Security Token Offerings (STOs) have taken the world by storm in 2019 as the blockchain technologies have gone mainstream and the public has started recognizing their tremendous potential for growth. This is also happening in light of regulatory problems with ICOs that has led to a steep decline in ICOs and cryptocurrencies just in Q1 of this year.
Here’s a quick definition to get you up to speed: a security token is a token that is subject to federal security regulations. It gets its value from an external, tradable asset, which can be almost anything from a work of art, jewelry, or gold, to real estate like a piece of land or a building. Almost anything under the sun can be tokenized – as long as it has value.
Security tokens have so much potential because they essentially create a gateway, letting traditional capital markets merge seamlessly into the financial technology domain – at least, when they’re done right.
When a token is released to the public, similar to an IPO for a public company, the process is known as an STO. Here’s a quick guide to the STO process to help give you a sense of what steps are required to get up and running quickly and easily.
The Tokenization Process
Looking at the tokenization process at a macro level, there are three basic stages:
(1) preparing the STO, (2) launching the STO, and (3) providing post-STO services, such as paying dividends to token holders and trading on secondary markets.
Let’s look at each of these stages in a little more detail:
(1) Preparing the STO
What’s involved in getting an STO ready for market?
- Define the concept. What is the role, purpose and features of the tokens? A clear purpose and goals will generally create greater market value.
- Investigate legal regulations. Compliance with national regulations in each jurisdiction, including the SEC’s Howey Test to determine whether this is a true security token
- Choose a security issuance platform.
- Write a White Paper that encompasses the marketing model, legal requirements, the business model, and other relevant details. This is your primary communication with potential investors, so it must be highly professional.
- Hire expert team with experience in cryptocurrency development and consultation and create a marketing website.
- Introducing the STO to the market pre-launch via listing websites, letting investors make informed, educated choices upon launch.
- Choose a partner exchange to maximize the token’s future liquidity.
As you can see, this is easily the most involved stage of the STO—and for good reason. Without all this background work, the token will have little appeal to investors and is more likely to fail when it’s actually introduced.
Fortunately, with all the hard work behind us, it’s time to move on to…
(2) Launching the STO
This stage is fairly straightforward, and this is where all the groundwork done during Stage One begins to pay off as investors choose to back the asset.
- Launch the sale. Crowd sale of tokens for raising funds opens to the public.
- Due diligence. Interested investors must pass KYC/AML (know-your-client / anti-money-laundering) checks.
- Registration. Verified investors are registered on the platform but do not receive tokens until the end of the STO period.
(3) Providing post- STO services
- Distribute tokens. Tokens are now the property of the investors.
- Company development. Company undertakes the promised project or builds the product, pursuing business goals as described in the White Paper.
- Pay dividends. Ongoing reports and dividends are provided to investors, however unlike traditional securities, investors do not receive a voting share.
- Track secondary trading. Secondary trading ensures the ongoing liquidity for investors of their token investment.
- Technical services & support. As required.
Key elements explained
A few of the essential prerequisites to a successful STO launch include smart contracts, issuance platforms, and exchanges. This section will explain each of these to demystify what’s involved in ensuring the success of your STO launch.
Smart Contracts: Smart contracts are exactly what they sound like – “contracts” that are written in software so that they enforce themselves. They ensure the exchange of assets (fiat currency, cryptocurrency, and/or tokens) without the need for intermediaries or third parties. They are defined by the asset owner before the STO launch and developers program them in computer code so that all the parties and subject matter of a contract are clearly identified. They define the rules and penalties surrounding a contract. Smart contracts automatically execute a contract action, such as releasing escrow funds, when the requirements of the contract are met (as defined ahead of time by the code). This vastly reduces the costs involved in a transaction while providing a high level of trust and security.
Issuance Platforms: Security tokens require a platform where a number of unique individuals and services can come together: KYC providers, Smart Contract developers, legal experts, token investors, and more. For convenience, an issuance platform (like Polymath, Harbor, Securitize) provides a single virtual area where they can all come together, making the process as streamlined as possible. The issuance platform simplifies the STO because it embeds financial security requirements into the security token’s design.
Secondary Exchanges: After the initial sale, just as with a public company, tokens in an asset can be traded on secondary markets, or exchanges. STO-compliant exchanges provide a platform (like DX.exchange or Lykke) where tokens can be exchanged for other tokens, cryptocurrency, or fiat currency, providing a higher level of liquidity than many other types of investment. Secondary exchanges are an intrinsic part of the success of any STO.
SolidBlock offers a platform built exclusively around helping companies launch successful STOs.
Based in Israel, a major emerging blockchain hub, SolidBlock is a smart contracts and platform developer for tokenized securities. SolidBlock specializes in tokenization of real estate assets.
SolidBlock develops smart contracts that meet the requirements of the token issuing company or organization, creating waterproof contracts that ensure that the company’s tokens, and the investor’s stake, remain secure.
SolidBlock’s services include coding customized smart contracts for STOs and managing tokenized securities, buying and selling securities, and making investments within the blockchain ecosystem.
As seen here, ensuring the success of your STO launch requires a skilful combination of a number of really different elements: high-tech, financial experience, marketing expertise, and familiarity with legal and regulatory compliance requirements. SolidBlock provides all these components, helping ensure that every single client can raise funds simply and easily.
If you’re wondering whether tokenization is the right step for your asset, contact SolidBlock – our proven STO blueprint and combined fintech experience can take the weight off your shoulders and make your next funding steps simpler than you ever imagined!