8 Tips for Creating an STO

Many people are now familiar with the utility tokens but provide the security token offering a completely new concept there. Unlike the utility tokens, which are often used to access a service provider, security tokens are property-defined assets. This feature provides much higher price stability for the STO investor compared to utility tokens. The holders of these securities have various rights, including profit-sharing rights, dividends, equity, repurchase rights, and voting rights.

Nevertheless, many start-ups tend to do so, initially offering deals to avoid classifying their tokens as securities. The complex regulatory conditions associated with the issuing process and the high costs are the main reasons for the unpopularity of the STOs.

There has been much hype surrounding the new security token offering, especially as the SEC has almost completely stifled the use of utility tokens as unregistered securities. Furthermore, STOs are very similar to an IPO because of the comparable legal framework – the advantage being the higher reliability and security that investors get for their investment.

A large amount of ICOs that have failed in the last 2 years has undermined the trustworthiness of Blockchain projects. Fortunately, the security token offering has already come to the rescue. In the following article, you will learn how to successfully implement your own STO.

A security token offering has tokens that have features of securities. In general, the following can be called a security token offering:

Extra Information for Knowledge

The new and different nature of blockchain companies and cryptocurrencies calls for a new way of informing the public about everything your new token can do. If your token has special privileges or privileges in terms of existing assets, that information should be shared directly with prospects and potential customers, as they always want to know how much their value will increase. A new crypto-currency will be particularly attractive to investors if the value of the token can be increased by using the new product currently.

You should, therefore, be able to clearly explain why investing in your token is particularly worthwhile for an investor. The STO marketing strategy is even more effective when the audience has little experience in buying or handling tokens. Complex strategies or executions confuse this type of investor rather than informing and convincing them. Therefore, you should not use different wallets and you should pay attention to a legally compliant implementation of who can invest in this project. Also, there are indications as to how long the transactions can probably last and many such additional information. It is possible that some procedures are similar to those common to traditional commodity trading. That sounds like a lot of unnecessary work,

Within the EU, securities are defined as corporate shares and bonds. In the US, however, the definition is much wider.

For the classification of a token, the so-called Howey test is used, which checks the properties of a token and, as a result, classifies the token either as a utility or security (from a legal perspective, it looks much more complicated – the different classifications are more than two and will be subdivided into other subclasses, for the sake of simplicity we will assume in this article that it only differentiates between the two classifications).

Here are the conditions for the classification of security tokens. Note that these conditions do not all have to be met simultaneously for your token to be classified as a security. Furthermore, this also depends on the jurisdiction of the country in whose jurisdiction the project is founded. Tokens that represent or grant the right to a capital in a company

• Tokens that represent the right to profit or ownership of a company 
• Tokens that constitute a loan or other obligation 
• Tokens that are secured by real estate 
• Tokens that form a unit of a mutual fund or a collective investment 
• Before functional Utility Token in the United States

This list is not exhaustive, as the definition of securities varies from country to country. What is considered as a security in one country is not accepted security in another country.

How does a Security Token Offering Work?

A security token offering is used to raise money for a start-up or a company. Raising capital for start-ups or established businesses is a logical extension of the concept behind the ICOs or IPOs. In the United States alone, more than 650,000 businesses are set up each year. Wall Street, Silicon Valley, and venture capitalists often do not provide sufficient capital for newbies. This provides regulated and legally compliant Security Token Offering (STOs) a new source. Although around 5.6 billion euros were invested globally through ICOs and STOs in 2017, more than 36 billion euros were raised through IPOs in the US alone in the same year.

What are the Benefits of a Security Token Offering?

Unlike traditional financial models, a security token offering offers many benefits. Let us mention a few:

– Affordable
Smart contracts eliminate intermediaries, which in turn lowers the cost of services. The administrative costs for buying and selling are zero.

– Fast
KYC and AML audits are automated, which accelerates the sale of assets to accredited investors.

– Global
The tokens may be eligible for global trading, which means that as long as you have a wallet, you can trade anywhere in the world.

– 24/7 Trading
The crypto trade outshines the traditional trade because it runs uninterrupted. You can trade at any time of day or night.

– Quick Launch The
Security Token Offering will be promptly accepted as soon as we realize that it leads to more liquidity and less administration.

– SEC compliance
Because the security token offering complies fully with the law, you do not have to worry about breaking the law.

Furthermore, STO projects also offer some advantages over utility tokens.

Greater Security for Investors

Because securities have been regulated against utility tokens for several years, this provides a sense of security for potential investors and increases the chances for the STO project to obtain its necessary funding. This also increases the chances of attracting institutional investors who invest much more in comparison to private investors. Some projects have reached their soft cap only from a limited number of private investors during the private sale phase. Furthermore, security tokens are very often backed by assets whose value keeps the token price stable and protects investors’ investments.

Lower technical complexity

Utility tokens give their owners the right to use a particular service. In most cases, it’s about a digitally accessible service offered on a single platform. With security tokens, such a condition does not exist – the security token can simply give the right to dividends or ownership without developing a complex online platform with multiple complex functionalities.

STO is the new ICO

You’ve probably already heard the statement. The reasons for this are the low reliability of ICOs because of the lack of legal regulation you need to undergo. The trend has already moved towards STO instead of ICO and the market simply values STOs as more confident than ICOs.

What are the Disadvantages of a Security Token Offering?

Legal Restrictions

The Security Token Offering has many rules and restrictions on who can invest in them and how they can be exchanged. Therefore, they may not be freely traded and are subject to many secondary trade restrictions. This can significantly affect liquidity. STOs must comply with a variety of legal jurisdictions and exclude important countries with many potential investors.

