Security Token Offerings - A comprehensive guide to raising capital

Security Token Offerings - A comprehensive guide to raising capital

Token Offerings refer to the process of raising capital by issuing security tokens, which are digital assets that represent ownership or investment in an underlying asset. Unlike Initial Coin Offerings (ICOs), which often involve the sale of utility tokens, RWAs comply with securities regulations and provide investors with legal rights and protections. Security tokens can represent various assets, such as equity in a company, debt obligations, revenue-sharing agreements, or even tangible assets like real estate.

Raising capital is a crucial element for businesses at different stages of their growth and development. Capital infusion enables companies to finance research and development, expand into new markets, hire skilled personnel, invest in technology and infrastructure, and acquire necessary resources. By accessing external funding, businesses can fuel innovation, enhance their competitive edge, and seize growth opportunities.

Understanding RWAs

While both RWAs and ICOs involve the sale of tokens, there are significant differences between the two:

  1. Compliance with securities regulations: RWAs are designed to comply with securities laws, offering investors legal rights and protections. In contrast, ICOs often involve the sale of utility tokens that do not necessarily grant ownership rights or represent traditional securities.
  2. Investor protection: RWAs prioritize investor protection by adhering to regulatory requirements, such as conducting KYC/AML checks, providing transparent disclosure, and ensuring compliance with securities regulations. ICOs, on the other hand, may lack the same level of regulatory oversight, which can expose investors to higher risks.
  3. Asset representation: digital assetss typically tokenize real-world assets, such as equity, debt, or revenue-sharing agreements. In contrast, ICOs often tokenize access to a product or service within a blockchain ecosystem.

Regulatory Framework for RWAs

RWAs are subject to securities laws and regulations that vary across jurisdictions. These regulations aim to protect investors and ensure fair and transparent markets.

In the US, the Securities Act of 1933 regulates the initial issuance and sale of securities, while the Securities Exchange Act of 1934 governs secondary market trading. The Howey Test determines whether an investment qualifies as a security issued by the Supreme Court.

AML and KYC regulations require robust investor verification in the US too.

While in Europe, the regulatory landscape for securities varies across different countries within the European Union (EU) and is influenced by EU directives. The [EU Prospectus Regulation]( Prospectus Regulation inaugurates a,in the European Economic Area.) sets out the requirements for issuing and offering securities to the public, including security tokens. The Markets in Financial Instruments Directive (MiFID II) regulates the provision of investment services and activities, including the trading of securities, and imposes obligations on financial institutions. Europe also required financial institutions to implement robust AML and KYC procedures like the US. Still, individual countries within the EU have their own national securities laws and regulations that businesses must comply with as well.

Each jurisdiction may have its own specific rules and regulations regarding digital assets. It is crucial to understand the legal and regulatory landscape of the target jurisdiction, as it impacts the requirements for conducting a RWA, such as licensing, investor eligibility, disclosure obligations, and secondary market trading.

Benefits of Conducting a RWA for Raising Capital

Increased Investor Protection

Digital assetss offer enhanced investor protection compared to other fundraising methods. By complying with securities regulations, RWAs provide investors with legal rights, such as ownership, profit-sharing, voting, or dividends. This legal framework ensures transparency and reduces the risk of fraud or unregulated activities.

Access to a Wider Investor Base

RWAs have the potential to attract a broader range of investors, including institutional investors, accredited individuals, and retail investors. Compliance with securities laws can provide credibility and attract investors who value regulatory oversight and investor protections.

Enhanced Liquidity Options

RWAs can offer improved liquidity options for investors. By listing security tokens on regulated exchanges or alternative trading systems, investors have opportunities to buy, sell, or trade their tokens. This liquidity can provide flexibility and enable investors to exit their investments or diversify their portfolios.

Preparing for an Token Launch

Defining the Project & Token Structure

Launching a successful Digital Asset requires careful preparation and planning. The initial step is to define the project and determine the token structure.

