STO

STO

STO stands for security token offering. We believe that in few years it will be the most common way for companies to raise money.  The major advantage of security token offering is that its conducted in full compliance with existing legislation.

If you have never heard about security tokens before we recommend reading this artcle https://medium.com/@hamletcrypto/the-upcoming-security-tokens-revolution-f71fb0c23ec9 written by Ilia Frankstein, Managing Director of Tetha Crypto.

IS STO RIGHT FOR YOUR COMPANY?

All legislation was created to protect investors.  Even in US which has the most strict regulation in the world to protect investors around the world before the Sarbanes-Oxley act was passed in 2002 there were many cases of corporate and accounting fraud shaking investor confidence in stock markets.  Utlity token markets have been falling recently and will contniue to fall long term because most projects that issued these tokens have very little to show to investors. There is no revenue, no assets, no audited financials, no transparency, no detailed annual reports. There is a lot of PR and very little real disclosure.  If your company is a startup with no revenue but promising great potential we will take you as client with one condition, it will be solely your responsibility to market and sell your tokens to investors. Otherwise we recommend security tokens issuance only to companies that own real assets that have market price like real estate for example or companies having existing revenue history for at least three years and which are ready to provide as much disclosure to investors as possible.  Generally we device all security tokens to two categories: those that will be offered to accredited investors only and those that could be sold to general public. The infrasturcture that is being built for security tokens allows to automatically whitelist accredited investors in your company.

TYPICAL STO PROCESS

Getting an advisor

An advisor will be able to assit you with the following:

  • evaluate the options for your STO which include the type of offering private or public
  • structure the offering
  • come up with a proper type of security token; the technology used to create security tokens offers great flexibility and selling equity is just one option out of many available. Other options could include revenue sharing token for example. However if offering security tokens to the public in US using Reg A+ only three types of security tokens are allowed: equity token, debt token and debt convertable to equity token. For all advanced types of security tokens like revenue sharing tokens Reg D 506 B or C regulation should be used and those can be offered to accredited investors only.
  • select the most suitable tokenization platform; many platforms already exist and new are bieng built all the time each of these have their advantage and disadvantage which are important to understand in advance.
  • select legal counsel
  • connect you with reputable service providers for marketing and PR
  • help you find additional advisors for your project based on your requirements.
  • make important introductions to the community of investors which could help you to kick start your fundrasing process
  • help you to list your new token on security token exchanges, liquity layers and contract market makers.

Defining investor audience and jurisdictions

With security tokens its possible to define your investor audience and jurisdictions. You can make a decision to offer your tokens only to US investors or investors in as many countries as you wish. Your investors could be only accredited or general public. Tokenization platform will automically whitelist only specified investors and prevent sales or trading of your token to any investor outside of your requirements.

Selecting tokenization platform and issuing the token

There are quite a few tokenization platforms to chose from and each one has its own advantages and disadvantages. Going into details will require a separate article, please contact us for details. Upon review of your specific requirements we will help you to chose the proper platform.

The actual token issuance could be very simple procedure or quite complex especially of your token requires specific functionality.  Most of it could be done in house by Tetha Crypto. In some cases we will refer you to third party contractors.

Roadshow and marketing campaign

Roadshow and marketing campaigns are not much different from IPO road shows or roadshows that we’ve seen for the most successful ICOs.

Listing on security token exchanges

Many exchanges for trading of security tokens are being built.  Most notable of these projects are: Neufund, tZero, OKMSX, Blocktrade, Coinbase, TokenX, Open Finance Network and an effrot by Bakkt company (Intercontinental Exchange). Some of these exchanges are already operational and have security tokens being traded on them. An example of such exchange is Open Finance Network.

Like mentioned above there are two way to proceed with security token offering, one would be to offer your security tokens only to accredited investors using an exemption called Reg D 506 or a public offering using an exemption called Reg A+.

REG D 506B and 506C STOs

When it comes to selling securities SEC has certain rules and regulations that an issuer has to comply with. However when securities are offered to accredited investors only there few exemptions from these rules. The most commonly used are Reg D 506B and 506C exemptions. A company that satisfies the following standards may qualify for an exemption under this rule:

  • Can raise an unlimited amount of capital;
  • Seller must be available to answer questions by prospective purchasers;
  • Financial statement requirements as for Rule 505; and
  • Purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering.

