A Definitive Guide to STO Platform Development

Getting started with your Security Token Launch

In the last couple of years, ICOs have been very successful, however, the controversy surrounding legitimacy of ICOs has made some countries ban them, while other countries like Switzerland, Singapore etc. consider passing harsh legislation against them. In order to seek foreign investments, businesses are considering Security Token Offerings which is not just another name of an Initial Coin Offering (ICO), but are completely different. In contrast, STOs are backed by real assets such as gold, oil, equity etc. which makes them legal in the eyes of authorities.

The major shift from ICOs to STOs is being considered all around the globe due to the simple fact that security tokens offer legal compliance. This makes more investors interested in security token business models as they hold potential in the blockchain niche.

However, for an STO Launch, you must consider some important aspects, which we have described below:

 

1. Determining the need for an STO

As an early adopter of blockchain technology, you must be able to articulate why a Security Token Launch can be transformational for your business. The journey is very long and the investors will test your knowledge and scrutinize your well-research business use case before investing their hard earned money.

First things first, it is very important for a company to assess its readiness for a fundraising. This, in particular, starts with considering the following diagnostic questions.

  • Is your business investable? Can you showcase the three key metrics i.e. Growth, Control and Quality to the investors?
  • How much does your customer base increase over the last few years?
  • Do your customers often interact with your product/service?
  • How much do you wish to raise and for what you are raising?
  • Have you ever been a part of crowdfunding before?
  • How many investor meets were successful so far?
  • Have you defined your target audience?
  • How much funds will you use for your company’s growth upon reaching your crowdfunding goals?

 

2. Regulations to be considered

As you are planning to enter the US market, you must ensure that your services are asset-backed and your token offerings are classified as securities. In order to do so, your offerings must pass the Howey and other alternate tests. We have talked about these regulations in our previous blog on Security Token Offering.

However, if your offerings fail the Howey Test and are not subject to federal securities and guidelines then your tokens will disqualify to be a security token and will be considered as utility tokens.

 

3. Token Registration

First, come up with a name that goes well with your STO offerings, further choose a token symbol. This will likewise enable you to reserve your symbol and prevent others from misusing it. You might need some legal assistance here to fine-tune the various aspects of the entire process, however your STO development company can guide you through the entire process.  Once finished, you can submit your reservation details. The confirmation will be sent to you by the token issuance platform through an email. If you have ever been a part of an ICO, then so far this works similar to that.

 

4. Choosing a token issuance platform

There are many token issuance platforms that render token issuance services, we being one of the most noted names when it comes to Security Token Offering Services can help you sail through the entire process. However, depending upon your Security Token requirements, you will need to make sure whether you want launch asset-backed tokens or you are looking out simply for security tokens.

 

5. Leveraging Whitepaper Marketing

The importance of whitepaper cannot be underestimated as it is the bible which talks about your business and future goals. Your business prospects can read about security tokens and regulations and understand how the industry works along with token usage details and team members.

Once your whitepaper is ready, you should seek expertise from industry leaders and build a team, this will help you gain credibility.

 

6. Empanel Experts

Now, you will need a team of experts who are well-versed with cryptocurrency and blockchain technology, just make sure to empanel people from various departments such as accounting, sales and marketing, legal industry etc. This will make sure that your STO Launch is passing all the regulatory frameworks and tests depending upon the targeted geography.

 

7. Marketing your STO platform

Kick-start by making a website which will cover all the key details such as development roadmap, token distribution information, the whitepaper and the idea behind the project. Add a customer support channel and embed the live token sale countdown on the website. Further, you can leverage other platforms such as Medium And Hackernoon and other ICO/STO listing platforms which will introduce you directly to the crypto community.

 

8. Token Creation for STO Launch

Now you will be required to include supplementary information about your STO platform and the token. In order to do so, it is advised that you must have a legal and marketing team by your side.

For doing so, you must be able to execute transactions on the smart contracts. This can be done by using MyEtherWallet (MEW) using which you can sign transactions and execute them using Metamask Chrome Extension. Here, you will be prompted to add your website where you can add a link to your website. Once done with this, click on the Submit button for token issuance.

 

9. Structuring your Security Token Offering

There are some points that you must consider before structuring your STO, please note that if you are running a capped STO then only a certain number of tokens that have a predetermined price can be sold. Once these tokens are sold, you cannot sell any token further.

The STO structuring comes with a checklist, to kick-start, you need to outline the start and end date of your STO followed by supported methods of payments and rate of token valuation.

 

10. Investors’ Whitelisting

Finally, you will be required to chalk down the list of future investors for the tokens. However, this can be done before or even after your STO.  The investor will be issued with your security token where in exchange for supporting cryptocurrencies like Bitcoin or Ether or even Fiat in some cases.

Congratulations! Now you have your own regulatory-compliant security token on Ethereum testnet!

Note: You can also mint (create) tokens for existing shareholders, which is optional. This implies to the fact that security tokens can be minted on an “as per the requirement” basis when requested.

We provide end-to-end custom solutions for STO development. Email us today at [email protected] to develop your own security token or to embed regulatory requirements into your token ecosystem.

Are Security Token Offerings (STOs) succeeding Initial Coin Offerings (ICOs)?

In the United States, the Securities and Exchange Commission (SEC) has started issuing guidance on how to handle the cryptocurrencies being sold in ICOs.  They’re working hard to protect the residents from fraudulent schemes. For any entrepreneur, the practical applications of Blockchain are perhaps the democratization of fundraising. Blockchain solution in a venture capital ecosystem enables entrepreneurs to tokenize the equity and bringing liquidity to venture capital and angel investors in return. In this blog, we will discuss how Security Token Offerings are outnumbering ICOs especially in US economy where the effect of new rules on efficiency, competition, and capital formation in regards to cryptocurrencies keep fluctuating.

