In 2007, Initial Coin Offerings (ICOs) have gained a lot of attention from fundraisers, raising around $13 million per project on average. While ICOs flourished in number and size, people started to realize its shortcomings: more than 90% of ICOs projects’ roadmaps were not actualized. Increasing awareness has also been put on ICOs by the regulators. With the sluggishness of ICOs, people have started to turn to Security Token Offerings (STO), the next significant crypto trend. In this blog we’ll cover how to launch an STO and what key factors make up a successful offering.
Table of Content
Part 1: Starting an STO: Is it right for you?
Part 2: How to Launch an STO: The key requirements
Part 3: How to Launch an STO: The key parties
Part 4: How to Launch an STO: The Offering & Token Issuance
Part 5: Conclusion
*Disclaimer: This is NOT legal advice. This is a basic overview of the processes associated with getting started with an STO. If you’re considering launching your own STO contact a lawyer to ensure that you comply with all the relevant regulations that may pertain to your business or offering. This blog does not consist of legal advice.
Part 1. An STO: Is it right for you?
What are Security Token Offerings (STOs)?
A security token represents the ownership and the rights entitled with securities. Security holders are entitled to an array of rights including equity, dividends, profit sharing rights, voting rights, etc. By taking advantage of Blockchain technology, these rights are written into a smart contract and traded freely as a token. These tokens are usually backed by real assets and comply with regulations.
First, we have to understand the difference between Initial Public Offerings (IPOs), Initial coin offerings (ICOs) and Security Token Offerings (STOs) so as to answer the question “Why should we launch an STO?”
Initial Public Offerings (IPOs) are the most traditional and mature way of raising funds. Compared with ICOs and STOs, IPOs are more regulated and difficult to launch. The financial cost can be huge and listing processes can be complicated.
On the contrary, Initial Coin Offerings (ICOs) based on blockchain technology greatly reduced the investment threshold and issuing difficulty. It allows more efficient and convenient trade of tokens. However, as ICOs are non-regulated, security is generally low.
Security Token Offerings (STOs) are deemed to be the middle of both fundraising schemes in regulation, convenience and issuance difficulties. It can, on one hand, reduce the issuance cost, increase efficiency, and complies with the regulating process. Investors, therefore, will be more confident in STO projects.
Should I go STO?
Starting an STO makes sense for a wide range of industries and is viewed as an easier gate compared with IPO. Therefore, it is not impossible for a firm to first launches an STO and then go for an IPO. STOs are especially suitable for companies who have great ideas and have resources in the crypto industry. However, don’t consider starting an STO just because of the buzz associated with blockchain and STO.
Cost of STO
The cost incurred in STOs differs from case to case.
|Token issuance with Polymath||~4,500 (20,500 POLY)|
|Marketing||~50,000 – 100,000|
|Security Audit||~10,000 – 50,000|
|Whitepaper||~5,000 – 15,000|
For reserving a token symbol on Polymath, it cost 250 POLY. Further creation of token and token contract will cost another 20,250 POLY. The minimum cost for token issuance with Polymath will then be 20,500 POLY which is around USD 4,500 [1: 0.223 15 Nov 2018 03:21 AM (GMT)].
By using the exemption created under Regulation A+, the legal expense ranges from USD 45,000 to USD 55,000. It is a much less expensive option than other exemptions and is frequently called a “mini-IPO”. When choosing which regulation to file under, companies should not only consider the price but also nature of their offerings.
Simply speaking, the cost for launching an STO is around USD 100,000 and more if a larger amount of funds is being raised. However, this is just a ballpark estimate, as other complications may arise that could lead to costs being significantly higher. Take this into account before considering starting an STO.
Part 2. How to Launch an STO: The key requirements
Different states define “security” differently. The European Union (EU) defines securities mainly as shares in companies (equity securities) and bonds issued by companies (debt securities). For the United State, however, the definition is wider. The Howey Test was created to test whether something is a security or not. In the Howey Test, three elements must be met in order to be labeled a security:
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
Once the token is classified as a security token, it is subjected to legal regulations. There are different exemption requirements in different countries. This may also be one factor when considering where to launch the STOs. These regulations are incredibly important to consider when deciding how to launch an STO.