The rule is split into two options based on whether the issuer will engage in general solicitation or advertising to market the securities.

If the issuer will not use general solicitation or advertising to market the securities then the sale of securities can be issued under Rule 506(b) to an unlimited number of accredited investors and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated – that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.

In July 2013, the SEC issued new regulations as required by 2012 Jumpstart Our Business Startups Act. These new regulations add Rule 506(c) to allow general solicitation and advertising for a private placement offering. However, in a Rule 506(c) private offering all of the purchasers must be accredited investors and the issuer must take reasonable steps to determine that the purchaser is an accredited investor.

Accredited investor exemption

Section 4(5) of the ’33 Act exempts from registration offers and sales of securities to accredited investors when the total offering price is less than $5 million and no public solicitation or advertising is made. However, Regulation D does not address the offering of securities under this section of the ’33 Act. This definition is also used in defining the size of investment allowed under Regulation A.

Preparing legal documents for Reg D 506B and 506C

The only thing that needs to be done is filing Form D within 15 calendar days after you STO is completed.

REG A+ STOs

In case of offering digital securities to the public through an STO Reg A+ regulation offers great alternative to very expensive traditional IPO process while insuring complete compliance with existing legislation as opposed to utility tokens ICO that we have seen up until now.

ELIGIBILITY FOR STO UNDER REG A+

Reg A+ regulation provides two tiers of offerings:

  • Tier 1, which consists of security offerings of up to $20 million in any 12-month period, and
  • Tier 2, which consists of security offerings of up to $50 million in any 12-months period

There are differences between the two please inquire for more details.

Under Reg A+ any private US or Canadian companies are eligble with the following exceptions:

  • an investment company registered or required to be registered under the Investment Company Act of 1940 or a business development company as defined in Section 1(a)(48) of the Investment Company Act of 1940
  • a blank check company; and
  • an issuer that is disqualified under the SEC’s “bad actor: disqualifications rules.

In May 2018, President Trump signed into a law the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among other things this Act now allows existing public companies to also use Reg A+ exemption. But until SEC adopts these new rules they won’t come into effect.

Preparing legal and accounting documents for Reg A+

There are many legal providers and auditors to choose from and we will recommend you those that will do great job while charging reasonable fees.

In General for all Reg A+ offerings following is required:

  • For 1-A (named the Offering Circular similar to IPO memorandum) which is reviewed and qualified by the SEC.
  • Balance sheets and related financial statements for the two previous fiscal year ends(or for such shorter time that they have been in existence). For Tier 1 offerings unaudited financial statements may be filed unless auidited ones already exist and were obtained for other purpose. For Tier 2 offering audited financial statements are required.

There are also some ongoing reporting requirements:

  • For Tier 1 offerings the company is required to file an exit report on EDGAR no later than 30 days after completion of the offering
  • For Tier 2 offerings annual and semi annual reports as well as current event reports need to filed.

The typical IPO costs well over million dollars to conduct and another million dollars for annual filing requirements. From the initial IPO costs most of the money goes to lawyers and auditors. As you can see with Reg A+ offering your security token offering will avoid most of the costs especially if choosing Tier 1 raise. For preparation of Offering Circular we will help you to save as much money as possible.

WHAT ARE THE COSTS ?

  • Legal fees are hard to estimate because they depend on many factors. Reg D offering will cost less than Reg A+. In any case will put you in touch with our lawyers that will do great job for much less than average market price.
  • Marketing fees are from 200K, our clients are welcome to use their own marketing providers. Its is possible to average to 2% marketing fees from the raise.
  • AML check $5 per investor worldwide. For Reg D verifiying that the investor is accredited – $30 per person.
  • Creating security tokens and relevant smart contracts estimated at $15K.
  • Optional software engineering – $20K-$65K depending on application or platform.
  • Please contact us for Tetha Crypto fees, based on services required by your company we will be able to make you a competitive offer. 

Disclaimer: At present time Tetha Crypto is not offering to raise money for issuers, our focus is only on doing the technical part of creating security tokens and consulting.