There’s a new buzzword in crypto space: STO, which stands for “security token offering.”
STO is rising as a powerful alternative to private equity and venture capital financing.
Polymath, a platform that helps people launch securities tokens, estimates that STOs will grow to a $10 trillion opportunity over the next few years.
But let’s start from the beginning:
What is a Security Token Offering?
STO is the cryptographic tokenization of your capital, which provides investors with a digital share of your company. To confirm ownership, a security token uses blockchain transactions and smart contracts.
STO can be very compelling to business owners for many reasons:
- It follows law regulations in order to be safe and reliable.
- It doesn’t depend on geography or demographics. This means that companies can present themselves to more investors over the internet.
- It’s diverse—it can represent various assets and other tokens packed together.
- Security tokens can be traded on regulated exchanges, thus providing liquidity.
How Do Security Token Offering Solve the Problem with ICOs?
ICO (Initial Coin Offering) is a method of raising funds in an unregulated environment. When the project receives at least the minimum desired amount during the ICO, it’s taken to the next level: completion.
The problem is that the crypto market is highly volatile and unstable. Plus, ICOs are not officially regulated, and in some parts of the world, they are even banned (most notably China and Hong Kong).
Not to mention the scary statistics: A study from the Stratis Group revealed that in 2017, more than 80% of ICOs were identified as scams. Let’s face it: those are some serious numbers.
“To date, we have brought some enforcement actions concerning ICOs for alleged violations of the federal securities laws.”
— Jay Clayton, Chairman, U.S. Securities and Exchange Commission
On the other side, STOs are actually registered with the SEC (Securities and Exchange Commission) and considered to be a safer alternative for companies that want to raise funds compliantly.
“With smart contracts and securities tokens you can program them to do things, proxy voting, corporate governance, you can do so much more than with paper contracts sitting gathering dust in a filing cabinet… You can eliminate your whole back office.”
— Trevor Koverko, Polymath Founder & CEO
Another great thing is that governments are taking STOs more seriously compared to ICOs. So the question is …
How Do You Make Your STO Project Successful?
Launching an ICO is complicated, but launching an STO is even more problematic. An STO project depends on various factors, one of the most important being the legal assessment.
Even the smallest legal issue can compromise the entire project. Plus, you need to complete proper ongoing KYC (“Know Your Customer”) and AML (Anti-Money Laundering) checks on investors.
These are just some of the reasons why you should consider outsourcing as much as possible to people who specialize in this type of projects.
And this is where Security Token Advisors are taking the floor.
Why do you need a Security Token Advisor?
There are numerous problems you can encounter if your STO isn’t performed according to regulations. Here are some of them:
- Exchanges won’t list any STO that has legal issues.
Remember that the loss of even one exchange can permanently damage the value of your brand. Government bodies or the SEC can give you a penalty, or in the worst case, they can even completely shut down your business.
This is exactly what happened in September 2018, when the SEC announced it had decided to shut down the cryptocurrency exchange 1Broker. After this, users lost millions of dollars in funds.
According to the SEC, 1Broker allegedly violated federal laws through a bitcoin-based security swap scheme.
Also in September 2018, the SEC ordered Menzgold, a gold trading company, to suspend its operations with the public immediately. SEC said it has thoroughly investigated the activities of Menzgold and has found that the company does not have the license to trade in gold collectibles from the public.
These are just a few examples.
- You can fail to properly follow KYC or AML policies.
KYC describes how a business identifies and verifies a client’s identity, while AML refers to all policies and regulations that oblige financial institutions to monitor their clients in order to prevent illegal actions.
Failing to comply with KYC and AML procedures puts all of your banking relationships at risk, and can even lead to the confiscation of funds. KYC and AML checks are a process, and you should know how and when they should be done.
Without the right guidance, you could face serious consequences.
- You could appear unprofessional.
Have you ever heard the saying that you never get a second chance to make a first impression? This applies to business, too. Looking unprofessional can drive away people from working with you, and you can’t blame them.
Which leads us to the next question…
How a Security Token Advisor Can Help You?
A Security Token Advisor can help you by:
- Introducing you to a proper legal counsel, token issuers, and potential investors.
- Walking you through exploring, understanding, and applying Security Tokens to improve your business.
- Producing the full investment package of required documents, including writing white papers, developing a financial model for your project, creating content for your investment deck, and more.
- Building the technical platform for STO with KYC/AML and dividend issuance.
- Developing a token on the Ethereum blockchain according to the developed tokenization model.
- Marketing and promoting your STO. This can include managing your social media profiles; creating, updating, and implementing a content plan; writing and submitting press releases; guest posting about your product on relevant blogs, and more.
It seems that with STOs, the cryptocurrency community has finally created a positive relationship with SEC, offering a compliant, flexible, and diverse way to improve a business.
When you’re dealing with other people’s money, it’s essential to make sure that the STO project is not breaking any laws on the way.
To make sure that you’re following all regulations and getting the most out of an STO, you definitely should consider hiring an agency that provides STO advisory services— not just any agency, but one that will become your business partner and do its best to ensure your success.