In the US, security token must be registered with the Security and Exchange Commission (SEC) before it launches its offering, unless qualified for one of the exemption regulations below:
Regulation A+ (limited public offerings): Companies can offer their security token without registration with the SEC for offerings of up to $20 million in a 12-month period (Tier 1) or $50 million in a 12-month period (Tier 2). The issuance of regulation A is comparatively more time-consuming and costly than other regulations.
Regulation D (private offerings): Companies can broadly solicit and generally advertise the offering if all investors in the offerings are verified to be accredited investors according to Rule 506C. Companies must fill the “Form D” after the securities are sold.
Regulation S (foreign offerings): Companies can have their security tokens offerings take place outside US but cannot involve US investors.
European Union (EU)
For all security token offerings, companies have to draft a prospectus and comply with local security laws requirement, unless qualified for one of the exemption regulations below.
- The qualified investors’ exemption, a.k.a. private placement: Similar to Reg D in the US, companies can solicit the offerings to qualified investors
- The limited amount exemption: Similar to Reg A+ in the US, companies can sell securities up to 5 million euros without drafting a prospectus.
- The limited network exemption: companies can sell their security freely to up to 150 people per member state.
- The nominal value exemption: companies can sell their security freely if each security is equal to at least 100,000 euro.
- The large investments exemption: companies can sell their securities freely if each investor purchases at least 100,000 euro worth of securities issued
Singapore government has an open and welcome attitude towards STOs while they also keep a keen eye on the regulations imposed. Companies must submit and register prospectus to the Monetary Authority of Singapore (MAS) before the STOs unless qualified for one of the exemption requirements stated in A Guide to Digital Token Offerings published by MAS.
An Offer may nevertheless be exempt from the Prospectus Requirements where amongst others:
- the Offer is a small offer of an entity or units in a CIS, that does not exceed S$5 million (or its equivalent in a foreign currency) within any 12-month period, subject to certain conditions;
- the Offer is a private placement offer made to no more than 50 persons within any 12-month period, subject to certain conditions;
- the Offer is made to institutional investors only
- the Offer is made to accredited investors, subject to certain conditions;
Part 3. How to Launch an STO: The key parties
Huaxing created the following graph to provide clarity on the security token ecosystem. We’ve provided translation and some more detail on this graph below. Tatiana Koffman provided more clarity on these important parties on her blog, The Security Token Ecosystem.
Part 4: How to Launch an STO: The Offering & Token Issuance
After understanding the background information and parties involved in the STO ecosystem, the following part will outline the process of how to launch an STO. The whole timeline of an STO lasts for around 1 year with 4 main stages for pre-STO.
Team Formation (6-month)
Preparation always takes up the most time in the STO process. In the first 6 months, a team of experts should be formed to ensure smooth execution in the later part.
A diversified team including professionals from various industries such as accounting, development, legal, sales and the marketing industry is essential in providing specific advice for STO process. They serve as consultants throughout the STO launch process.
For example, a legal advisor plays an integral role in determing how to launch an STO as they help ensure the security token is compliant with all the regulatory frameworks or exemption requirements. It can be challenging to find an experienced and reliable legal advisor as STO is relatively new to the market. Therefore, finding a suitable legal expert can be a challenging but important task.
Other than forming a team of experts who have deep knowledge about cryptocurrency development, it is also the stage to gather information about issuance platforms. It is vital for careful selection of issuance platforms as companies may have different needs and concerns.
Pre-listing preparation (2-month)
In this stage, final preparation work on the structure of offerings should be done with advice from the experts. Marketing materials should start to be prepared as well.
