After dominating conversations in the crypto media for some time, the STO fundraising model is now making a breakthrough. In fact, it’s becoming the latest trend in NFTs.
From 2017 to 2018, the Initial Coin Offering (ICO) model raised significant questions about the effectiveness of blockchain technology. More specifically, during this period there were significant cases of illegal airdrops, fraudulent activities, and scams on this platform. As a result, countries like South Korea and China banned ICOs. On the other hand, the US SEC came down hard on multiple founders and ventures due to alleged illegalities.
Soon after, the STO model emerged. It was a better alternative for revitalizing the crypto space and guaranteeing the safety of investment through better security. Like bonds and stocks, the STO has introduced better security in the blockchain industry. Unlike ICOs, which are built entirely on utility tokens, the STO model provides tokens backed by assets. Moreover, STOs are within the regulatory framework.
We’ve collaborated with experts in this space to put together this insightful guide with all the details about STOs, types of security tokens, and how to run an STO in 2023.
What’s an STO?
A Security Token Offering (STO) is a public event that involves the selling of tokens through a cryptocurrency exchange. Thereafter, investors can use the tokens in trading the actual financial asset, for example, equities. Thanks to their effectiveness, STOs have been in used in various investment situations.
At the moment, both institutional investors and independent investors are embracing the STO model enthusiastically. It’s also worth mentioning that STOs are regulated by the US SEC (security and exchange commission). As a result, accredited investors are the only ones who can take part in the STO.
The STO model is based on “tokenization”. It’s an industrial phenomenon whereby actual assets like real estate or equity are transformed into blockchain digital assets. In order for the token to become a security, it must fulfill the ‘Howey Test.’ According to this test, a transaction becomes a security token under the following scenarios:
- It’s a money investment
- The third party or the promoter will make a profit
- It’s a common enterprise type of investment
With that being said, the STO model leverages tokens that are based on blockchain technology. STO tokens represent a given stake in an enterprise or external asset. Furthermore, crypto startups and companies can also issue such tokens with a similar role as equities, bonds, and stocks.
Just as with traditional securities, STOs fall under multiple regulations. Therefore, before issuing them to investors, you should make sure these tokenized assets bear the same benefits as typical securities. Those benefits include dividends, voting rights, and shares.
After getting approval for SEC exemption, you can issue these tokens via the tokenization platform. Thereafter, they can be traded via ATS (alternative trading system) on a secondary market. Thanks to this, the closing of the market will not affect the trade on the Security Tokens.
In a nutshell, STOs help you direct these tokens to target investors. Ultimately, the process of using an STO is more or less similar to the process of issuing tokens via ICO.
Types of STOs
Asset-backed tokens are a digital representation of an actual asset in the blockchain industry. It could be an art, estate, commodities, or carbon credit. This type of token comes with all the features that are characteristic of typical shares. At the same time, they have the attributes of a digital token – such as liquidity and transparency.
As the name demonstrates, debts tokens interest-based short-term loans that investors offer to a company. Such loans include structured debts, corporate bonds, and mortgages.
Investors with equity-based tokens not only get the voting rights but also a share of the firm’s profit.
Why should you launch a Security Token Offering (STO)?
The emergence of STOs in the crypto space was an assurance that security issues in the crypto space are now minimal. Investors can finally earn returns in the blockchain industry without getting scammed or experiencing fraud as often as was the case before.
The STO model is a gateway to investment opportunities for crypto companies and projects. That’s in addition to the boost in revenue distribution and liquidity in this sector. More importantly, thanks to STOs, startups have direct access to potential investors. As a result, they can easily attain their business objective and optimal growth potential. Less than 2 years ago, the STO market experienced a historic growth of 500%. In fact, in early 2021, STO companies cumulatively raised more than $30m during fundraising events.
Are you wondering whether STO is a better investment for your company or startup? Well, here are compelling reasons worth looking at:
1) You can access institutional capital
Security tokens come with many regulations, so traditional capital has found a gateway into the blockchain sector. The STO model has opened up great opportunities for startups and mid-size companies to access investors from family offices and VCs.
2) Low barrier to entry
Thanks to the security token, you can tokenize many assets from real estate to art. Due to the flexibility of STOs, even startups have a shot at raising funds for their projects with lower upfront fees via the private capital market.
3) Retention of control
Contrary to traditional VC deals, security tokens have multiple advantages for issuers. For example, as a founder, you are not obligated to surrender board seats or your voting right. As such, you can enjoy peace of mind and channel your energy toward project growth.
The same applies to investors; you don’t need to surrender your voting rights to them. That’s because as an issuer, you can decide to dispose of a fraction of profit tokens. Furthermore, you can also issue some dividend rights.
How to launch an STO
If you’re organizing an STO launch, the following steps will guide you:
1) Assess your project idea
Before an STO launch, assess your project idea once more. You need to develop an idea that crypto investors will appreciate. It should resonate with their interests. Once you’re certain the investors will love your project, you can move on to the following step.
2) Get legal help
Given that security tokens have their own set of regulations, you’ll need legal assistance. With the help of a crypto advocate, you can ensure your project doesn’t clash with SEC regulations. A legal professional can also help you meet the regulations imposed on security tokens in various countries.