  1. Token type and utility: Businesses need to decide on the type of token they intend to issue. It could be an equity token representing ownership in the company, a debt token representing a loan agreement, or a utility token granting access to specific products or services. Understanding the purpose and utility of the token is essential in attracting investors and establishing value.
  2. Token economics and valuation: Establishing the token's economics involves determining factors such as the total supply, distribution mechanism, token pricing, and token allocation. Conducting a thorough valuation analysis is crucial to set a reasonable price for the token and determine the initial market capitalization. Factors like the underlying asset value, revenue potential, and market demand should be taken into account.

Legal & Regulatory Considerations

Compliance with legal and regulatory requirements is paramount in conducting a RWA. Engaging legal counsel and compliance experts early on in the process is essential to ensure adherence to applicable laws.

  1. Engaging legal counsel and compliance experts: Businesses should seek the expertise of legal professionals with knowledge of securities laws, blockchain technology, and RWAs. Legal counsel can provide guidance on compliance requirements, help navigate complex regulatory frameworks, and ensure that the RWA is conducted in accordance with applicable laws.
  2. Preparing necessary documentation: Businesses need to prepare necessary documentation such as a whitepaper, terms of the offering, subscription agreements, and any required disclosures to provide comprehensive information to potential investors.

Marketing & Investor Outreach

Effectively marketing the RWA and conducting investor outreach is crucial to attract interest and raise capital. Building a strong online presence and creating an investor pitch deck are vital to a successful marketing strategy.

  1. Building a strong online presence: Establishing a professional and informative website dedicated to the Digital Asset is essential. The website should provide an overview of the project, details about the team, token information, and any relevant documentation. Engaging in social media channels and participating in relevant industry forums can also help increase visibility and attract potential investors.
  2. Creating an investor pitch deck: A well-crafted investor pitch deck is instrumental in conveying the project's value proposition, business model, and potential returns to investors. The pitch deck should include information about the project's market opportunity, competitive advantage, roadmap, and details about the RWA, such as the token structure, use of proceeds, and potential token value appreciation. This can then be used to set up investor meetings and pitch to them.

Launching a Token

Choosing the Right Issuance Platform

A successful Digital Asset requires careful consideration when choosing the right issuance platform. The platform will serve as the infrastructure for the token sale and investor participation. Here are two key factors to consider when selecting an issuance platform:

  1. Evaluating platform features and security measures: It is crucial to assess the features and capabilities of different issuance platforms. Look for platforms that offer robust security measures, such as multi-factor authentication, encryption, and cold storage for token custody. Consider the platform's user interface, functionality, scalability, and compatibility with blockchain protocols.
  2. Compliance with regulatory requirements: Ensure that the chosen issuance platform complies with relevant regulatory requirements. The platform should have the necessary licenses and certifications to operate within the jurisdiction where the RWA is being conducted. It should facilitate compliance with know-your-customer (KYC) and anti-money laundering (AML) regulations by implementing robust identification verification processes for investors.

Conducting a Token Sale

Once the issuance platform is chosen, the next step is to plan and execute the token sale process effectively. This involves the following:

  1. Establishing a token sale timeline and pricing strategy: Determine the duration of the token sale and create a clear timeline, including pre-sale and public sale periods. Develop a pricing strategy that takes into account market conditions, token supply, and demand. Consider offering early bird incentives or tiered pricing structures to incentivize early participation.
  2. Setting investor participation criteria and KYC/AML procedures: Define the criteria for investor participation, such as minimum investment amounts, accredited investor requirements, or geographic restrictions. Implement robust KYC/AML procedures to verify the identity of investors and comply with regulatory obligations. Collect necessary documentation and ensure a smooth onboarding process for investors.

Investor Relations & Ongoing Communication

Building trust and providing transparency will help foster long-term relationships with investors. Consider the following practices:

  1. Providing regular updates and transparency: Keep investors informed about the project's progress, milestones, and any significant developments. Provide regular updates through newsletters, blog posts, or dedicated investor communication channels. Transparency regarding token utilization, governance, and financial performance will instill confidence and trust in investors.
  2. Addressing investor queries and concerns: Establish clear channels of communication for investors to ask questions or seek clarifications. Promptly address any concerns or inquiries raised by investors. Consider hosting webinars, AMA (Ask Me Anything) sessions, or dedicated forums where investors can interact with the project team and get their questions answered.

