Being the 22nd richest country in the world and with the 7th largest economy in Asia, international investors including blockchain companies have lots of interest in Taiwan. With security tokens proving to be a go-to option for most blockchain companies, Taiwan’s Financial Supervisory Commission in July 2019 recognized the need to officially incorporate security token offering (STO) into the Securities and Exchange Act, which entails the regulatory framework for trading securities, by defining security tokens as securities.

According to the FSC, a security token is a cryptocurrency that is transferable and hold the following features:

  • The owners make capital contributions to the issuer
  • The owners invest in a common enterprise/project
  • The owners expect to receive profit depending on the efforts of the issuer or a third party.

The new Security Token Offering regulations

In January 2020, the FSC proposed deregulating STOs with an equivalent of up to NT$30 million. These STOs are characterized as “Exempt STO” in Paragraph 1 of Article 22 of the SEA. According to the article, these STOs are exempted from the obligation of reporting to the FSC.

Although the deregulation of STOs seemed to be a step in the right direction, the exemption comes with a tight set of restrictions. Additionally, the NT$30 million limit is relatively low, meaning that most of the STOs will not be exempted since most of them have targets above NT$30million.

However, the main objective behind the new regulations is to ensure that STOs in Taiwan are issued by regulated issuers and issued to professional Taiwan investors.

Issuer’s Qualifications

For a company or startup to issue security tokens in Taiwan, it has to be a company listed by shares, meaning it is incorporated per Taiwan’s Company Law.

For an STO to qualify for the exemption, the STOs must be conducted to on the same trading platform with the cumulative placements not exceeding the NT$30 million. The issuer must also ensure that the raised funds are denominated in the New Taiwan Dollar (NT$).

Additionally, the issuer should show the relevant issuance documents in an application to a security firm like the prospectus and security token application.

The prospectus, in particular, should include:

  • The Company Profile and Risks.
  • The Operation Overview.
  • The Operating Plan and Execution.
  • The Financial Overview.
  • An Expert’s Opinion on the Information Technology used in the issuance of the security token
  • Financial (non-certifying CPAs or securities underwriter) Expert’s Opinion about how reasonable the issuance price is.
  • Attorney’s opinion on whether the issuance of the security token complies with the set regulations and if the fundraising project adheres to the set legal rules.
  • Any other documents that should be disclosed and supplemented as per the securities firm notification.

The security firm that the issuers choose to use should have a securities dealer license.

Investors’ regulations

STO investors should be professional investors that qualify as per the criteria under paragraph 3 of Article 3 of the Offshore Structured Products regulations.

For the Exempt STO, the amount that a professional investor can subscribe should not exceed the limit of NT$300000.

Key Takeaways

For an STO to qualify for the “Exempt STO” it should target raising NT$30 million, which is equivalent to $1003764 USD. This is relatively low and means that most of the security token offerings will most likely not fall under the Exempt STO category. The Exempt STO category is however good for the small startups looking to raise a small capital.

Secondly, only professional investors as per the Offshore Structured Products regulations can participate in an STO. Also, the maximum amount that an investor can cash in cannot exceed NT$300,000 on a single STO.

Thirdly, STO funding is limited to the New Taiwan Dollar (NT$). This makes it increasingly difficult for foreign investors. Also, issuers cannot raise funds in other cryptocurrencies or USD as is the norm with most STOs.

Fourthly, an STO can only raise funds through one platform. Therefore, one STO cannot use different platforms to issue security tokens. Also, there is a limit to the number of STOs that can be accepted by each trading platform. This reduces market participation of STO issuers and operators of the trading platform.

Fifthly and lastly, there are many business restrictions and strict qualifications for security token trading platform operators.

Blockchain has become a booming industry and starting a blockchain startup would certainly be a great idea at the moment. Several blockchain projects ranging from crypto giants like Ethereum, Bitcoin, Stellar, CitiOS, and the like to smaller projects like Cosmos, Storj, Aragon, Augur and the like, have been started in the past years and they have registered tremendous growth. These projects serve as great indicators that blockchain technology adoption is on the rise and you can definitely grab the opportunity by starting your blockchain project/startup.

Nonetheless, for your blockchain project to pick, you will have to convince investors to invest in it. This is the hard part for most blockchain startups!

A good blockchain project is good, but it is not everything. The growth of blockchain projects is determined by how the public adopts it. You need investors to invest their money into the project! So how do you get the investors to recognize your blockchain project and invest in it? What do investors look for in a blockchain project? To attract investors to your blockchain startup, you have to tackle these questions. These questions should be addressed in the whitepaper, Press Releases (PRs) and other marketing strategies like social media platforms.

What investors look for

Below is a guide to some of the things that investors look at:

Clear problem statement and solution

This is the anchor of your blockchain startup and it cannot be over-emphasized enough. You have to clearly state the king of problem you intend to solve and how you intend to solve the problem.

Most importantly, this problem should be something that affects a large group of people to ensure large market growth. A niche problem focused on just a certain minority group of people will certainly attract a few customers, meaning its market growth will be limited.

Your solution to the problem must also be something workable. You should clearly show the investors that it is something that can be done.

Prove that you are better than any other solution in the market

If your projects stand out among your competitors, customers will prefer it to your competitors and that would translate to a higher chance of market growth.

Therefore you have to ensure that your solutions stand out. You also have to explain to the investors how it stands out.

Additionally, you have to take precautionary steps to ensure that your solutions remain ahead and that it is not replicated by other startups. Some of the best ways to do so are by applying for patents, copyrights and trademarks.

