November 16, 2018
Security Token Offerings (STO) part 2
Security Token Offerings (STO) part 2: Leveraging the power of Blockchain technology to deliver liquidity to venture capital investments.
Among the many practical uses of blockchain technology to business owners, the rise of simpler, more accessible ways of fundraising stands out. Both entrepreneurs and investors benefit from this; entrepreneurs can issue tokenized company equity and investors can do the same for the funds they are assembling. With the inception of ever more popular Security Tokens, investors and entrepreneurs are able to make sure appropriate regulatory compliance is enforced on both sides of the investment funnel.
Venture capital expenditure drives innovation and also takes disruptive solutions into the marketplace, especially now in the Digital Economy era. One of the factors startups struggle with increasing capital is the illiquidity of venture investments. If investments into startups were fluid like investments in public offerings (stocks), as well as compliant with regulations and exemptions, investors would be able to purchase equity on the early stage of a company lifecycle, regardless of geographical barriers.
At Wuzu, we believe the Security Token technology is the answer to both liquidity and compliance issues. Security Tokens are able to uncover trillions in illiquid capital, such as in private equity, venture capital, real estate or debt, to name a few.
Before we get deeper into Security Tokens, lets address concerns regarding ICOs, and Utility tokens.
Utility tokens, ICOs, and regulatory concerns
At first, the most popular fundraising method utilizing blockchain were Initial Coin Offerings (ICOs). Purchasing a Utility Token delivered access to an application or service and not dividends or equity. Many blockchain based startups started raising money to fund their projects by promoting Utility Tokens through an ICO procedure with just a concept and a whitepaper. They raised billions of dollars in capital without providing equity or diluting their business. In 2017, we witnessed an enormous influx of cash into ICOs (approximately US$ 5 billion). These Utility Tokens were offered publicly and traded in exchanges which were not regulated. The U.S. Securities and Exchange Commission (SEC) began cracking down on the ICO progression and often declared all ICOs as securities, plus exchanges had to have a cash transfer license to trade these tokens. In March 2018, Financial Crimes Enforcement Network (FinCEN) plainly stated that no businesses were able to promote Utility Token to U.S. investors until they had a cash transfer license. These actions significantly delayed the issuance of Utility Tokens employed in ICOs, marking the end of the ICO phenomenon. Nevertheless, entrepreneurs began searching for alternatives, and the solution is Security Tokens.
Security Tokens and Security Token Offerings
Security Tokens are real financial securities which are supported by anything tangible like assets, profits, equity, or revenue of a business. Therefore if a startup is issuing a Security Token, investors that purchase them gain equity and in turn rights to dividends, as well as some rights within the business. In addition, investors must go through a compliance process which includes KYC/AML, certified investors checks, and so on.
Like Bitcoins (and other digital currencies) that are regarded as “programmable money,” Security Tokens can be seen as “programmable ownership” or “programmable equity” in general. Security Tokens could be programmed with factors like who can buy/sell (such as merely accredited investors) in what jurisdictions, dividends, voting rights, additional rights in the business as well as different details regarding governance and compliance. In a nutshell, Security Tokens turn capital rights into a technology which may be programmed with regulations that can be performed automatically via a smart contract.
Security Tokens will drive the next significant trend in capital markets. Equity ownership will be disrupted, in the exact same way cryptocurrencies are disrupting cash.
Who in the corporate level is able to raise money with Security Tokens and at what stage?
Generally speaking, every organization could raise money via Security Tokens. Naturally, companies that are further along the path of decentralization have an easier journey ahead.
- Decentralized organizations (already using Blockchain technology)
- Organizations moving from a centralized data source to decentralized (Blockchain)
- Traditional centralized companies.
Although Security Tokens may be used by organizations at every stage — Ideation, Early Stage (Seed, Post-Seed, Series A) as well as Late Stage, they’re much more suited for businesses at Post-Seed / Series A and beyond. Vendors at this point are better positioned to show revenue traction, and generally will be more equipped to cope with regulatory and legal demands connected with Security Token offerings.
In some instances, Blockchain businesses built from the ground up by way of a decentralized design can launch their own STO without much friction.
Structuring Security Token Offerings
There is a great variety of methods to design a Security Token Offering (STO) depending on the entry point of the business as well as capital being raised. The most popular method of fundraising is a three-tiered structure:
1. Private pre-sale: Typically open to tier-1 investors (VC funds, crypto funds, angel investors, and institutions) with a bonus on the primary token sale selling price (often 20 %).
2. Pre-sale: Typically open to tier 2 investors or even to all those who missed the private pre-sale at a lower price on the primary token sale (often 10%-15 %).
3. Main sale: Typically ready to accept accredited investors worldwide at no discount.
Infrastructure for Security Tokens
There are 3 primary levels of infrastructure needed for issuance as well as trading. Wuzu provides services and solutions in all 3 levels, plus others.
1. The technology platform for Security Token issuance. In other words, our ability to list tokens to all exchanges running our technology.
2. Regulatory rights to issue and trade Security tokens. Due to our legal structure.
3. Custodian and compliance platform. Granted by our cold storage institutional wallet and application of KYC/AML processes.
Why Security Tokens?
To sum up, Security Tokens offer several unique advantages:
– They bring liquidity to investors in the form of simple fundraising for the setting up of investment vehicles- They simplify the fundraising procedure for entrepreneurs while tearing down regional barriers to foreign investors
– Security Tokens allow businesses to tokenize its equity. This is not available only to blockchain enterprises.
– Enable investors throughout the world to get involved and trade anywhere.
– Provide international regulatory compliance via the use of common KYC/AML procedures and checks that have global reach and validity.
Wuzu believes in the power of Security Tokens; we are proud early adopters of the delivery of online solutions to capital investments through Security Tokens for innovative businesses.
Platforms like Wuzu provide the catalyst and foundation to make it possible for Security Tokens to be a new and potentially priceless tool within the capital markets toolbox. Unregulated ICOs provided the motivation for this up and coming trend, and now the STO movement is already underway. The 3rd Blockchain revolution of digital ownership will arguably be the most impactful and important to date.