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.

Tokens

Tokens issued during an ICO is a utility token. Such tokens do not have to follow any regulations and compliances that are in place for securities. However, designing the perfect utility token is difficult. If the issued token offers a return to the buyer, it is considered as a security and it has to comply with the securities regulations.

For company A, the tokens offered cannot serve any utility but can only offer returns to the buyers. In this scenario, the fundraising option via an ICO is not a feasible option for the company.

Research shows that restricted shares are undervalued by 20%-35% due to their lack of liquidity when compared to ordinary shares.

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.

Security Token Offering (STO)

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.

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.

How to launch an STO?

With CoinFactory, company A followed the 3-step process to set up, execute and manage the STO.

Pre-STO

During the set-up phase, the company focused on structuring the offering, completing legal reviews, ensuring compliance filings, creating the required documentations etc

Issuance

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.

Lifecycle Management

Finally, it’s the post token sale phase. At this stage, the company will manage the investor community, reporting and define secondary trading compliance.

Below is a detailed breakdown of the process followed by Company A

Pre-STO

Issuance

Lifecycle Management

Company Charter

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.

STO Documents

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.Company Overview, Risks and FinancialsAn overview of the business, business risks and financial reports.Offering DetailsCompany 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: Minimum Investment Size $10,000. This was done to ensure that valuable investor slots are not taken up by small investors Rights No dividends or voting rights were granted with the token offering. Obligations The company established the right to block tokens if buyers do not complete their KYC/AML/ Accreditation process. Transfer Rights Secondary trading was allowed as permitted by the existing securities regulations. Price Price of one token was set at $1. Selling 30 million tokens to raise $30 million Accepted Currencies The company allowed investors the flexibility to invest using BTC, ETH, USD Cap The upper and lower limits set for the raise Closing Dates The date at which the offering ends. Use Of Proceeds Proceeds were tentatively earmarked to perform a series of M&A transactions

Marketing

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.

KYC/AML/ Accreditation

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.

Token Issuance

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.

Funding

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.

Ongoing Communications

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.

Secondary Trading

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.

STO Overview and Timelines

Pre-STO

Issuance

Lifecycle Management

Estimated Times1

Responsible

Coinfactory Role

Company Charter

1 Week

Company, Counsel

Advise / Knowledge Sharing

Offering

1 Month

Company, Counsel

Advise / Knowledge Sharing copy

Marketing

3 Months

Company, Broker/Dealer

None

Total time from kick-off until Issuance: 2 - 6 month

Estimated Times

Responsible

Coinfactory Role

KYC/AML/ Accreditation

Ongoing

CoinFactory

Lead

Token Issuance

1 Day

CoinFactory

Lead

Funding

1 Day

CoinFactory

Lead

Total time from kick-off until Issuance: 2 - 6 month

Estimated Times3

Responsible

Coinfactory Role

Ongoing Communication

Ongoing

Coinfactory/Company

Execution

Secondary Trading

Ongoing

CoinFactory

Lead

Total time from kick-off until Issuance: 2 - 6 month

Conclusion

Company A successfully raised $30Mn by selling 30Mn security tokens to the accredited investors. The token sales was completed over 42 days.

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