A competent team

A qualified team acts as proof to investors that the project will become a success. A project could look great on paper, but without the right team, it could remain just that. You need the right minds for the project to materialize.

That is why it is imperative to higher professionals for all the roles in your blockchain project. To show the investors that you got the best team, you should include the qualifications of each team member in his profile on your website and the whitepaper.

Growth potential

After, showing your potential investors what your startup does, what problem it intends to solve, how your project intends to solve the problem, and how your solution is better than other solutions currently in the market, you have to also show your investors how you shall reach the market and make money for them to also benefit if they invest with you.

Investors look for projects that have a stable marketplace that is full of consumers. Therefore, you will have to show them the group of people you are targeting as customers, how that market base will grow, and what will make them want to use your product. By doing so, you will prove to the investors that there is a potential stream of revenue that will ensure that their investments keep working for them.

Clear business model

Apart from solving a certain problem for the society, your blockchain startup should have a clear replicable business model that will instil confidence into the investors that your project will become a success.

Most importantly, your business model should be scalable and readily adaptive to ensure that it accommodates immerging markets.

Clearly Presented margins

It is always very important to realize that although investors decide to choose your blockchain project because they believe in it, they are also looking to make some extra money. Nobody would invest his/her money into something expecting zero returns.

One of the best way to prove to investors that your project is going to give them good returns is by clearly and professionally presenting the margins of your startup/project. Promising margins will certainly make investors interested in your blockchain project.

Blockchain technology is revolutionizing every aspect of our lives. Besides the impact of blockchain technology on Governments, financial institutions, and conglomerates, blockchain technology has also proved to be a game changer when it comes to the way small Fintech startups raise capital. Startups can now conduct Initial coin Offerings (ICOs) among other methods to raise funds for their projects.

However, for an ICO to be successful, the development team has to diligently choose the blockchain protocol upon which their project’s token will be built on. This is mainly because the functionality of the token will greatly be influenced by the chosen blockchain protocol.

Besides, there are other blockchain technology use cases that the startups can benefit from the blockchain protocol they choose to use. Some of the most profound use cases include asset management through asset digitization, decentralized finance, global trade & commerce, and payments.

Advantages of using blockchain technology

  1. Ability to streamline and automate executions. The use of smart contracts, for example, has made it possible for businesses to eliminate intermediaries and thus streamlining business processes and allowing real-time clearing and settlements.
  2. Increased security during transactions. The fact that the data stored on blockchain networks is immutable transactions tamper-proof and thus authentic.
  3. Ability to develop and deploy permissioned blockchain networks that have a shared business logic and customizable governance.
  4. Ability to digitize assets. This is what has made it possible for startups to conduct online crowd funding through methods such as ICOs.

Most used blockchain protocols for creating ICO tokens

1.    Ethereum

Ethereum is an open-source, public Blockchain distributed computing platform that features smart contract functionality. It was the first such blockchain platform to be developed and it has paved the way for the development of many other blockchain networks that are based on its blockchain architecture.

Ethereum was the first blockchain protocol to prove that blockchain was not only meant for the creation of cryptocurrencies for payments as its predecessor, Bitcoin.

Ethereum provides a platform for blockchain developers to develop decentralized applications. The decentralized applications developed on Ethereum are usually accessible from anywhere in the world. Also its ERC-20 token standard has earned itself a reputation when it comes to the development of cryptocurrency tokens. Actually, most of the altcoins use Ethereum’s ERC-20 token standard.

The token used for conducting transactions within the Ethereum network is called Ether (ETH) and it is normally generated by the platform as a reward for mining nodes the performed computations.

Some of the notable features of Ethereum apart from the smart contracts include the Ethereum Virtual Machine (EVM) that executes scripts through a network of public nodes throughout the world and Gas, which is its internal transaction pricing mechanism.

Ethereum use cases largely revolve around smart contracts and dApps.

Pros of Ethereum enterprise use cases
  • Ethereum supports the development of decentralized applications (dApps). Therefore business enterprises can use the platform to write customized blockchain codes that whose performance is oriented towards the specific business enterprise.
  • Ethereum has a very promising use case in decentralized finance (DeFi). Enterprises can use Ethereum’s smart contracts to issue or go for smart contract powered loans. Developers can also use the smart contracts to mint stable coins as in the case with the MakerDAO project. Smart contracts can also be used in creating decentralized exchanges.
  • Ethereum has proved to be of great use when it comes to tokenizing real-world assets. One of Ethereum’s use cases in line with this is the PolyMath, which has embarked on the creation of a revolutionizing platform for creating security tokens.
  • The decentralized nature of Ethereum and the decentralized applications developed on it make it impossible for hacking attacks.
  • Ethereum’s smart contracts have completely revolutionized the way transactions are made. Instead of writing paper agreements, the transaction agreements can now be recorded in a computer code. In so doing, it has eliminated the need for intermediaries, and parties can now transact directly.
Cons of Ethereum enterprise use cases
  • Though Ethereum’s smart contracts can be easily used in generating digital identities. It has proven to be extremely difficult for governments or regulatory authorities to check the authenticity of digital identities.
  • Ethereum was designed to work through the proof-of-work (PoW) consensus mechanism, which makes it less scalable compared to other blockchain networks. And although there are plans to switch the consensus mechanism from PoW to PoS, the process is not that easy.

2.      Stellar

Stellar is a decentralized open-source blockchain network that allows cross border transactions by converting the currencies to digital representations. The network uses a cryptocurrency token known as Stellar Lumen to facilitate transactions within the network.

Some of Stellar’s uses cases involve its integration into Vumi, an open-source messaging platform, enabling Vumi to use cellphone talk time as airtime. Stellar also was integrated into Oradian’s banking platform to enable the bank top to add microfinance institutions in Nigeria.