3) Evaluate your STO goals
Besides regulations, there are other critical features you need to consider regarding your STO. For instance, the features, purpose, and role dictate the value of the token. Also, depending on the type of token you’re offering, some allow the holders to obtain rights (product usage or voting). There are some tokens that holders can leverage to conduct certain tasks in the product, for instance, BAT (Basic-Attention Token). Additionally, some are a store of value permitting both external and internal transactions in the ecosystem.
4) Choose a platform
Since time is of the essence, pick the relevant issuance platform for your security token. Speaking of which, some of the best issuance platforms in the industry include Swarm, Securrency, Securitize, Harbor, and Polymath.
5) Develop your whitepaper
Developing a whitepaper for your security token is a vital step. That’s because it’s a crucial document that every crypto project must have. You need to do this part right because your whitepaper is the lifeline of your project. So if you get it wrong, your project will fail even before you launch it. That said, you can hire a professional whitepaper writer to develop it for you. With the help of whitepaper, you can do project branding successfully. Most importantly, a whitepaper will allow you to establish your expertise in dealing with security tokens. This document can also help you compile a mailing list that you’ll need for marketing. Other benefits include help with lead and sales generation. You can also use it to create a following and active engagement online.
6) Build a team
A successful security token project needs a team of experts to back it from development to launch and post-launch. With their help, you’ll generate more returns for your business. Also, investors will have more faith when they learn about the team of experts behind your project.
7) Design a marketing site
The business website is essential for your STO because it helps market your launch. Additionally, it allows the investors to interact with your project before the launch. Using the site, they can get more insight into your project and even access the whitepaper.
Furthermore, websites provide a platform where you can compel the investors to take action whether it’s before or after the STO launch. On your site, include a link that allows investors to take part in the STO event.
8) Do STO marketing
Introducing your project to the prospects is an important step in a successful STO. It allows the investors and crypto fans to be aware of your incoming product launch. Even so, the most important purpose of STO marketing is getting the attention of serious investors. Additionally, as part of your marketing effort, you should list your project with various top-tier blockchain sites.
You can also use social media marketing and email campaigns. With social media marketing, you can develop a community to support your STO event and keep promoting it after the launch. Social media is actually the best platform for creating a buzz that will market your project even more. On the other hand, email marketing supports a personalized approach to target investors.
STO marketing that builds trust and reaches the target community requires digital marketing. Therefore, you need to allocate a big enough budget for this. In order to do that, take into account how many strategies you are planning to deploy.
9) Choose an exchange platform
There are specific exchanges that work best with security tokens. These platforms have regulations that are in line with an STO event. These include Securency, Alpha Point, Securitize, tZero, Harbor, Swarm, and Plymouth.
10) Pick a custodian
As mentioned earlier, security tokens represent actual assets. Therefore, before the launch of the STO event, you need to ensure the actual assets are under a third-party custodian. To manage this, you can get assistance from qualified organizations like PrimeTrust and CoinBase.
11) Develop the security tokens
After choosing the issuance platform, you need to shift your focus onto developing the token. When creating the token, take into account its security, especially due to the rampant cyber theft in the digital space. Moreover, consider the token regulation in the development process, among other things.
12) Run a crowd sale
The requirements for a crowd sale include your business site and a button for buying tokens. By clicking on the button, serious investors can participate directly in your STO event.
13) Put together a Community Support or Management Team
After the STO launch, the next step is establishing a support team. This team will attend to all the clients’ inquiries. They’ll also help with the monitoring and management of your project’s presence on various platforms. With their help, you can build lasting relationships with the investors. However, to attain this, they must promptly respond to client inquiries and feedback.
14) Product building
After the crowd sale, it’s time to develop security token products. You can hire a blockchain expert for this. Remember to make sure they’ve got the knowledge, skills, resources, and experience on security tokens besides other blockchain platforms.
How Pressfarm can help
An STO launch requires massive resources and expertise in several fields including marketing, technology, finance, and legal. Unfortunately, even with an in-house team for your project, it’s overwhelming to manage all these parts of an STO event. As such, you need external assistance to reduce the burden.
What’s more, launching an STO requires unique marketing tactics that are different from those of an ICO. An ICO primarily relies on social media and community building as marketing campaigns for fundraising.
Since an STO appeals to professional investors, you need a sophisticated marketing approach to target them.
Launching an STO is an extensive process that requires lots of attention to detail and hands-on work. For this reason, you might find it helpful to hand the responsibility of generating publicity for your launch over to seasoned PR and marketing experts like the ones at Pressfarm.
How Pressfarm can help with this
The team at Pressfarm can help you create quality content that can attract media attention and earn public trust. With a professional press release, some engaging guest posts, and a branded media kit, you can earn credibility in your niche and excite potential investors.
In addition to creating this content for you, the team at Pressfarm can distribute it widely, thus boosting your online visibility. By sending this content to the right media outlets, startup directories, and professional networks, Pressfarm can make it easier for your target audience to find you through organic searches on search engines like Google, Yahoo, and Bing!
Once you sign up, the account executive at Pressfarm also builds custom media lists containing the best media professionals in your niche. You can combine the use of these media lists use of with Pressfarm’s media database of 1 million+ journalists, bloggers, and influencers. With all these media contacts, you’ll be able to continue doing extended media outreach for your brand long after Pressfarm has wrapped your PR campaign up.
One of Pressfarm’s PR packages could be just what you need to generate some buzz about your STO.