Post Token Launch Considerations

After successfully conducting an RWA, businesses need to address several key considerations to maximize the potential of their tokenized assets and ensure ongoing compliance. This section explores important post token launch considerations:

Token Listing & Trading

  1. Listing on regulated exchanges: Seek listing opportunities on regulated security token exchanges that comply with relevant securities laws and provide a secure and transparent trading environment. Listing on reputable exchanges enhances market credibility and liquidity for token holders.
  2. Liquidity options and secondary market trading: Explore various liquidity options for token holders, such as creating market-making programs or establishing a trading venue for secondary market trading. Enhancing liquidity can attract more investors and provide existing token holders with avenues to buy or sell tokens.

Compliance with Ongoing Regulatory Obligations

  1. Reporting and disclosure requirements: Comply with ongoing reporting and disclosure obligations imposed by regulatory authorities. This may include providing periodic financial statements, disclosing material events, and reporting on token utilization and governance matters. Adhering to these requirements promotes transparency and ensures compliance with applicable securities laws.
  2. Corporate governance and shareholder rights: Implement robust corporate governance practices to protect shareholder rights and ensure effective decision-making processes. This may involve establishing a board of directors, conducting regular shareholder meetings, and adhering to corporate governance guidelines and best practices.

Post ToKen Launch Fundraising & Scaling Strategies

  1. Leveraging the token ecosystem for further capital raising: Explore opportunities to leverage the token ecosystem for additional fundraising initiatives. This may include conducting follow-on token offerings, utilizing token-based fundraising mechanisms like decentralized finance (DeFi) protocols, or exploring partnerships and collaborations within the blockchain and crypto space.
  2. Expanding the business and maximizing investor value: Utilize the raised capital to expand the business operations, develop new products or services, and increase market penetration. Continuously engage with investors, provide updates on business progress, and demonstrate value creation to maximize investor confidence and satisfaction.

Real World Assets Success Stories

  1. Vevue: Vevue is a decentralized video-sharing platform that sought to leverage the benefits of digital assets to raise capital and provide international investors with investment opportunities. They launched a security token for their Wyoming Corporation, offering non-voting preferred equity shares to token holders. The VUE token, compliant with the ERC1404 standard, replaced their previous utility token, VUT. Through their RWA, Vevue aimed to enhance investor protection and create a more regulated and transparent investment environment for their global investor base.
  2. Siafunds: Sia, a prominent cloud-storage company, introduced Siafunds as a way to distribute real-time transaction fees from storage-related payments on their network. By launching a RWA, Sia aimed to offer qualified investors the opportunity to participate in the growth of their cloud storage ecosystem and share in the network's success. The distribution of up to 750 Siafunds provided investors with a means to benefit from the increasing adoption of Sia's services while creating a new avenue for fundraising and value sharing within their community.
  3. BCAP: Blockchain Capital, a venture capital firm focused on blockchain and cryptocurrency investments, launched BCAP as the first tokenized venture fund. BCAP is an Ethereum-based smart contract digital token that allows investors to gain exposure to a diversified portfolio of early-stage blockchain startups. By conducting a RWA, Blockchain Capital aimed to democratize access to venture capital investments in the blockchain space and provide investors with a liquid and tradable asset. The RWA raised a total of $25 million, enabling Blockchain Capital to expand their investment activities and support the growth of promising blockchain projects.

These real-world assets success stories demonstrate the varied applications and benefits of RWAs in different industries. By embracing the tokenization of assets, these companies were able to raise capital, attract global investors, and offer innovative investment opportunities. Through compliant token structures and the use of blockchain technology, these STOs aimed to enhance transparency, liquidity, and investor participation in their respective ecosystems.

As you can see RWAs offer a plethora of benefits to a business looking to capitalize on investment opportunities. If you follow this guide, you’ll be well on your way to leveraging tokenization potential and gaining traction for your startup or already established company.

Brickken is a first-of-its-kind tokenization platform that can assist in the process. We have built-in assistance with legal requirements and access to experts across multiple industries. Our token suite allows you to set up the metrics and tokenomics of your security tokens however you like. Check out the Brickken official site for more details on how we can help.

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