Stellar has also partnered with several banks including Deloitte, IBM, KlickEX to facilitate cross border transactions.

Pros of Stellar enterprise use cases
  • The stellar network makes cross border transactions cheaper since it eliminates the need for intermediaries. It only costs an average of 1/100,000 of a penny per transaction.
  • Stellar also makes the cross border transactions to be faster compared to the use of traditional means. Stellar can easily achieve 10,000 transactions per second with an average on-chain settlement time of 5 Seconds.
  • Digital currencies developed using Stellar can be traded on StellarX, which is Stellar’s decentralized exchange platform.
  • Stellar has smart contract functionality and users can be developed and executed smart contracts.
  • With Stellar, there are no limits. Businesses can transact any amount at any time to whatever location.
  • Stellar has the necessary documentation, tooling, and support to help enterprises get their project quickly.
Cons of Stellar enterprise use cases
  • All Stellar accounts are required to have a certain minimum balance of lumens.
  • Stellar’s smart contract is not as developed as those of Ethereum blockchain.

3.      Binance Smart Chain (BSC)

Binance smart chain (BSC) is a blockchain-based platform launched by Binance that shall enable developers to issue new cryptocurrencies as well as ICO coins. The platform supports smart contracts and decentralized applications (dApps).

The Binance smart chain shall run parallel to the current Binance Chain blockchain.

Binance smart chain gives Binance Company its blockchain rather than depending on Ethereum.

Pros of Binance smart chain enterprise use cases
  • Enterprises can easily create customized blockchain networks for use in their businesses.
  • Just like Ethereum, Binance smart chain has smart contract functionality which can be of great help in business transactions.
  • Binance smart chain enables developers to come up with their cryptocurrency tokens that can also be used for Initial Coin Offerings.
  • Binance smart chains also make it easier for the cryptocurrency coins developed to be listed on Binance exchange.
Cons of Binance smart chain enterprise use cases
  • The binance smart chain features a delegated proof-of-stake (DPoS) system of governance, which is prone to centralization. Centralization would stifle creativity among dApp developers.

4.      Tron

Tron protocol is a blockchain network that provides a decentralized virtual machine that can execute a program through the network of public nodes within the network. TRON TRX is the cryptocurrency token used within the Tron network.

There are several use cases for Tron, key among them being the ability to use TRX as a payment system. Websites like travala.com have incorporated TRX as a mode of payment already.

Another use case for Tron was the partnership with BitTorrent, enabling it to use a token called BTT, which is a Tron based digital coin.

TRX has also found lots of use in the world of online gaming.

Pros of Tron enterprise use cases
  • Transactions within the Tron network are free.
  • The transaction speed is relatively high since the system can conduct 2000 transactions per second.
  • It allows dApps developers to easily develop applications (dApps) that are custom made according to the requirements of the enterprise and deploy them.
  • The TPS is much more improved in Tron thus giving Tron a high throughput.
  • Tron also has high scalability and it gives developers a wider variety of ways to deploy their applications.
Cons of Tron enterprise use cases
  • Tron’s whitepaper suggests quite a lengthy development timeline that suggests that we may not be seeing the real application of TRON come to life soon. That leaves Tron users with only one choice of buying TRX and trading it on exchanges or using it as a payment option.

5.      Cardano

Cardano is an open-source decentralized public blockchain network that features smart contract functionality. It was built to improve the financial system.

Some of the renown Cardano use cases include the GRNET, released in 2018 for checking student diplomas, the New York Ledger Accelerator (SOSV) and Traxia, released in 2018 for converting invoices into smart contracts so that they can be sold as short-term assets,

Pros of Cardano enterprise use cases
  • It allows the use of smart contracts and provides blockchain developers with a network to develop and deploy dApps.
  • Cardano has proved to be flexible, secure, and scalable for enterprises. This is mainly due to the use of the Proof-of-Stake consensus mechanism.
  • Cardano integrates a wide range of digital coins without the use of an intermediary.
  • It also combines regulation and privacy.
  • It is one of the few blockchain networks that go through a third party audit, thus making it highly transparent.
  • Cardano blockchain network is made up of two layers, the Cardano settlement and ledger processing transactions layer and the Cardano computation layer that supports smart contracts and provides users with a platform for building DApps. This makes it less prone to the disruptions brought about by soft and hard forks.
  • There is a middle layer made up of side chains that connects the two main layers. This makes Cardano more scalable.
Cons of Cardano enterprise use cases
  • Cardano introduces its programming language called Plutus and developers could have a hard time trying to learn the new programming language to be able to develop dApps on the platform.

Launching a successful Initial Exchange Offering (IEO) is simple if done correctly.

Initial Exchange Offering mode of fundraising was invented after Initial Coin Offerings (ICOs) proved to be hectic to regulate, and thus becoming a playfield for scammers. The IEOs, however, retained the basic framework of the ICOs but placing the process of the token issuance/sale on the hands of cryptocurrency exchange platforms. That is why IEOs are sometimes referred to as ICOs that are issued on cryptocurrency exchanges.

Although IEOs were intended to solve the issue of safety with the ICOs, IEOs ended up introducing lots of other advantages for the token issuers. Some of these advantages include:

  • Trust

An IEO instills trust into your potential investors. The token crowdsale is conducted through a cryptocurrency exchange and investors/ users believe that the exchange properly vets any token issuer before agreeing to sell the tokens to its users. Besides, exchanges are in business and if they allow a scam project to conduct an IEO thought their platform, it could greatly harm their reputation; therefore they have to be vigilant in cross-checking the projects behind the IEO.

