Bitcoin seems to be challenging fiat. Blockchain Technology is disrupting decade-old industries. Security Token Offerings (STO) are the new method of fundraising. Originally, ICOs were thought to be killers of the space but due to the number of scams, regulations were quick to address the issue. STO is, simply put, the legalized version of ICOs.
Launching an ICO is already a complicated process. Add on the additional legal compliance and the necessity to complete proper ongoing KYC and AML on investors required for an STO, you then have a plethora of things to worry about. Should you then engage an STO Advisory?
What are Security Token Offerings (STOs)?
But let’s try and understand it with a simple analogy: A factory.
Fundraising with Initial Coin Offerings (ICOs): Creating a utility token or a means to hold fiat value.
Investing in an ICO or utility tokens essentially means you are investing in the machinery or the idea of building a machine to build/pack/service whatever the company is doing.
What happens if the factory does not make its products? There isn’t any demand for the product. When the company that owns these machines (built using your money) goes out of business or decides to change direction and leave the machines, your money will be stuck in those machines unless the company finds a way to incorporate it into their next business idea.
Larger or more established crypto-companies such as Ethereum or Stellar Lumens have been in the game for a good number of years and have developed a successful business model which generates revenue. Ethereum has never been built to be a store of value so the volatility of ETH does not (or should not) matter.
Fundraising with Security Token Offering (STOs): Equity or Asset-backed tokens.
Investing in an STO or security token means you will be investing in the company that owns the machinery and factory.
Prior to fundraising, the company has to go through proper legal channels with governing entities. Ideally, should the company ended up closing, it would ultimately be a failed investment. And if said company were a scam, they can be traced and found by authorities.
For more information on Security Token Offerings, please refer to my other article on Hackernoon:
There are no shortcuts to STOs
Referencing this news article from TodayOnline, companies issuing security tokens cannot afford to take a quick route to success. The company in question also found that “shilling” (also known as promoting) their project can lead to a warning from authorities.
Companies looking to expand through security token offerings require intense due diligence on the matter especially since each country has different laws and regulations.
Below are some of the problems that you will encounter if your security token offering is not performed according to code.
- Exchanges will not list any STO which has potential legal issues. Even the loss of one exchange can dilute the future liquidity and value of your brand
- The SEC or other government bodies can either slap you with a penalty or in a worst-case scenario shut down your operations
- Failure to KYC or AML properly could jeopardize future banking relationships and could result in the confiscation of funds
- You could appear to be unprofessional to those in the space
- De-optimization of the potential amount to raise
Engaging a Security Token Offering Advisory Firm
The majority of the world have an inkling what blockchain or fundraising is but the next step seems to be the hardest — what’s next? who should we go to?
That is where you can consider engaging a security token advisor.
Consultants or advisors are skilled individuals or group who can provide the necessary steps to move forward with an unknown industry. The main benefit of hiring consultants is the temporary expertise that they bring. Adopting a Pay-Per-Service philosophy, hiring consultants can be cost-effective in the long run as compared to hiring a full-time staff — employees’ benefits, human resource issues. They are also expendable to some degree providing an easy way to remove deadwood.
An advisor can also perform the following:
- Introduction to proper legal counsel
- Introduction to token issuers
- Introduction to potential investors
- Recommendations on jurisdictions to incorporate
- Optimization of the whitepaper/business plan
- Connecting at events to discuss the project
- Recommending changes to the planned corporate structure
Having an advisory at your beck and call provide a great amount of value to the organization. An advisory usually contains individuals from various backgrounds and expertise, allowing consultants to think objectively and develop innovative strategies purely for the hiring company’s business development and revenue growth. Advisors also may have the necessary business expertise and experience than the average employee.
A good STO Advisory firm should have a good grasp of current regulatory and legal in the blockchain space. Due to the false-promises brought by various ICOs, authorities have finally started catching up with the hype and bringing new legislation and law that can only be good for the industry. It is paramount that your consultant keeps up with the ever-changing laws and regulations to ensure your journey with STO is as smooth as possible.
The topic of Security Token Offering is still up for debate. But in theory, tokenization can pave the way to greater things just like how ICOs have been. Watching ICOs evolve into STO is the first step to disrupting the securities industry.
Iliya Zaki is the Head of Marketing & Business Development for Moonwhale Ventures, an STO Advisory Firm based in the U.S.
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