Legal assessment of a project is one of the most important factors that dictate the success of an ICO, IEO or STO. In the past few months, we have seen various blockchain project receive penalties and some even being forced to close down due to issues with the law.

BitClave, for example, will have to pay back the $25 million it raised in its ICO back in 2017 after the U.S. Securities and Exchange Commission (SEC) said that the ICO was unregistered. Meta 1 Coin will also have to refund $9 million after a court ruled in favour of the SEC, which argued that the initial coin offering (ICO) was fraudulent. Telegram, on the other hand, had to completely throw in the towel on its TON blockchain project after issues with SEC about its ICO.

To avoid falling into the same trap with your blockchain project, it would be wise to seek a competent legal advisor to handle the legal assessment of your project.

As in the above case scenarios, legal issues could jeopardize the whole project. If a case is filed against the way you raised your capital, you could end up being forced to refund the money. This would throw you back to the drawing board to try and find sources of funds to run the project. However, this time, things could prove to be hard since it would be hard for investors to trust you again and you would be forced to abandon the entire project altogether just like Telegram did.

What to expect from good ICO/IEO/STO legal advisor

  1. Whitepaper assessment

Since the whitepaper acts as the main source of information about your blockchain project. The legal advisor should ensure that it contains all the required legal documentation. Of essence, the whitepaper should contain legal disclaimers and the terms of sale for the tokens.

The legal advisor should help in drafting the legal disclaimer to ensure that all the risks and restrictions (e.g. restriction of investors from certain countries) are included.

Again, the terms of the token sale should be clearly stated to ensure that investors make informed decisions.

Another issue that has been a source of conflict, especially between the SEC and blockchain startups, is the token and funds distribution. This information should be laid out bare for investors to see.

  1. Review of the adopted token model for the IEO/STO/ICO

By reviewing the token model used for the ICO, STO or IEO, the legal advisor shall be able to verify the compliance of the token issuance with the laws and regulations and also give remedies in case of any arising issues.

Security tokens have different regulations compared to the utility tokens and this is the main thing that a legal advisor looks at. If the project uses a utility token or a security token, does it comply with the laws set in place in the regions where it expects its investors to come from?

  1. Aspects of the KYC/AML to be used

Know Your Customer (KYC) and Anti Money Laundering (AML) are some of the basic requirements for blockchain/cryptocurrencies around the world. Therefore, the legal advisor gives guidance on the model that should be adopted and also works closely with any of the involved third parties.

  1. Legal audit of the Project internal processes and documentation

A good legal advisor will also do an audit of the internal processes of the project behind the ICO, IEO or STO to ensure that everything complies with any existing local regulations.

The audit could also include an audit of the smart contracts to ensure that they are executed exactly as the whitepaper and website stipulate.

  1. Evaluation of Tax compliance and the company structure

The legal advisor also helps with accounting, bookkeeping, insurances, tax declarations and domiciliation services among other things through the network of its partners.

Depending on the country, companies dealing with digital tokens are taxed differently depending on the type of tokens they involve themselves with. In Singapore for example, there was a recent update on the Digital Tokens Tax Guidelines.

These ensure that the company remains in good books with the authorities within the country where it is registered.

  1. STO prospectus

Where a legal prospectus is required like in Taiwan, Switzerland and the European Union, the legal advisor helps in preparing it to ensure that it meets all the legal requirements.

  1. Commercial agreements

The legal advisors help in drafting terms and conditions, token sale agreements and any other commercial agreements like the Memorandum of Understanding, the Advisory Agreement, the Financing agreement, etc.

Coming up with an innovative blockchain project is just a tip of the ice bag when it comes to pulling through a successful project. You have to find a way of explaining the blockchain project to your potential investors and the whitepaper is your best shot in doing so.

What is a whitepaper?

Before going any further, let’s first look at what a whitepaper is.

A whitepaper is a document that gives a detailed architecture of your blockchain project, elaborating on the problem that your blockchain project intends to tackle, the proposed solution for the problem, and giving a detailed description of the products or services that the blockchain project will be offering. It can be closely paralleled to the business plan of your blockchain project.