High Expenditure in the Legal Field

Due to the several regulations and restrictions for security tokens and STOs, the legal expenses are considerably increased. Depending on the jurisdiction, this effort can be quadrupled compared to an ICO launch.

Lack of existing market examples

Because STO projects are relatively new and not as popular as ICOs, there are only a limited number of successful STOs in the crypto market. However, this reality is expected to change as early as 2019.

TIP 1: Make Sure Your Project Needs a Security Token Offering

For certain business models such as REITs, a security token offering is best suited. Both security tokens and utility tokens have their advantages and disadvantages. Whichever is appropriate for a particular business model varies from case to case. It is important to take a complex look at how the choice of token affects the business model.

TIP 2: Make Sure Your Security Token Offering is Legal

Since security tokens are considered securities, they must follow local securities laws, which are well established in most countries. This means that if you make a public sale of security tokens, you need to register your security token offering with local securities regulators and make more detailed disclosures that would otherwise be required for an IPO.

Securities tokens are securities and therefore cannot be used as utility tokens. This means that they cannot be used as a platform currency. You cannot deliver the security tokens or use them for bounty campaigns. Securities are subject to numerous restrictions on transfers, repurchases, etc. and therefore cannot be used as a utility token.

TIP 3: Tailored Marketing for Crypto and Financial Concepts

In the security token offering, a marketing sweet spot encounters often risky ICO tokens or conservative, SEC-approved products backed by real assets.

These tokens can appeal to a wide range of experienced investors if the start-ups address them properly. Traditional investors will respond to increased liquidity and reduced administrative costs while being reassured by the availability of investor protection and real assets.

Key marketing measures for STO projects include the following:

Offline Marketing and Roadshows: While the success of the marketing strategy of an ICO project does not necessarily depend on roadshows, this is rarely the case with security tokens. It is recommended that the focus of security token offering marketing also be on offline marketing because you want to reach many private and large investors early. Roadshows are best for this – personal contact will increase the trust and reliability of the STO project and potentially bring a significant amount of funding.

Online Marketing:  The importance of online marketing is as high for STO projects as it is for ICO projects – the crypto community lives online and can be accessed via traditional crypto channels such as telegram, e-mail, social media, and online media. Make sure you use opt-ins to track email addresses of prospects on your STO website, so you can start early with email marketing. The creation of a content strategy, paid advertising and especially the PR strategy and its implementation should be prioritized. The development of the own telegram group and the social media channels is just as important as with an ICO.

TIP 4: Choose Your Exchange Carefully

One of the biggest selling points for security tokens is that they bring liquidity to traditionally illiquid markets. Before Blockchain, swapping fractions of an illiquid asset such as a real estate investment or a private equity fund was challenging or even impossible. Blockchain makes it as easy as selling a token.

Tokens need to be compliant when changing ownership, which requires a running KYC/AML process throughout the lifecycle of the token. Token buyers and sellers must have a place where they can find each other: a swap meet. The SEC has mandated that all stock exchange listing securities tokens must register as securities brokers.

TIP 5: Networking and Confidence Building

Many of the current cryptocurrency exchanges do not perform due diligence on their users to identify users who are not allowed to invest in specific security tokens. In decentralized crypto-exchange systems, this problem is even more complex.

The security token offering platforms are regulated crypto platforms designed specifically for security token issuance. These platforms are designed to solve liquidity problems, which are by far one of the biggest barriers to mass adoption of security brands. The liquidity represents the ease and stability with which a security token offering can be performed on the market.

TIP 6: Use a Security Token Offering Platform to Issue Your Token

Many of the current cryptocurrency exchanges do not perform due diligence on their users to identify users who are not allowed to invest in specific security tokens. In decentralized crypto-exchange systems, this problem is even more complex.

The security token offering platforms are regulated crypto platforms designed specifically for security token issuance. These platforms are designed to solve liquidity problems, which are by far one of the biggest barriers to mass adoption of security brands. The liquidity represents the ease and stability with which a security token offering can be performed on the market.

Here is a list of some platforms for an STO launch:

Polymath: Polymath is a block-chain protocol for issuing and distributing legal, token-based securities. The project was initialized as ICO and has reached financing of almost 60 million.

Harbor: Harbor is an open-source platform for migrating traditional investment products to blockchain-based assets.

Swarm: Swarm translates assets into tokens using the proprietary SRC20 protocol.

Securitize: Securitize is a cloud solution for the translation of assets into legally compliant tokens.

TIP 7: Trading with Security Token Offering on Exchanges

The Security Token Offering exchanges simplify the process of issuing security tokens and are excellent for trading worldwide. These platforms not only provide you with a security token but also help you to complete all the necessary formalities and legal procedures. This includes the SEC’s rules or the securities laws of the country in which you issue your token. The Security Token Offering Platforms will help you find the right KYC/AML provider for your STO.

TIP 8: Protect the Interest of your Investors with an Escrow Contract

An ESCROW benefit is provided by a third party. It is a smart contract that keeps your investors’ investments and passes on the access rights to the project team only if certain conditions are met. These conditions are defined in advance through contracts between the STO Company, the investors and the third party. An exemplary condition for this would be that the funding obtained is only released when the soft cap of the STO project is reached – in any other case, it will be paid back to the investors. The ESCROW company operates with its reputation and requires only a small percentage as a fee for its performance.

An ESCROW contract will increase the trustworthiness of the STO project and avoid potential fraud. This invests in the security token offering appealing to all investors and increases your chances of obtaining the necessary financing.

Conclusion

Because the utility tokens are currently having a hard time on the market, there is a real hype about the security token offering that can surely pay off for fast and smart investors. However, such an investment should always be considered well, as it represents a great risk and the money can be completely lost. However, these security tokens can also make a big profit, as they represent some value and can, therefore, be considered useful even in the daily life of a crypto investor.