Things You Should Know Before Launching an STO
Initial Coin Offering (ICO) is the first and fastest way to finance a blockchain project without the involvement of an intermediary in 2017-18. In the first quarter of 2018 more than $6.3 billion were raised from investors through ICOs, which was more than the total ICO funding in 2017.
However, the regulatory authorities like the US Securities and Exchange Commission (SEC) soon started to intervene. They noticed that the projects of ICOs mostly were similar to the securities and so they thought that these projects should launch ICOs with some prescribed rules and regulations. Thus another token offering system known as STO, Security Token Offerings came into existence.
What’s a Security Token?
A huge number of companies are evolving day by day so the international financial market is not capable of fulfilling their investment requirement. They need to find new investors. This was the reason ICOs evolved and STO we can say is an upgraded version or the next generation of ICO. Security tokens are the cryptographic blockchain based tokens representing real-time financial values like shares, warrants, bonds etc. STOs are trustable investments because they are bounded by regulations based on the geographical location of its investor base. You become the owner of a part of the company without taking any possession of the company.
STOs offer more fluidity in comparison to ICOs. There are a number of security token platforms which help in launching a new STO.
What is a Security Token Platform?
You can’t individually set up and launch an STO. The exchanges of the crypto space are also decentralized. Therefore we need a platform to assist us with STOs launching and its sale and purchase.
A security token platform helps in issuing the tokens and completing all the legal regulations that are required to be approved by SEC regarding the use of the security tokens. It assists in the process of selection of a proper KYC provider for the tokens.
How to Launch an STO?
An STO launch is subjected to very tight scrutiny compared to an ICO particularly in terms of legal frameworks and tokenomics. This is because each token represents security. The regulations are still unclear in many jurisdictions around the world. That’s why the investors and regulators analyze these projects much more rigorously. You need to partner with the right team of advisors to help navigate the process.
The stepwise process of launching an STO has been explained in brief.
Step 1: First create a document including all the important details of your business such as the idea, targeted technology and every detail of your product. This is an essential document in launching an STO. The investors get all the details of the product through this initial document.
Step 2: Understand thoroughly the legal regulations of STOs. You need to check whether your project and product comply with these rules or not. If it does, then move to the next step.
Step 3: Now you need to select the market exchange for your STO. The exchange will validate some of the regulations of investment in STO. It will tell you whether you can launch your security token or not.
Step 4: A crypto security token platform is used to set up the STO. There are many platforms to help in the issuance of the security tokens as well as all the legal paperwork for STO. It’s up to you to choose between them.
Step 5: Lastly you need to market your STO to create the buzz regarding your invested STO. STOs can be easily marketed in comparison to ICOs.
Examples of STOs
STO is a new concept and is still in its nascent stage. Blockchain Capital was the earliest pioneers. It is a venture capital firm which raised $10 million within six hours of opening its STO earlier this year. The proceeds from STOs were transferred into one of the firm’s ventures funds. Science Blockchain has raised $12 million for its incubator and fund focused on blockchain investments.
Currently, Sia has offered STOs. It is a blockchain-based cloud storage platform. The Sia platform operates two coins. The Siafunds coin is being sold in the STO. The users of Sia cloud storage will transact in the Siacoin as the utility token of the platform.
Important Things That You Should Know:
1). Cost Involved:
You should be aware of the total budget which you might need to spend during the whole process of launching an STO. Let’s see the cost split up right from the initial to the final stage of an STO.
Let’s consider that you are going to launch your token on the Polymath platform. It costs around 250 POLY just to register your token symbol and 20,250 more POLY for the token contract. If we calculate in dollars, then it will around 5000$ approximately.
After this, based on your fundraising plan, you need to spend some money on your regulation filing. Normally, as a small company with a good product can opt for Reg A+, with which you can 50$ million in a one year period. So in order to get your company registered for this Regulation A+, you need to spend around 50,000 USD. This is just some approximate least amount it takes but if we add up other costs involved because of the marketing team, legal team, product development team etc. then the whole budget may shoot up to 1,00,000 USD. So let’s be prepared for this budget plan.
2). Howey Test
Your token should pass the Howey Test in order to proceed with the further process. You might be wondering what’s this Howey Test? Let me explain you briefly.
The investors whose invested money should be able to generate expected profit to them. That too, at the labor of the company’s efforts. Your token should pass this test in order to get the tag security. Or else it’s just a utility token. You can Google more about this test if you want to know more information.
3). Qualified Exemptions
If your token gets the security tag, then it’s subjected to legal regulations. This legal regulation varies from country to country. For example, if your company is based out of the US and want to launch the STO within the United States, then it’s token is subjected to Reg A+(limited public offerings) or Reg D(private offerings). There’s also Regulation S which is for investors involving non-US citizens.
Similarly, for Europe, the token regulations are governed by the European Security & Markets Authority. Also in Singapore, the Monetary Authority of Singapore decides the regulations.
4). Key Players
The next step is knowing about the key players: Issuance platform, STO Exchanges, and Liquidity Layers. The Issuance platform plays a major role in issuing the security token. This is where the token creation is carried out once the exemption requirements are met.
The STO exchanges are where the security tokens are traded. Few examples are tZero, OFN etc. The Liquidity Layers are where one can liquidate the tokens to real money. Bancor and Airswap are the two famous layers for liquidity of security tokens.
5). Team Formation
Once you are all good with the above things, then the next stage is team formation. Only a good team can take up things in the right way. So form your team with experts from all areas like accounting, marketing, sales, legal, development etc. Plan major things like Writing Whitepaper, Security Token creation, Which platform to go for, Marketing Strategy, Legal notice, Product Details, Business Model etc.
The recent development in the blockchain space has confirmed that the industry is heading towards an STO-predominated future. ICOs brought an excellent means of crowdfunding for startups. STOs have further enhanced these fundraising opportunities with new investment dollars into space. I hope you got what you came up for. The above-mentioned things will surely help you form your checklist before launching your STO.