The whitepaper is intended to help investors study your blockchain project in detail so that they can decide whether to invest in it or not. Therefore, it has to give investors enough reason as to why they should invest in the project.

Functions of a whitepaper

Let us elaborate more on the specific functions of the whitepaper so that you can hit each of them while coming up with your project’s whitepaper.

 

  1. Introducing the idea or concept

Any investor looking at your whitepaper will be looking to find out what your blockchain project intends to accomplish. Therefore, you should ensure that you let them have a clear picture of the problem you have identified and your solution to the problem. This should be done at the earliest point possible to capture the attention of the reader.

The best blockchain projects are those that address the challenges that the larger society faces while going about his day to day activities.

  1. Explaining this new idea or solution in details

The whitepaper should then take the reader/investor the extra mile of understanding how your idea should work. You have to breakdown the entire project into a simple form for investors to understand how it will function.

Here you have to strike a balance between getting too technical and putting things in the lay man’s language. Technicality shows some sense of sophistication but if you get too technical, you risk losing the attention of the investor, who is most likely than not just a layman looking for a chance to invest in the best investment opportunity that comes his/her way.

  1. Justifying your idea/concept, token and team

You are probably not the only person that has tried tackling the same problem you identified. Therefore, you have to carry out extensive research into any other existing projects related to the problem you are solving and show your reader/investor what your projects bring to the table.

You have to give him a reason to invest in your project and not in your competitors’ projects. Therefore, you have to identify what you intend to do different and how that is an advantage compared to the rest of the solutions.

When justifying your blockchain project, you also have to justify the benefits of your token/coin to those who will invest in your project. After all, the only way investors will invest into your project is by purchasing the project’s tokens/coins either through an Initial Coin Offering (ICO), Initial Exchange Offering (IEO) or Security Token Offering (STO). Therefore, you have to clearly explain your token/coin and also classify it accordingly; shall it be a utility or security token).

Another thing that the whitepaper should justify is why the team behind the project is the best. Remember, investors are looking at investing in a project that has the prospects of going all the way through to become a success. Therefore, they will have to scrutinize your team to see if they are capable of seeing the project through. A strong team will instil confidence in the hearts of investors to invest.

Questions that the whitepaper should address

To have a good whitepaper, you should ensure that it answers the following questions:

  • What prompted you to come up with the idea?
  • How will blockchain technology be incorporated into your idea?
  • What is the market analysis?
  • Who are your competitors?
  • What is the growth potential of your project?
  • How does your product work?
  • What are the technologies used in your project?
  • What is the commercial application of your project?
  • What kind of token do you intend to use? What platform shall it be based on?
  • How do you intend to raise funds? Do you intend to use an ICO, IEO or STO?
  • What are the conditions if any for investors to invest?
  • What has already been done on the project and what is the approximate time required to accomplish the rest?
  • How do you intend to use the funds raised through the crowdfunding?
  • Are there any bounty campaigns?
  • Who are in your development team?

Steps to writing a good blockchain whitepaper

To answer the above questions, you could follow the following steps:

 

  1. Identify your primary target

Before embarking on drafting or writing the whitepaper, you should first consult with the development team to identify the target of your blockchain project.

Some of the questions that you should seek to answer include:

  • Is it just the ordinary person?
  • Is it a professional e.g. a professional cryptocurrency investor?
  • Is it a blockchain developer who would use your solution to develop other networks?
  • Is it an executive in a business who might influence his/her company to buy your blockchain technology?

Once you identify the target group, you should go ahead and create a detailed profile about them. the profile should point out the following:

  • Gender
  • Age
  • Occupation
  • Location (country, state, province or continent)
  • Interests/hobbies
  • Education level (to understand the language, either formal or informal, that you shall adopt in explaining your blockchain project)

With the above details, it will be easy for you to understand how best to explain your concept. If for example, you are dealing with a target audience who are experts in cryptocurrencies, the use of technical terms won’t hurt. However, if your target is the ordinary man, you will have to use a simple to understand language.

Also, since your blockchain project is something that you would want to be adopted around the world by people with different languages and cultures, you will have to do white paper localization.

