Security Token Offering:
A Hypothetical Case Study
Company A is based in USA, focusing on the energy sector and plans to expand the business by selling renewable energy infrastructure to other organizations. However, the company did not have the capital required (approx $30MM) to expand the business. In this scenario, the company was exploring the various options it had to raise the required funds. Initially, the company was inclined towards doing an IPO (Initial Public Offering), considering that it would provide the required liquidity, but the doing an IPO is very costly as well as it demands tedious operational and reporting requirements. The option of private offering lacks liquidity features, prevents secondary trading of the shares and would affect the true market valuation of the company.
Among the three available options for fundraising, ICOs offer easy access to capital. However, regulatory uncertainty and the lack of any “utility” in the planned offering rules out the possibility of launching an ICO.
Company A was presented with a new method of fundraising, called STO aka Security Token Offering. Unlike an ICO, an STO did not require the offered token to have any utility but could offer returns to the buyer. It has to be conducted in compliance with existing securities regulations in each jurisdiction. STO offered liquidity just like an ICO and the costs and lack of operational implications of private offerings.
Approximate cost over 10 Years
Required Track Record
Only Accredited Investors
While company A was evaluating the option of an STO, their main concern was the limitation of STO had for the number of allowed investors. Only 2000 accredited investors were allowed to participate in the STO, which is a regulatory limitation placed on private offerings. However, given the fact that the private offering market in the US was 22X bigger than that of public offerings, company A decided to do an STO for fundraising.
With CoinFactory, company A followed the 3-step process to set up, execute and manage the STO.
During the set-up phase, the company focused on structuring the offering, completing legal reviews, ensuring compliance filings, creating the required documentations etc
In the execution phase, that is, the token sale phase, the flow of capital and token distribution is managed. The company has to do KYC/AML/Accredited investor review for the buyers.
Finally, it’s the post token sale phase. At this stage, the company will manage the investor community, reporting and define secondary trading compliance.
The tokens issued in an STO represent the company stock. The company has to define the various attributes of the stock such as the voting rights, preferred or ordinary, dividends etc. This may require changes to the company’s charter. Company A had 10MM authorised shares and only 1MM issued shares, and they decided to issue 5MM additional shares for the token sales via STO.
Company A has to define terms and conditions of the STO in an Offering Memorandum. This document is less comprehensive than a prospectus, used for public offerings.
An overview of the business, business risks and financial reports.
Company A decided to launch an STO under Regulation D, Rule 506(c) since this allowed them to perform solicitation for their offering. The terms were:
$10,000. This was done to ensure that valuable investor slots are not taken up by small investors
No dividends or voting rights were granted with the token offering.
The company established the right to block tokens if buyers do not complete their KYC/AML/ Accreditation process.
Secondary trading was allowed as permitted by the existing securities regulations.
Price of one token was set at $1. Selling 30 million tokens to raise $30 million
The company allowed investors the flexibility to invest using BTC, ETH, USD
The upper and lower limits set for the raise
The date at which the offering ends.
Proceeds were tentatively earmarked to perform a series of M&A transactions
A legal partner was hired to assist the company with drafting the standard Private Offering legal disclaimers along with some additional disclaimers relating to the token offering.
The company has to define Subscription Agreement that investors may be required to sign. This document summarizes the terms of the investment and captures the investor consent to those terms.
Since the 506(c) allows for general solicitation, the company set aside a budget for marketing purposes. Due to the cap on the allowed number of investors, the marketing activities had to be more focused and cost-effective than that of an ICO. The company spent $100,000 on marketing its offering. To manage the investor onboarding, the company chose to use a white label landing page.
STOs are limited to Accredited Investors in USA. Working with CoinFactory, the company easily managed the KYC/AML/ Accreditation process and created investor accounts on the platform for every investor that cleared the process.
Company A used CoinFactory's standard smart contract for the token sale via STO. The audited smart contract included all necessary global compliance requirements, such as limits on investor counts, lock-up periods, and flowback restrictions. The smart contract was then tweaked to facilitate the buyback powers the company wanted.
The funding process is where capital is raised by selling tokens to the investors for BTC, ETH or USD. The tokens are issued to the investors in proportion to the amount they funded. This end to end process was handled by CoinFactory in compliance with the requirements defined in the set-up phase by Company A. In addition, since Company A preferred not to hold all the funds collected in BTC & ETH on their Balance Sheet, they opted to use the 3rd party Custodian service that was offered through the platform.
Following are certain life cycle implications that do have to be addressed in an STO
After the token sales, the company may need to communicate with investors. CoinFactory's community management portal facilitated the Company A to do this efficiently. The communication generally includes periodic financial reports, details about buybacks, bounty and bonus programs etc.
Restricted tokens have certain limitations regarding secondary trading such as lock-up periods and limits on investor counts in different jurisdictions. Managing these complexities can be tedious, but fortunately Company A’s counsel confirmed that the secondary trading restrictions baked into the CoinFactory's smart contract were fully compliant.
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CoinFactory / Company
Company A successfully raised $30Mn by selling 30Mn security tokens to the accredited investors. The token sales was completed over 42 days.
ICOs and STOs are disrupting the business finance realm. Wait no more, reach out to us today to discuss how to launch an ICO or STO for your project.