An STO whitepaper is the most critical marketing document to educate potential investors about the product. An effective STO whitepaper should be concise and precise while capturing most of the important information. The whitepaper should focus on a solution but not blockchain. Below is the suggested outline of an STO whitepaper:
- Legal Disclaimer
- Product Details
- Industry Overview
- Technical Architecture
- Business Model
- Go to Market Strategy
- Assets and another type of security associated with the token
- Tokenomics and Token Usage Details
- Team members and advisory
Security Token Creation (1-month)
While most of the legal documentation and marketing materials are prepared, the company can then focus on security token creation. There are many different issuance platforms in the market. The company should choose the most suitable platform and then start creating the token. This is actually one of the easier parts of the process for how to launch an STO. Below is a short preview for creating token with Polymath:
- Create Account on the Polymath Decentralized Application
- Register Token Symbol
At this step, the Token Name and Token Symbol will be reserved for 15 days. Creation of Token should be done within the time limit.
- Choosing Providers
There is a range of partners including advisory, legal team, KYC/AML providers and marketing team who will offer help for STO.
- Creating Token
Additional information such as websites or a legend can be added. After that, the token issuance can be completed
- Setting Up Offering Details
Below are some details that should be considered
Start/end date: inform potential investor the time period of investment
Accepted payment: state if the token is raised in POLY or ETH
Hard cap: state the maximum amount of money that wish to be raised
Rate: state the percentage of POLY or ETH that the token is valued at
- Whitelisting Investors
By whitelisting the investors, investors are allowed to participate in the STO. When the investors send POLY or ETH token to the STO contract, the company’s token will be given to the investors. The whitelist can be updated at any time during the STO.
For a more detailed guide for creating token, please visit https://blog.polymath.network/create-your-own-security-token-offering-sto-with-polymath-7d37f8cd9a6c
Marketing campaign (3-month)
The marketing campaign is crucial in introducing and selling the security token to the potential crypto investors. Information such as team members, whitepaper and token structure would be valued by the potential crypto investors. It is important to make sure this information is delivered effectively to the right type of investors.
Marketing campaign format may include roadshow, mail marketing and social media channels. Building trust and promoting the security token are the major objectives of these activities.
However, depending on the regulations and in which jurisdiction the STO is registered in, you will need to be careful with your marketing efforts, as there are laws against promoting certain types of investments. You can learn more about this in one of our other blogs below.
Then it will proceed to the sale of a security token. Provide community support on various social media and crypto platforms. The support services offered can maintain a good relationship with investors and respond to their enquiries.
Part 5: Conclusion
All in all, STO is the next biggest crypto trend after the slowdown in ICOs. We can see a large market potential for STO. Carlos Domingo, founder of SPICE Venture Capital also commented on the size of the security token market.
“It’s inevitable that security tokens will transform equity just as bitcoin has transformed currency because they afford the owner a direct, liquid economic interest and the expedited delivery of proceeds. Every type of ownership can be tokenized, which is a massive multi-trillion dollar addressable market.”
To capture this opportunity, companies should start to understand what an STO is and be prepared. However, the steps necessary for how to launch an STO are likely to change as regulators adapt and new players enter the industry.
Akash Takyar, A Comprehensive Guide to Launch STO- Security Token Offering (https://www.leewayhertz.com/launch-sto-security-token-offering/)
Alex Lielacher, How much does it really cost to launch an ICO? (https://www.bitcoinmarketjournal.com/launching-an-ico/) 8 Nov, 2018
Grace Zhai, ICO Budgets: How much does it really cost to do an Initial Coin Offering? (https://blockchainreview.io/cost-to-do-an-ico-initial-coin-offering-marketing-fees-budget/)
IPOtoGo, How Much Does It Cost to do a Regulation A+ Offering? (https://ipotogo.com/how-much-does-it-cost-to-do-a-regulation-a-offering/) 21 Mar 2018
Jason E. Barkeloo, So you want to launch a STO…? (https://medium.com/@knowbella_tech/so-you-want-to-launch-a-sto-1ba0d83a74dc) 10 Jun 2018
Polymath, Cost to create an STO with the Polymath Token Studio (https://www.reddit.com/r/PolymathNetwork/comments/99dg5q/cost_to_create_an_sto_with_the_polymath_token/) Sep 2018
Tatiana Koffman, Your Official Guide to the Security Token Ecosystem (https://medium.com/@tatianakoffman/your-official-guide-to-the-security-token-ecosystem-61a805673db7) 14 Apr 2018