How to issue a digital security, what are the steps: a brief outline of the 12 stages that a company will take to launch an STO complying with all the legal issues. We intentionally skip the zero stage: the decision to take the very STO as a way of raising funds and focus only on practical steps. This is neither a call for action nor a 100%-safe guide. One must do their own research to make conscious choices and deliberate decisions. 1. Business model analysis … to make the decision what type of securities to issue for attracting investments. This stage is about finding the best instrument to attract investments to the company. Common questions are raised, like when is it coming to financing; debt or equity? Let’s assume that STO suits you. Then, the IB or financial specialists identify what type of securities could be suitable according to its business model. Common shares that represent a share of equity, debt instruments as bonds or preferred shares considered as hybrid instruments of debt and equity financing. So, first, it’s important to understand the company’s market capitalization and develop a clear vision of a financial plan to decide what are the amounts to be attracted at a current round and how. 2. Legal body incorporation and a bank account Investors need to be sure in the investing for the securities into a real company. There are common options as Simple Agreement on Future Equity that promise shares after legal body incorporation. However, it’s applicable only for startups on usually pre-seed rounds and issue of digital securities is different. There is a myth that STO is available only in the US, but this is not true. However, the process there is a bit more well-defined. Legal body in the US jurisdiction guarantees the US investors their rights according to the local legislation they used to work with. It means that one may have more chances to attract investments from the US investors into a US-incorporated company. It takes approximately two weeks to open a bank account — to make it possible to receive the fund. In part, SVB and Silvergate banks seem to be welcoming various businesses as well. to expand their own presence in crypto/blockchain enterprises 3. Structuring of the Agreements with the investors This is definitely the vital task, in terms of the balance of interests between parties and risks mitigation. The legal and economy specification must outline the rights of investors and your security offering details. For instance, it should contain: the date of Digital Security emission, the rules of their circulation, how the distribution of dividends is to be conducted, when the company will make reports to Financial Regulators and Tax authorities. All this plays a big role in the investors’ decision and will be outlined in the agreements. 4. Filing with the regulator Each jurisdiction has its own rules of compliance when issuing a security. General rules require filing the S-1 prospectus. This might be a complicated process. For instance, in the US there are exemptions when it’s not necessary to approve the prospectus with the SEC. The most common exemption is under the Regulation D applicable for the US investors. To qualify for limited offering exemption under the regulation D the securities should be offered to accredited investors only under , and the company has to take reasonable steps to verify the status of the investors, so KYC and using the accreditation soft on your website when attracting the investments would be a benefit for optimizing the process for both parties. the rule 506(c) There is also a chance to accept non-accredited investors under the Regulation D rule 506(b), without promoting the token (general solicitation) and offering the security to the investors that are known to the issuer prior to offering process. Practically it’s the family, friends or angels that backed up the project from the beginning and can not exceed the number of 35 investors. Also, Regulation S is applicable for non-US investors and Reg CF for crowdfunding the amounts of no more than $1 million. You will also draft a Private Placement Memorandum, a definitive narrative of the offering outlining the benefits and risks of a venture, which is a key document for accredited investors. Risks and disclaimers shall be described widely to protect the company from the investor’s potential claims. You will need to prepare all filing-related documents, including Operating Agreement/Shareholders Agreement, Subscription Agreement, Investors Questionnaires, and Blue Sky Notice filing. 5. Smart Contract development and token creation All the terms and conditions of a tokensale outlined in the specification shall be implemented in the smart contact. The token itself represents a security, so all the requirements as restricted selling (i.e., the lock-up period) need to be set in the smart-contract. The smart contracts logic settlement and choosing a token standard is a challenge with legal rules ‘incorporated’ into the code. That’s exactly where lawyers and tech specialists should work together. There are some solutions that allow the lock-up periods, whitelisting of Reg D and Reg S investors and restricting trades between each other and other features to make the token’s circulation compliant. You can try some platforms — like Securitize, Polymath, Harbor, Astos — to issue the token. 6. Settling the dashboard to investors on-boarding The dashboard is some soft that helps you to accept the investments, with KYC/AML and accreditation. White Label solutions settled and customized on your website make it easier to invest in your company using crypto or fiat transactions. 7. Starting out a marketing campaign ‘Security’-marketing is quite different than it was in the ICO world. We all watched the case with Floyd Mayweather and DJ Khaled — these pop-stars were fined for the promotion of a security without a license. The fines are twice bigger than the received payments under the marketing agreement. Product description and meetups about its development and usage won’t fall under the ‘licensed activity’, however, an offer or direct promotion of a security for sale must do the issuer herself or licensed broker-dealers only. 8. Accreditation and Verification (KYC/AML processes) After the marketing campaign and receiving some commitments, it becomes necessary to check the investors’ status. The accreditation is required when the investor can’t provide a legal opinion or W-2 statement to prove her status. An accredited investor when she possesses assets to total no less than $1 mln or has personal income no less than $200k annually or $300k for a household for the recent 2 years, and has expectations to maintain such an income. is considered such Talking about the assets amount required to qualify for accreditation, almost all property considered as an asset, even an old wine bottle or an old car can help one to reach the required 1 mln. Directors, Executive officers, and General Partners are also considered as accredited investors. As a company attracting investments, you need to verify this status via KYCprocess. You check the investor’s proof of the status by investigating their attached documents or by the results of the verification company that can be used for that purpose. Verify Investors, etc. may be handy here. 9. Receiving funds When an investor is checked, she can transfer the funds to your business bank account or make a crypto transaction. 10. Distribution of the digital securities After receiving the funds, you — as a company — shall deliver the tokens (digital securities) to the investors to their whitelisted (via KYC) wallets. 11. Listing on the secondary market As for today, Tzero started to trade digital securities on their exchange (ATS) last week, Open finance made its first transaction last month and a few more exchanges most likely to be launched soon. The listing procedure on such an exchange differs from public listing on traditional exchanges like the New York Stock Exchange, and requires internal compliance procedures. Namely, a legal documents provision, protocol security audit etc, that would mitigate the risks for the exchange when dealing with the asset. 12. Capitalization table management All the processes are handled, investors holding your tokens and trading on the exchange after the lock-up period expiration — and the management of the ledger where all the data of current investors is the next challenge. Distribution of the dividends, creating the new tokens and distributing when the owner lost its private keys and other processes would fall under the cap table management. There are enterprise-grade software vendors in the space, making all procedures easily trackable and deliverable as Vertalo and others. Zufar G., the VP of business development at Astos: full lifecycle management company for digital securities offering, in collaboration with Finrazor.com. My original Article on Finrazor: _We intentionally skip the zero stage: the decision to take the very STO as a way of raising funds and focus only on…_finrazor.com An STO Lifecycle: The Complete List of Milestones | Finrazor.com

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