufficient level of experience and knowledge on unregistered securities, they will also be seen as an accredited investor.
This expands the number of people that you can target your marketing to.
If you are setting up your STO in the United States, it is incredibly likely that you will be registering under a Regulation D exemption. This means that all of your US investors will need to meet the above criteria.
Thankfully, according to DQYDJ, there are over twelve million US households that qualify as accredited investors. This means, even though you are limited to these people in the US, there are still a lot of potential investors to appeal to.
Furthermore, all of these investors have access to a large amount of money, which means if you market effectively, you can still raise a ton of money.
Another positive about targeting accredited investors is that generally speaking, you know that these investors are going to be legitimate. This is going to make complying with KYC and AML regulations a lot easier than they would be if you were gaining investment from non-accredited US investors.
Once you have finished your STO, this is when you come into the Post-STO stage. Generally speaking, this part is actually easier than the other parts of the process. This is because you have already gained the investment and your responsibilities and the things you will need to do are largely similar to that of an Initial Public Offering.
What to do with the Money:
Firstly, you will need to decide what you are going to do with the money you’ve raised. It is best practice to have a rough idea of what you are going to use the money for before you raise it. This isn’t always practical. For whatever reason, you may have earned more or less than you expected.
It is best to consult with your new investors and your own team, to come to a decision on the best use for the raised funds.
It’s great that you’ve absolutely smashed your STO and you have gained the investment that you wanted. You managed to generate a lot of buzz and excitement for your project and your investors love your product. This doesn’t last forever.
You will want your token to be traded so that it can increase in value and you can truly build your product. So holding the interest of your own market is very important, if you fail to do this, your Token value will fall and your company valuation will plummet.
To avoid this, you will need to continue marketing your product. Keep the initial magic alive. You will need to continue telling your story and develop your marketing content long after this stage is finished.
The best way to do this is to hire a specialist marketing firm. These are the type of people that can keep up to date with the latest developments in the market, meaning you can tailor your marketing efforts to the modern day.
Another thing that helps to do this, is to formulate a working relationship with key business analysts. They will be able to give you advice on how best to manage your investors and the directions that your company should take, to maintain maximum efficiency. This will also help to increase your valuation, which will attract further investment.
Managing your Investors’ Expectations:
Your investors would have sunk money into your STO, with certain expectations for the business, based on your business plan. You will need to be able to effectively show them, that you are successfully executing on your business plan, without getting into any legal trouble.
To do this, you will need to create a strong culture of professional discipline for your organization. With effective methods of increasing your revenue, becoming more efficient and helping to improve the liquidity of your Token.
It is also a must, that you manage to figure out the metrics which will help to grow your business. This ties in with using analysis to drive your company direction. Armed with these metrics, an analyst can paint a clear picture of the business’ current performance.
You will also need to be aware of ever emerging threats to your business. This could be in the form of new competition, regulatory changes etc. To effectively perform this, you may need to review your choice of legal advice and your methods of risk management.
Keep Moving Forward:
After the long battle of preparation and finally launching your STO, it may be easy to feel like you should take your foot off of the pedal and relax. However, it will soon be apparent that your STO was just the beginning. You need to keep going in a forward direction.
You should paint a focused picture of your long-term goals. It is an achievement to have successfully completed your STO although, if you want to sustain consistent success, you will need to plan extensively and maintain extreme levels of operational performance, never settle.
To become a leader in your market, you cannot let things say static and stagnant. You have just reached the first stepping stone in your journey of taking your industry by storm. You will constantly be reviewing your business model and the upper levels of your management structure, to make sure you have the right people and models in place to remain effective.
And that’s a wrap. After reading this guide, you should be armed with a lot of the information you need on how to launch your own STO. To maximize the buzz around your STO, gain investment and to stay relevant Post-STO, you should definitely have a conversation with us here at GuerillaBuzz.
We will help to make sure your STO, blows up and gets the exposure it deserves.