 

ICO-A high-risk speculative investment?

ICOs lately has been a subject of speculation among the high-volume institutional investors. The fruits of the industry are starting to be borne—Nearly $400 million, or more than 10 percent of $3.7 billion raised in initial coin offerings, has been lost or stolen, Ernst & Young claim.

This boils down to the fact that participating in an ICO is perhaps not a preferred option for individual investors. For individual investors, it is hard to stay upbeat with the on-goings in the cryptosphere and they are most likely to be unaware of the token purchase price of seed investors or VC rates. Another reason surrounding the mistrust in ICO is that ICOs are not liquid like investments in public like stocks and they are not compliant with SEC regulations either.

The fact that the ICO terms might fail and the project is always a high-risk investment makes ICOs highly regulated especially in countries like the USA. Moreover, the DAO tokens following the DAO Hack failed to pass the Howey and other alternative tests and were deemed securities by the SEC. That’s when Security Tokens comes into the picture.

 

What are Security Tokens?

Unlike ICO where the token issues are dApp or utility token, the token hodlers gain governance voting rights or they get the profit-sharing rights then the token is considered to be a Security Token.  They have the attributes of a security; the regulatory compliance can be applicable to both the investors and entrepreneurs on their respective sides. Furthermore, the following can be regarded as a security token:

  • If the token offering is giving the right to equity shares in the enterprise
  • If the token hodler gains the profit or ownership in the company, just like stocks
  • If the token represents a kind of unit of a mutual fund, loan or any debt obligation
  • If the token is backed by real assets such as landholdings

STOs are subject to federal security regulations in the states. Below are the regulations which when properly met can pave way for Security Tokens to attain the same reputation as the stocks.

For a thorough understanding of these regulations, you can also refer to this Medium publication.

 

Now, what makes token a security?

Before moving ahead, you must know that according to the government and regulating authorities any investment being done with an intent to make a profit is security. Usually, STOs look more like IPOs are they are somewhat similar in nature and offerings. Talking about the United States, understanding the purpose of the investment is of paramount importance.

The SEC and FINMA categorized tokens into two broad categories, i.e. Utility Tokens and Security Tokens. The centennial case that addressed this issue is the SEC v. Howey Co., 328 U.S. 293 (1946). The Howey test will answer these four questions based on which the type of token is decided:

  1.      Is money or real-assets are involved in the investment?
  2.      If yes, then are these investments are in a common enterprise?
  3.      Whether the investors are expecting profit from the investment?
  4.      Are there third-parties efforts involved in making the profit?  

If the answer is ‘Yes’ to these questions, then the token sale is likely subject to the U.S. securities laws.

The token buyers can avail benefits like profit shares, dividends and voting rights. Moreover, the security tokens can also feature similar attributes as that of utility tokens. If an organization acknowledges that its token is a security, then it can be considered as an investment. For the buyers, security tokens bring more transparency in token economics.

 

To achieve the crowdfunding goals, is it important to launch an STO?

As mentioned above, the investors in an ICO do not need specific rights or company share where they are investing. In contrast, the STO investment is more about empowerment, here the investors gain more rights and own shares which is somewhat similar to that of a regular business intending to initiate an IPO. However, with STOs the decentralized nature of cryptocurrency is absent as there are governing bodies involved for the approval. Here are a few major reasons why people find STOs more legitimate than ICOs:

  • They received an asset-backed token, basically a share in the company
  • STOs require government compliance which means no scam projects
  • Through blockchain, STOs will unblock trillions of dollars of illiquid assets
  • Any company can tokenize its equity, STOs are not just limited to blockchain companies
  • STOs provide global regulatory compliance, unlike ICOs they are not limited to Switzerland, Moldova or Singapore

STOs can effectively address the major issues faced with Utility Token Offerings — they offer corporate accountability and minimize the possibility of fraud.

 

Key takeaways
  • We have two legal structures of tokens: Security and Utility tokens
  • Howey Test in the USA might be a good approximation to evaluate the secure nature of the token, there’s still a lot of uncertainty surrounding cryptocurrencies
  • If there is some value associated with a token, this will not automatically prevent it from being qualified as a security token
  • Security Tokens brings legal clarity for everyone in the ecosystem be it the company or the ICO contributors (although this is a speculation as of now)
  • Only the licensed security trading platforms will facilitate secondary trading of security tokens
  • Security tokens cannot be used as utility tokens, this means they cannot be used as a medium of exchange or trade
  • Unlike ICOs, you cannot use security tokens to incentivize the users neither you can gain access to any platform with that.
  • Security tokens differ from jurisdiction to jurisdiction, i.e. it is not necessary that what one platform consider as security would be the same for another platform.
  • The security tokens are designed in a way that they will not convert to utility token once the business operations are live
  • You as an investor must have a holistic look at both kind of tokens depending upon your investment.

 

EndNote – STOs are defeating its nemesis in the USA

Experts believe that tons of capital is expected to flow from Wall Street to security tokens in the coming years which will open up fractionalized investment. You can choose to offer security tokens by adhering to SEC guidelines and you will not be required to give up equity in the company or a revenue share. Despite the technical and regulatory hurdles, the token economy is moving forward and the token issuers must use the existing tools and shall not bet on these regulations to be modified.

DISCLAIMER: The purpose of this blog is to help potential token issuers understand how security tokens are regulated in countries like the United States. As a reader, you must conduct your own due diligence and seek consultation which provides a greater understanding.