Below are the steps required to do a Securities Token Offering (STO) on Regulation D 506c and/or Regulations S exemption.
So, you’ve got a terrific project, say a 200-room hotel in Miami Beach. You want to raise funds for a total renovation, which will cost millions. But you don’t have enough cash on hand to cover the costs. And you don’t want to go through the extra time and expense involved in an IPO. What can you do?
You think about it and then come up with a great idea. Why not sell off pieces of ownership in each of the 200 rooms? The prospective owners would get a cut of the revenue generated by each room.
You’re perfectly positioned for an STO, or security token offering. It’s like an IPO, but instead of using investment bankers and a host of other financial professional and lawyers, you’re selling your “digital stock” directly to investors.
What are the steps required to launch a Securities Token Offering (STO)?
- You will need a lawyer or 2. This will cost money and the fees range from $10,000 to $50,000. (Note: BrightCOIN can refer you to some amazing private placement lawyers at attractive prices).
- The first thing that lawyer must do before filing your offering with the SEC is to produce a private placement memorandum (PPM). The PPM will lay out the terms of the investment. This is the equivalent of a prospectus for an IPO and serves the same purpose. It will include a subscription agreement and a questionnaire that your investors must agree to and sign.
- Typically you would register for a Regulation D 506c and, and most likely do a Regulation S as well. The Reg. D allows you to accept investment from accredited investors within the US. Reg. S permits the sale of your tokens to non-US residents.
- Bad Actor checks should be done on all proprietors that own 20%+ of the issuers equity.
- It is HIGHLY recommended that you also engage a licensed escrow to handle the monetary transactions. This will eliminate a lot of headaches and ensure compliance with appropriate laws.
Your STO smart contract has to be Regulation D 506c and Regulation S compliant.
- There are a couple of crucial caveats with this. For one thing, all of your security tokens have transfer restrictions for 12 months. (if you’re an SEC reporting company, however, you only need restrictions for 6-months).
- Secondly, your tokens can only be listed on secondary exchanges that are securities compliant, like OpenFinance for instance. The tokens can be traded from one accredited investor to another, but not to the general public (during the restricted period). Non-US investors don’t need to be accredited, however, they may only sell to other non-US investors or other accredited investors.
- Lastly, security offerings have a maximum number of investors that are allowed to participate before private placement rules change. This has to be enforced at the smart contract level as well.
Here’s where the hard part comes in.
Now you have to deal with building out the technology. You’ll need to create your token, build and launch your STO, and begin taking funds. First and foremost, you’ll need a smart contract that is not only geographically and jurisdictionally aware, but also KYC, AML and accreditation aware. Also, regulation, transferable and number of investor aware.
You’ll also want the flexibility to make changes in your offering like the ability to change your pre and main sale start and end dates; the ability to reissue new tokens and freeze old ones if an investor happens to lose his wallet private key. You’ll want that smart contract be upgradable in case you want to change currencies and easily evolve with regulatory requirements and changes in different jurisdictions.
This is where BrightCOIN comes in.
On our platform you can create your token, give it a name and symbol, and a per token price in either ETH or USD; build your offering’s start and end dates, pre-sale and main sale periods, along with allotting tokens for founders, advisors, bounties and rewards, company holdings, and any other group of people to whom you would like to award tokens. You can set your soft cap and hard cap. You’ll be able to choose to accept any of eight of the major cryptocurrencies and accept fiat currency too.
Once your offering has closed, BrightCOIN will issue and distribute your tokens for you. Of course, you’ll want all of this to be secure and transparent. The BrightCOIN smart contract has been fully audited, and is always available for third party audits. And since the BrightCOIN smart contract is built on the ERC20 protocol, all transactions are logged on the Ethereum blockchain enabling full transparency.
On the BrightCOIN platform, your PPM , subscription agreement and questionnaire, and other necessary legal documents will be displayed for investors to read and accept. You’ll also need KYC, AML, live photo ID verification, and accredited investor verification, all of which are baked into the BrightCOIN platform. Your investors will be able to quickly and easily complete their transaction on your own branded contributor portal.
Best of all you can complete all of this yourself with our WYSIWYG editor, enabling you to build a token offering in minutes without any coding. And, of course, with our basic package for STOs in the US, for zero upfront costs. It’s an entrepreneur’s dream scenario.
Make no mistake, launching an STO is not easy at all. But BrightCOIN makes the whole process a lot simpler. We’re really excited about the future, especially of security tokens. The key is to approach your tokens as if they were actual stocks or financial instruments. The assets that back your token are what really count.
NOTE: This article is provided for informational purposes only and should not be construed as legal or tax advice.