A good example of how careful exchanges are when listing IEOs is the recent case where Bittrex, one of the most famous crypto exchanges in the world, canceled the RAID IEO after suspicion of fraudulent activities following the termination of a partnership between OP.GG. (a data analytics company) and RAID.

Therefore, if your IEO gets listed on an exchange, investors will have some trust that your project is not a scam and it could become a success in the future.

  • Security

When issuing an IEO, you do not have to worry about managing the AML/KYC since the crypto exchange handles all that.

  • Easy

Once you have accomplished the hard part of creating a token, doing the tokenomics, and writing the white paper, the rest is left to the exchanges.

Also, you do not require to conduct a lot of marketing and roadshows compared to the ICOs, since the exchange where the IEO is listed already has some users who will get interested in your IEO.

  • Token Listing

There is nothing more precious than to see your project’s token listed on a crypto exchange for trading. It is a painful reality that quite a number of projects that have conducted token crowdsale struggle to have their tokens listed on exchanges.

However, for an IEO the token is easily listed on the same exchange where the IEO was issued since the exchange had already vetted the project before.

Examples of successful IEOs that have been conducted

The first projects that conducted taken crowdsale through IEOs were Bread and GIFTO, which conducted their IEOs in 2017 just after IEO was invented.

IEOs then embarked on a journey to fame that culminated in 2019, during which a number of projects carried out very successful IEOs within record-breaking timeframes.

Some of these projects include:

Steps to launching your successive IEO

Hitting the anticipated target with your IEO is the dream of every blockchain startup or company that launches an IEO. However, to do that, you have to follow through all the necessary steps.

We shall go through the entire process of launching an IEO step by step.

1.      Work on your blockchain project

Remember you are raising funds for your project. Therefore, you have to have a concrete blockchain project that at least seeks to solve a particular problem.

Also, your project should be viable with the prospects of being implemented in the foreseeable near future. A good project idea should include a progressive business model, the use of breakthrough technologies and also have a strong team of experts.

2.      Token Economics (Tokenomics)

This is a very critical step and you should hire experts to do this for you.

Most exchanges prefer issuing utility tokens to get off the hook of being required to apply for the strict regulations that go with issuing security tokens. As a matter of fact, most of the exchanges will require a legal opinion that concludes that the token is a utility token. Therefore, you should ensure that the token that you create for your project is a utility token.

However, if you prefer to create a security token, you should be ready to look for a securities exchange that is registered and authorized to conduct the sale of security tokens. You should also be ready to adhere to the strict rules that go with issuing securities.

3.      Whitepaper

The whitepaper explains your blockchain project, the tokenomics of your project and how you intend to distribute the funds collected through the IEO within the project. Therefore, you should hire a professional to draft and write the whitepaper for you.

Some of the most important parts of a whitepaper are:

  • Legal disclaimer
  • An executive summary of your project
  • The problem statement
  • Overview of the project
  • Description, use cases, advantages and usefulness of the created product/technology
  • Financial model of the project
  • Market analysis
  • Token economics (Tokenomics)
  • Roadmap
  • Team members
  • Partners

The whitepaper should demonstrate to the potential investors why they should invest in the project by purchasing the tokens being issued through the IEO.

The team members should also be well listed alongside their qualifications and contact information.

4.      Marketing

To reach as many prospective investors as possible, you should embark on good marketing strategies. Also, the stronger your project is the high the chances that you will get a strong exchange to launch your IEO.

Some of the marketing strategies that you could employ include:

  • Social media marketing – LinkedIn, Facebook page, Twitter, Telegram chats, and Medium.
  • Community management – You should work at generating as much hype as possible around the project on different forums. Some of the best platforms to use include Reddit threads, Bitcointalk threads, Medium, and Telegram chats, so on.
  • Press Releases – these should work at explaining the advantages of your project and also creating awareness of the coming IEO.

5.      Finding the right cryptocurrency exchange for the IEO Launch

Once the project, tokenomics, and whitepaper are done, you will have to diligently choose the cryptocurrency exchange platform to use for your IEO.

When choosing an exchange, you should consider whether the exchange is registered to operate in your country or region. Regulated exchanges always hold the front seat in the hearts of cryptocurrency investors. Therefore, launching your IEO on a registered exchange is an added advantage. You also avoid the risk of getting your IEO interrupted by legal case battles.

You should also do a background check to find out about its reputation; whether it has been involved in irregularities in the past and if any, how it resolved them.

Some of the cryptocurrency exchanges that are known to conduct IEOs are:

  • Binance
  • Huobi Prime
  • Bittrex
  • BitMax
  • KuCoin
  • Liquid
  • IDAX
  • CoinBene
  • Latoken
  • OKEx
  • Exmarkets
  • ProBit

Once you identify the cryptocurrency exchange where you want your IEO launched, you should approach the exchange’s listing team. The listing teams of most of the exchanges are can be approached through their agencies or partners.

The conditions set by the listing teams vary from one exchange to the other and you should be keen to identify what is required for the exchange you have chosen. For instance, different exchanges ask for different fees; to some, it could be a percentage of the amount received from the token sale while in others it is a standard listing fee while others ask for both.

The listing team will also require enough information about your project. Therefore, they are going to review the entire project to understand the current stage of the project development, the readiness of the token for the sale, the team and the potential of the project to succeed.

Most importantly, exchanges require a legal opinion on your token.

Legal opinion

The legal opinion is a legally abiding document that concludes that the token of your project is a utility token. Different exchanges have different requirements for the legal opinions and you should enquire about what your specific exchange requires from you.

