Introduction to the STO Process

What is an STO?

The wording STO (Security Token Offering) has been around for a while and gained momentum ever since the fall from grace of ICOs in 2018. Their popularity seems to be increasing more and more and today we see a lot of STO-labeled projects. This label has often been misused to market a project as a “safer ICO”. Due to the unclarity on what an STO is this tactic has sometimes worked, in this article we will shed some light on what an STO actually is, why is important and how it works.

First of all, an STO is a token offering where buying said tokens represent an investment into a security. While this first definition seems straightforward the level of complexity that derives from this implication shouldn’t be underestimated.

Arguably the most important difference between an ICO and STO resides in the regulatory aspect. Since there was no real law to regulate ICOs and issuance of utility tokens, there was little legal security when an ICO. STO solve this issue since they are regulated by the existing securities market laws. The effort on the legal side remains, however, first of all, it should be clearly understood what type of security does the token represent and based on that one should prepare the appropriate documentation.

Compared to an ICO an STO may potentially provide greater levels of safety for the investors and greater accountability for the project’s team.

An STO may improve liquidity given the appropriate secondary market while being less costly than a traditional IPO. Furthermore, it benefits from the automation brought by the programmable nature of tokens.

How to launch an STO

Launching an STO is a complex process that can however be broken down in different phases in order to simplify it.

Phase 1: Token Design

In this phase it is important to define the characteristics and proprieties of the token. What type of security will it be, how many tokens will be issued at what price and what type of token standard will be used.

Currently our research shows that the majority of STOs offers either non-voting equity, preferred equity or revenue sharing rights with their tokens. It seems however likely that more traditional rights on common (voting) equity will be associated to the tokens in future STOs.

Phase 2: Primary Market

In this the key decisions regarding the issuance of the tokens are made. It is important to choose the correct issuing platform and the right jurisdiction. Working with the right issuing is crucial since it will provide the technology necessary for the issuance and subsequent transfer to a secondary market.

During this phase it another important decision concerns the legal aspects of the capital raise. The jurisdiction, type of investor, min/max investment thresholds,... are all determined in this phase.

The issuance of a security and subsequent sale to the public normally requires the issuing company to prepare a Prospectus. In Europe however, several countries offer exemptions, allowing the issuer to raise a certain amount of capital without having to issue a fully fledged prospectus.

In the US it is possible to take advantage of an exemption by restricting the sale to accredited investors only.

Phase 3: Secondary Market

Once the token has been issued it is important to provide adequate liquidity to the primary market buyers so that they may able to exchange their tokens. A secondary market is not entirely mandatory but provides a significant incentive for investors, thus increasing the success chances of an STO.

Phase 4: Marketing

Once the strategic decisions are taken, during Phase 1 to 3, it becomes important to create awareness for the STO.

This includes both establishing personal contacts with large investors, organising events and panels, roadshows, as well as more traditional methods of advertising and social media presence.

It is important to note that unlike ICOs, marketing STOs requires the approval of the sovereign market authority of the specific jurisdiction.

BrightNode has the expertise and the network to guide through all the phases of the STO. Contact us to know more.

Hereafter an exemplified version of our procedure: