Security tokens offerings combine blockchain technology with the corresponding requirements of regulated securities markets to support the liquidity of assets, which is a type of asset that can be rapidly converted into cash while keeping its market value. You need to and the broader availability of finance. Digital blockchain tokens can be created, transferred, bought, sold, and destroyed based on the computer code rules of the blockchain. The blockchain can be used as an existing system, such as Ethereum or Hyperledger. Security tokens can be listed on an exchange and may be restricted only to professional or accredited investors. The main difference with other forms of securities is in the structure, which is called the blockchain.
How does it work?
So, how to invest in security tokens if you are a newbie in this sphere? Many people spend a lot of time learning all the hidden pitfalls, but we have prepared for you some useful information that you need to study before investing in security tokens. Let’s clarify that the security token offerings are an innovative platform and ecosystem, providing opportunities for issuers to raise funds and investors to invest in the projects. Companies, government institutions, and international organizations are utilizing the technology to increase efficiency and lower costs.
When we talk about blockchain and cryptocurrency, many people use the terms coins and tokens interchangeably and treat them as synonyms. However, the terms are not identical. Blockchain coins are created using encryption techniques and store value over time.
Tokens opportunities are as follows:
- A token gives you ownership to an asset, equity, or debt, as well as access to multiple asset classes.
- Regulations and requirements depend on the venue and jurisdiction of the listing.
- All the terms and conditions of the token would be coded into it.
- Access to a global network investor.
- Dividend payouts.
What are the benefits to issuers?
- Liquid assets should be tokenizing such as private company shares, real estate, or different types of intellectual property rights;
- An owner of the assets can monetize them with the help of STO (Security Token Offerings) with much lower transaction costs;
- Issuers benefit from the utilization of blockchain technology;
- Automatic execution of certain operations through smart contracts.
What types of security tokens do I need?
There are 4 distinct types of security tokens:
A debt token is a special type of token served as a loan that the company agrees to spend with a particular interest for the token holders.
Equity tokens define the shares of the company, which can be compared with a regular stock. This type of token may involve profit-sharing in the form of dividends. The main benefits of equity tokens are that investors can vote.
Asset-based tokens are performed against a current asset.
Utility tokens define a unique way of accessing future services of the endeavor.
Which platform is better to use?
It is usually a complicated issue for a beginner to find the best platform for security tokens that can help to launch an STO efficiently. So, first of all, you need to determine what’s the purpose of the platform so that you can go over the compliance needs of your launch. For example, if we deal with the Wuzu platform, token users have to link accredited investors and regulate their offerings in a single ecosystem. Wuzu performs a fully compliant and proprietary exchange for token purchasing and trading. You need to take into account that the security token is subjected to protection legislation throughout its lifetime.
Typical STO process
Launching an STO involves different processes, and that can be generalized in the following steps:
Step 1 – Preparation
An issuer prepares investor information aiming at its target investors. The investor deck involves the business plan, profit forecast, valuation, and capital requirements, where the conditions depend on the particular jurisdictions of targeted investors. We recommend you to think about your business goals, taking into consideration all the legal aspects. For example, you need to provide less fulsome disclosure by restricting the sale to accredited investors in Europe than in the US. Many companies focus on increasing funds; other companies focus on improving the liquidity or even using an STO as a type of marketing stunt.
Step 2 – Create an offer
If you are an issuer, you need to create your token system structure, including the quantity, value of each token, soft cap, embedded rights, and duration of the offering. So, this is the stage when you define your goals and know what you do; the next question is how you can do it efficiently? Think about the technologies you will use to tokenize the assets and distribute the tokens, enforcing trading restrictions.
Step 3 – Select the service provider
The next step is to select a service provider, including the blockchain platform, technology, and financial intermediaries. Issuers choose digital wallets for investors to store the tokens. Also, issuers are responsible for assessing the listing rules of the blockchain platform.
Step 4 – Manage the capital
An issuer has to identify the target investors and distribute the deck to them. Brokers are responsible for collecting the funding from the investors and distributing the tokens to them. Also, brokers can operate with the funds on the trading platform.
Step 5 – Security
Tokens are usually sold for a particular purpose and then reissued on the trading platform. Moreover, the issuers can conduct further marketing activities and appoint a market maker to increase the liquidity.
Taking into consideration the size of the market today, tokenization could change the reality of the typical financial market. More and more investors would benefit from a fully digital approach to a financial instrument, so it is important to know how to operate in the market and invest in security tokens efficiently.
Let’s recap 5 significant steps you need to follow:
- Focus on the details, business plan, and legal aspects.
- Create the token structure, paying special attention to the quantity, value, and duration of the offering.
- Select the service provider which will correspond to all your needs and requirements.
- Identify the target investor.
- Present your pitch deck to them.
In addition, you need to remember about security so that tokens are sold for a particular purpose and then reissued on the trading platform.