To get a legal opinion, you should contact a legal company that is recommended or trusted by the exchange that you chose. The legal company will then take you through the necessary legal procedure.

Once you are cleared by the legal company, the IEO goes ahead and launches your IEO.

However, it is important to note that the exchange can still cancel the IEO before the set start date in case they realize some anomalies.

Post IEO launching

IEOs generally take a short duration of time to hit the target amounts. Some IEOs have less than 1 minute in the past to sell out.

So, after holding a successful IEO, you should concentrate on ensuring that your project achieves the objectives you have highlighted in the whitepaper following the developed roadmap. Hitting the milestones on the Roadmap gives investors hope that your project is headed for success.

You should also embark on ensuring that the collected funds are distributed as stated in the whitepaper so that they can go into the proper use in the project.

Initial Exchange Offerings (IEOs), which were introduced following the decline of Initial Coin Offerings (ICOs) popularity among blockchain startups and investors, have gone on to become a force to reckon with within the blockchain crowdfunding industry. IEOs are said to be more trustworthy compared to the ICOs.

IEOs are much safer compared to the ICOs and at the same time much easier to run compared to the STOs, which are the safest.

Some of the things that make IEOs a darling among blockchain token issuers and investors are:

  1. Trust

The fact that IEOs are issued on exchanges brings a sense of centralization in IEOs. This in return has brought trust among investors since they see exchanges as secure platforms due to the regulations that they have to adhere to offer their services.

  1. Efficient token listing after the token sale

Contrary to the ICOs where the issuers (the team behind the blockchain project) would be responsible for approaching exchanges to have their tokens listed, Tokens issued through IEOS are easily listed by the same exchange that issued them.

Therefore, investors are guaranteed that it shall not take long before they start selling the purchased tokens on the exchange.

  1. Ease of raising funds

Since IEOs are issued through exchanges that already have registered users, the IEO issuers are guaranteed that they shall get a vast customer base without much advertising as is the case with ICOs.

Also, the IEO issuers do not have to worry about things like AML/KYC. The exchange platform issuing the tokens takes care of that.

  1. Speed of sale

We cannot forget to mention that due to the large influx of ready investors in exchanges, IEOs take a very short time to hit their targets. There have been cases where it has only taken a few seconds for the target to be hit.

  1. Protection from regulatory consequences

Contrary to ICOs where the startups or companies behind the ICOs are the ones responsible for the legal obligations of the token issuing, Exchange platforms have well organized legal frameworks that deal with the legal consequences of the IEO.

However, there are some legal compliances that the startup or company behind the IEO should adhere to and it at times requires the help of an IEO consultancy or advisory firm to maneuver these regulations. Some exchanges go the extra mile of providing legal advice to startups.

Initial Exchange Offerings (IEOs) regulations

Having evolved from ICOs, which have no provision for legal compliance, IEOs still face the challenge of fitting in the various legal provisions within the various state regulatory authorities.

Of essence, the Team behind an IEO must work diligently to ensure that they developed the right kind of a token. In most cases, IEOs are not after security tokens unless the development team ants the token to be a security token. Therefore, the development team must work within the given regulations to ensure that the token that they develop does not fall under securities. To do so, it is advisable to consult with a reputable IEO advisory firm like Gravitas International so that they can guide you through the legal handles within your country and region. Besides passing the legal handles within your locality, it will also be paramount to adhere to the legal obligations within the countries or regions within which your target audience is.

In some countries like the USA, if the token being issued falls under securities, then the startup or team behind the IEO must look for a securities exchange to list the IEO. Besides, the startup or company behind the IEO shall be subjected to the registration requirements of offerings that fall under the securities laws. If the tokens are securities, the company or startup shall be required to make some important disclosures about its business, the terms of token offering, itself and also about the digital asset it is offering.

If the token does not fall under securities, the startup or company offering the IEO only has to look for a registered exchange where the IEO can be issued. In countries like the USA, such exchanges are normally registered as brokers and must be registered with the SEC and be members of FINRA.

Regulation authorities in different countries, including the SEC in the US, are doing all they can to ensure that they keep up with the rapidly evolving digital asset industry. One of the recent developments, the Initial Exchange Offering (IEO), has been gathering a lot of momentum since its invention.

IEOs are similar to the Initial Coin Offering (ICO). They are initial offerings of tokens by startups or companies that seek to raise capital.

IEOs evolved from the ICOs. The only thing that the IEOs have done is taking the coin offering process to cryptocurrency exchanges where the exchanges offer the coins/tokens on behalf of the startups or companies. In exchange, the companies or startups behind the IEO pay a small fee to the exchange platform.

IEO issuers have taunted IEOs to be highly secure by arguing that the IEOs are thoroughly vetted by the exchanges before being allowed to run on their platforms. However, the US Security Exchange Commission (SEC) issued a warning in January 2020 saying that some of the exchanges issuing IEOs are not registered with it and yet they are enticing investors with the propaganda that the IEOs they are offering are secure.

Though IEOs are known to be among the most secure coin offerings that investors can invest in, unregulated exchanges are taking that advantage to give investors false promises of high returns. Investors should be wary that IEOs can be conducted in violation of the federal securities laws making them lack most of the investor protections that are associated with the registered exchanges.

As such, there are certain issues that both IEO issuers and investors should take into account when issuing and investing in IEOs in the USA. These include:

Is the IEO offering security tokens?

Since IEOs are built on top of the ICO framework, they mostly do not deal with securities. However, the startup or company issuing the IEO should be well advised by its legal advisors to ensure the tokens they are issuing do not fall under securities (that is if they do not want to issue securities).

