What is a STO and why you would want to run one [Part 1]
3 min read
STO stands for Security Token Offering. STO can be considered some sort of mini-IPO (Initial Public Offering) as they have sometimes the same filing requirements and can be more or less public.
The opinions expressed in that article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about security token offerings. The views reflected in the commentary are subject to change at any time without notice.
Why I am talking about it?
I am the CTO of Pixelmatic, developer of the game : Infinite Fleet and it happens that we are currently running an STO to raise funds for our game through our publisher Exordium.
We got an article from Forbes recently that relates the issuance and the first distribution of our token. forbes.com/sites/michaeldelcastillo/2020/12..
So I wanted to share my view and experience of our adventure.
Why would you run one?
- Generally it takes days to issue and distribute actual securities to investors. In our case, it can be done in seconds.
- You will provide liquidity to your investors who will be able to easily buy or sell on secondary market.
- You can open the door to smaller and retail investors with certain legal frameworks.
Security Tokens vs. Tokenized Securities
In this series of articles, we will treat security tokens as tokenized securities by the definition of Constantin Kogan in his article: securities.io/security-tokens-vs-tokenized-...
A tokenized security refers to traditional security, a financial asset, that can be debt, equity, or even derivatives that are wrapped into a crypto token.
It means all of these tokens are securities thus they must comply with the jurisdiction of the company issuing them and the jurisdiction they will be distributed to also.
How to file a security?
This is the first question you must ask yourself, even before any technical and crypto aspect. You need to understand your jurisdiction's legal framework as well as the jurisdiction of your potential investors.
In the US
It is the Securities and Exchange Commission, that is in charge of the regulation of the securities issued and traded in the US.
So if you are planning to raise funds in the US, you must apply to the SEC. And to do that there are several regulations you may want to evaluate:
- Regulation D With this legal framework you will be allowed to raise funds privately only from accredited investors (generally high-net-worth individuals or companies). To see details on what qualifies an accredited investor go to Investopedia. Also, note that you are not required to be a US company to apply for it (though some jurisdictions may be forbidden to apply).
- Regulation A This framework allows you to raise funds publicly for a maximum of 50 million US Dollars from non-accredited or accredited investors. The filing takes time and has almost the same requirements as a traditional IPO, so you need to consider the time and cost involved.
- Regulation S This regulation is for US company willing to raise money from non-US-investors abroad. If you are not a US company, you can skip it.
- Regulation Crowdfunding This legal framework allows you to raise up to 1 million US Dollars through a broker-dealer publicly to retail (non-accredited) investors within a period of 12 months.
In the EU
Luxembourg offers a framework under the Prospectus Law which allows you to raise money publicly up to 8 million euros. For more details, check the website of the Commission de Surveillance du Secteur Financier: cssf.lu/en/prospectus
For any other jurisdiction
Consult with your legal counsel.
In the next article of the series, I will discuss the advantage of a security token over traditional security and mention different technical solutions available to issue a complying token.
Photo by Markus Spiske on Unsplash
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