However, there is still a probability that an IEO could involve the sale/offering of security tokens. In so doing, the IEO becomes subject to the registration requirements that apply to offerings that fall under the federal securities laws.

If the IEO is a securities offering, the company or startup offering the IEO should among other things provide important disclosures about its project/business, the digital asset being offered and the terms of the offering.

On this issue, IEO issuers could approach IEO advisory firms for directions on how to best formulate the IEO.

Is the platform issuing the IEO a securities exchange?

If the IEO issues security tokens, the exchange platform on which the IEO is being run should be registered with the SEC as a securities exchange. Or alternatively, the exchange should have applied to operate under exemptions; for instance, it could apply to operate as an alternative trading system (ATS).

The regulations that govern the registered national securities exchanges and ATS are aimed at protecting investors from fraudulent or manipulative trading practices that exchanges may indulge in.

If the exchange offering the IEO is a broker, is it registered with the SEC?

Most trading platforms opt to operate as brokers rather than securities exchanges.

The exchanges operating as brokers in the US are required to register with the SEC as members of the Financial Industry Regulatory Authority (FINRA), an independent, non-governmental organization that comes up with and imposes the rules governing registered brokers and broker-dealer firms in the US. Additionally, they should only run IEOs that issue utility tokens but not security tokens.

FINRA members are subject to regulatory requirements that aim at safeguarding investors by ensuring that the brokers and broker-dealer firms act in a manner consistent with SEC’s customer protection standards.

Fractional ownership through blockchain technology is the new haven for companies and startups looking to raise capital from investors in exchange for a stake in the companies/projects. Traditionally, companies and startups could only do so through the traditional shares market.

In the traditional shares market, shareholders have to undergo rigorous selling and buying procedures, which also involved lots of paperwork. Investors also have to invest the full minimum required amount to own at least one share of a company or startup.

But thanks to blockchain technology. Companies and startups can now digitize or tokenize assets and offer them as digitized securities also referred to as tokens, rather than as traditional shares. By doing so, people looking to own a stake in the companies/projects can now do so by purchasing the digitized securities, which are normally transferred through blockchain networks rather than through the traditional stock market platforms.

Fractional ownership

Fractional ownership refers to the ability of an investor to own a fraction of a company or startup asset. For this to happen, the asset must first be converted into a form that can be divided into fractions, which is normally possible through asset tokenization.

Traditional shares are normally offered as whole numbers without the possibility of breaking them into fractions. Therefore, investors can only purchase whole shares. For instance, an investor can purchase 1, 2, 3, 4, 5, etc. shares from a certain company, but cannot purchase 0.5, 0.3, 1.3, 1.5, etc. shares.

On the other hand, digitized assets are easily offered as fractions/decimals thus enabling fractional ownership.Investors can purchase 0.1, 0.5, 1.4, etc. digitized assets.

Contrary to the traditional shares market where investors are required to invest a minimum amount to purchase shares, security tokens can be offered as fractions or decimals, therefore, allowing fractional ownership.

Asset tokenization changes how asset ownership is managed and also automates the activities that come after investment.

Blockchain technology makes it possible to have instant, traceable and cryptographically secure distribution and transfer of the digitized assets (tokens) without the need for intermediary parties.

Besides, contrary to the traditional securities, tokens of the digitized assets are issued and settled on a blockchain network. Therefore, the transactions are instant and without the need of signing stock certificates. And this process is not time-bound; it can take place 24/7.

Advantages of using digitized assets (digital securities)

The digital assets can be offered through smart contracts or security token offerings (STOs), where the holders acquire fractional ownership of the company/project behind the tokens.

These digital securities can also be exchanged in secondary markets just like other cryptocurrencies. When an asset is digitized, shareholders can use smart contracts to promptly sell their securities on registered exchanges where there is high liquidity compared to the traditional shares market. This in return help in avoiding the long lockup period of capital that is witnessed in the traditional shares markets

The beauty of it is that companies and projects can basically tokenize any assets whenever the need arises.

Comparing traditional securities to digital securities

Traditional securities (shares) normally call for larger investments while digital securities (digitized assets) allow fractional ownership, which reduces the amount of the required investment.

Additionally, since traditional securities require large investments, access to significant funding can only be done by institutional investors while in digital securities, since there is fractional ownership, there is a large pool of investors which makes it easy to quickly access significant funding.

Secondly, in traditional securities, the capital is usually tied up, especially with private placements like the venture capitals. However, with the digital securities investors can sell the tokens at secondary markets where there is high liquidity.

Traditional securities are also too costly due to the high fee structures. But the digital securities have a low fee structure due to automation using blockchain technology.

 

Though ICOs and STOs are great fundraising methods that startups can use in raising funds for their projects, it is paramount to asses the risks involved.

Launching ICOs/STO requires quite an amount of investment and therefore requires due diligence to ensure that that money is used for the right cause.

Besides, the sole purpose of the ICO or STO is to raise funds for your project. So, one should assess whether the ICO/STO shall be able to meet its target.

What to consider when doing ICO/STO risk assessment

In assessing your ICO/STO, you should consider the following:

  1. Market assessment

It is good to keep in mind that the market shall play a very great role in the success of your ICO/STO and your project.

Before launching your ICO/STO, it is good to assess the market to find out if your project shall be accepted and even adopted by a significant number of people. If a lot of people like your project, they shall be ready to invest in it. However, if people don’t find the project to be worth it, they will not be interested in investing in it and your ICO/STO could end up being a total failure.

To ensure that your project fits in the market, you should ensure that it tackles a solution to something crucial in society. Your solution must also be viable and unique. Remember, you also have other competitors and you have to prove to the people that your project is better than the rest.

Besides, you must be able to identify your target group. You must clearly distinguish the people that you want your project to help. This ensures that your marketing strategies are trained towards this group. And the wider the target group, the higher the likelihood of finding more investors. To identify a target group, you should ask yourself what services your project intends to offer; and who is best suited for those services.

  1. Regulatory risk assessment

This is very critical in launching an ICO/STO.

You have to understand what is required of you depending on the regulations that are set within the region or country where you want to run your fundraising. Failure to adhere to those regulations could cost you a lot and could even result in your ICO/STO or project being put on hold by the regulatory authorities.

Since at times those laws and regulations are quite intricate, like when launching an STO, it is good to involve an ICO or STO advisory firm to help you maneuver those regulatory issues.

Legal liabilities can be very costly to your company or startup especially if you are involved in court cases. Also, once it goes public that your project is on trial at the courts, people/investors will tend to become extra cautious and it may hamper the rate at which people find it worthy to invest in the project even if you manage to handle the cases.

Why do an ICO/STO risk assessment?

  • Preparing yourself for eventualities in future

Countries and regions are still struggling with regulation cryptocurrencies and blockchain technology. As a result, most of the countries are still formulating laws and regulations to govern anything related to blockchain technology.

Therefore, your antennas should be up all the time to ensure that your blockchain project adheres to all the laws; even those that were just released. The best way to do this is by looking for a competent advisory firm like Gravitas International that will be concerned with the regulatory issues.

A good advisory firm will help you maneuver the current legal matters and also prepare you for legal issues that may come up in the future.

  • Ensuring that you ICO/STO does not violate any laws/regulation

There is nothing that can be bad like finding yourself on the wrong side of the law.

Risk assessment ensures that you are on the right side of the law.

  • Estimating the success of your ICO/STO

Carrying out a risk assessment, enables you to find out your weak points and helps you to come up with ways of improving to ensure maximum success of your ICO/STO.

It also enables your team to identify risks and develop plans and contingencies to mitigate risks for your investors. This instills confidence in the investors.

ICO/STO PR is all about making sure the public gets to clearly understand the project behind your ICO or STO. It deals with managing the spread of information about the project behind the ICO/STO to the public in a bid to market the project.

PR is, therefore, an integral part of marketing an ICO or STO. A well-marketed ICO or STO ends up attracting millions in investments while a poorly marketed ICO or STO could end up not hitting their targeted amount in the fundraise.

With that said, it is therefore very important to plan and manage the PR to ensure that it gives the right results. PR campaigns are quite expensive and if not handled professionally, they could end up eating into your pocket without any returns.

Planning an ICO/STO PR

To start with, it is advisable to get your development team together and figure out a PR strategy for your project. The strategy should be guided by the project objectives and milestone deadlines.

Of importance, you should come up with a content plan containing the content topics, titles and the targeted media where the content shall be published. Once the content plan is ready, you should hire an experienced copywriter to create the planned texts, which your PR manager send out to the various media outlets.

The cost of an ICO/STO PR

The cost of ICO/STO PR is not something that is universally set. It all depends on how much campaigning you want to do and how much you are willing to cough for it. Nevertheless, you should work at ensuring that every coin used in the PR is bringing in investment into the project. Otherwise, your PR will become a total loss.

Below is an average of what various PR practices would cost you:

  1. Hiring content writers

You should hire a professional content writer that will produce quality content for your project. Remember the quality of the content has a direct impact on the image of the project. Therefore, you should not settle for a cheap content writer.

You can hire freelancers through the various freelancer sites available. The cost could range from anywhere between $100 and $1000.

  1. Having your PR articles posted on popular websites

Having articles that talk about your ICO/STO project published on popular websites makes it easy to reach more probable investors who visit these sites for updates.

To post PR articles on top-tier sites like CoinDesk and Cointelegraph, could cost you between $2000 and $12,000 per article.

To post on second-tier sites would cost you between $500 and $2000.

  1. Get Trusted YouTube Influencers

Getting a trusted YouTube influencer with thousands or millions of subscribers would give your project an insane exposure. However, you have to do thorough research on the influencer since some influencers have fake subscribers.

The cost of getting a good YouTube influencer could range between $4000 and $40,000.

  1. Get your ICO/STO listed on popular ICO/STO listing sites

In choosing the listing sites, you must ensure that you are fully aware of the target audience. You should get a listing that will ensure that your target audience is reached.

The average cost of having your ICO or STO listed ranges from $200 to $5000 per listing.

  1. Joining Cryptocurrency Forums

There are quite several cryptocurrency forums with a huge number of users who could be potential investors.

Examples of such forums are:

  • Reddit threads
  • com
  • Bitcointalk
  • Quora

Also, the majority of ICO/STO listing sites have platforms for social activity and if the team is active on the platform, it could become more influential and possibly sway investors to invest in the project.

This is usually the cheapest and most underrated method of marketing ICOs and STOs. You will not need to pay to be allowed to join any of these social forums. The only people you could pay are your contributors.

  1. Holding/Attending Events and Conferences

You should attend events and conferences oriented and related to your project’s objectives. For example, if your project is related to blockchain healthcare, ensure that you participate in as many events related to healthcare as possible.

And as you attend the events, also ensure that you get a chance to speak and let people know about the objectives of your project in terms of the services or products you intend to offer. You should also be ready to part with some money in the form of donations. The amount will depend on your judgment of what can make a significant impact.

Security Token Offering (STO) has become one of the most appreciated methods of raising funds for blockchain projects and startups. However, it is strictly regulated since it falls under financial securities. Therefore, any person, company or organization thinking of conducting an STO in any part of the world must first be aware of the regulations they need to adhere to.

The regulatory requirements set for STOs are primarily set to educate and protect investors.

Due to the seriousness and complexities involved in most regulations, individuals, firms or companies looking to tokenize their assets or equity for sale to investors through STOs are advised to hire an STO advisor like Gravitas international to develop successful strategies and identify the various regulatory requirements for the specific region they want to operate in.

It is worth noting that different countries have different rules for STOs.

In this article, we shall look at STOs rules and regulations in some of the counties around the world where STOs have gathered momentum over the past few years.

1. STOs regulation in the USA

In the United States of America, digital currencies are regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)

The CFTC in 2015 classified cryptocurrencies as commodities, which meant they were to be included under the Commodity Exchange Act.

SEC, on the other hand, has set in place several rules meant to deal with anti-fraud, and registration issues of digital currencies. Through the Howey Test, the SEC can tell if the token used to raise funds falls under securities.

There are three types of regulations that any STO issuer eyeing the USA market should be conversant with. These are Regulation D, Regulation A+, and Regulation S.

  • Regulation D

This specifies how some certain token offerings can avoid the SEC registration after filling a form known as “Form D” once the securities are sold.

The issuers, however, must stick to Rule 504, Rule 506 (b), and Rule 506 (c).

Rule 504 does not set any limitations to investors while Rule 506 (b) and Rule 506 (c) allow accredited investors in the US to take part but does not put any limit on the fundraising.

This regulation, however, has limitations on resale.

This regulation also allows the STO issuers to advertise their projects.

  • Regulation A+

STO issuers who want permission to issue SEC approved securities to non- accredited investors should work under this regulation. However, the regulation states that the maximum amount of investment by investors cannot exceed $50 million.

This regulation does not have any resale limitations.

However, it is more expensive and takes more time to register with this regulation.

  • Regulation S

This regulation shed light on how the securities act registration for security offering that shall take place outside the US should be carried out.

Whenever a security offering is being carried out outside the US, the issuer must follow the security regulations of the respective countries where the offering is being carried out.

This regulation comprises of Rule 901, Rule 902, Rule 903, Rule 904, and Rule 905 of the 1993 Act.

2. STOs Regulation in Europe

In Europe, STO issuers must create a prospect and also meet the security regulation of their respective local regulatory authorities. However, there are some exemptions for the European Union, which include:

  • The qualified investors’ exemption – STO issuers can freely request accredited investors to invest.
  • The limited network exemption – STO issuers can sell their securities to 150 people in any European member state freely.
  • The large investment exemption.
  • The nominal value exemption- if the value of each of the securities is worth 100,000 euros, then issuers can sell the securities without any need for registration.
  • The limited amount exemption – issuers can sell securities of up to 5 million euros without the need for a prospectus.

Regulation of STOs in France

In France, any activities involving financial instruments must be regulated.

The French Treasury came up with a new legislative framework for token issuance after the Financial Markets Authority identified that lack of ICO regulations was a risk.

This was added to the Title V of the French Monetary and Financial Code (CMF) as a new chapter titled “Intermediaries in Miscellaneous Property and Token Issuers.”

The second chapter of the Title V gives the specifications of the tokens that can be registered, or transferred. As a token issuer in France, you must conform to the requirements and conditions under article L. 550-8.

Regulation of STOs in Switzerland

In Switzerland, token issuers must ensure that their tokens comply with Swiss laws. The Financial Market Supervisory Authority ensures that it examines every token sale.

But, in a nutshell, Switzerland is considered to be one of the friendliest states when it comes to token issuance.

STOs regulation in Malta

STO issuers in Malta should ensure that they comply with the Malta Digital Innovation Authority Act, Innovative Technological Arrangement and Services Act and the Virtual Financial Asset Act.

Authorities in Malta are required to first look into the technology behind any project to deduce if it is feasible or not.

3. STOs Regulation in Asia

Asia has grown to become one of the best places for blockchain and cryptocurrency startups.

STOs regulation in Singapore

In Singapore, any STO issuer must first submit a prospectus and register with the Monetary Authority of Singapore (MAS) unless they qualify for the exemptions in the “A Guide to Digital Token Offerings”.

The MAS is mandated to regulate digital token issuance that falls under the capital market products under the Securities and Futures Act (SFA). To determine if the token issuance falls under the capital markets, MAS examines the structure and characteristics of the digital token.

STOs regulation in South Korea

In 2017, the Financial Services Commission in South Korea announced that token sales are illegal in South Korea.

STOs regulation in China

China was the first to ban the sale of tokens in its country in 2017 before South Korea followed suit.

Nevertheless, we could see an ease on the STO stand by the Chinese authorities in future when they come up with STO regulations.

4. STOs Regulation in the Middle East

In the Middle East, the two most countries of interest are Israel and the United Arab Emirates.

STOs regulation in Israel

After forming a committee in 2017 to examine if the Israeli securities laws were applicable in tokens sales, the Israel Securities Authority (ISA) planned to be evaluating token sales on a case by case basis.

According to the ISA, security tokens are cryptocurrencies thus giving the holder of the token entity to the cash flows and ownership rights in the future.

STOs regulation in the United Arab Emirates

UAE Securities and Commodities Regulator plans to recognize tokens as securities, which are governed by the Dubai International Financial Services Authority (DFSA) in Dubai and Abu Dhabi Global Market’s Financial Services Regulatory Authority (FSRA) in Abu Dhabi.