Localizing the whitepaper means translating the original version of the whitepaper into different versions fit for the various parts around the world. It might include translating into various languages. The translation should go beyond the linguistics; it should include analogies, norms and examples that are local to the demographic localities you are translating for.

  1. Identify the goals that you want to achieve with the whitepaper

Your goals should be specific, measurable, achievable, relevant, and time-bound (SMART). An example of the goals include:

      i. Raising funds

Most blockchain whitepapers are intended to make investors gain confidence in the blockchain project to a point of purchasing the tokens offered wither in a Security Token Offering (STO), Initial Exchange Offering (IEO) or Initial Coin Offering (ICO). This way, the project developers can raise capital for the project.

If your whitepaper is intended for this goal, you should put in mind that at the end of reading the whitepaper, you want the investor to cash in on the project. Therefore, you have to include the projects potential to grow and how the investor shall make money out of the project. Every investor wants to invest in something that will bring returns and if possible in the near future.

You have to indicate how much you want to raise and by what date. You should also clearly indicate how those funds will be distributed into your project so that the investors can make informed decisions.

You should also include a clear roadmap indicating the various milestone. The roadmap should have realistic timeframes. Remember, if you fail to hit the milestones by the anticipated timelines, your investors will start losing faith in you and probably even want to opt-out.

     ii. Awareness creation

In any case, the whitepaper plays a great role in informing people/readers that there is a blockchain project that is about to be launched.

In some cases, this could be the sole goal, without the need to raise funds. An example of such a whitepaper is the Lightning Network Whitepaper whose main objective was to introduce a new scaling method for the blockchain network. After its launch, various blockchain networks among them, Bitcoin and Litecoin adopted the scaling method while others like ZCash and Ethereum were inspired by the technology to develop their versions of the solution.

    iii. Selling services and products

If your whitepapers goal is to sell a product or service, you should first identify and describe the problem that your audience has and then list the benefits of the solutions (products or services) that you are offering.

Such whitepapers are subjective. However, you should restrain from making in overly promotional.

An example of such a whitepaper is the Sirin Labs Whitepaper that was written to describe how its blockchain-enabled smartphone, Solarin, works and how its users were to benefit.

  1. Make a draft of the whitepaper

Your project’s development team (especially the designer, developer and engineer) should be actively involved in making the draft since it should give the main points that should be included in the whitepaper.

The team that creates the first draft should be keen to provide the necessary information on the:

i. Problem statement

ii. Market description

iii. Product description (how is shall solve the problem)

iv. Tokenomics (Token Economics)

v. Fund distribution

vi. The team

vii. The roadmap

viii. Partnerships

  1. Come up with a structure for the whitepaper

Before delving into writing the final copy of your whitepaper, it is important to come up with the structure. The right structure emphasizes the right points at the right juncture.

There are three most commonly used structures when it comes to writing whitepapers:

  • The Before (current world with the problem) — After (World without the problem) –Bridge (Your solution as the one eradicating the problem) structure
  • The Problem (identify and explain the problem) — Agitate (show the ugliest part of the problem) –Solve (introduce your solution to the problem) structure
  • The Features (Describe the features of your solution) — Advantages (outline what makes your solution to stand out) — Benefits (describe how the users shall benefit from using your solution) structure

The first structure is best for explaining a solution that is completely new in the market. The second structure is best for writing a whitepaper that is intended for marketing purpose. The third structure should be used if the problem you are tackling is obvious to the target audience and there are very many solutions out there.

  1. Hire an expert to write the final copy of the whitepaper

Since the members of the development team may be too busy on the project and lack time to write the whitepaper, it is advisable to hire an expert writer to write the final copy. The writer should be experienced in writing blockchain-related material; meaning he/she should have some knowledge of blockchain technology so that he/she can explain some technical issues well.

As the writer writes the whitepaper, the writing should be closely monitored by someone on the development team. The writer should be able to freely interact with the team to get assistance with concepts and things when the need arises.

If the writer is someone from the outside, the team should understand that the writer is too green on the project and shall require explanation on many things so that he/she can understand the concept and objective of the project. That way the writer shall be able to relay the information better on the whitepaper.

You can hire a freelance writer from one of the online working platforms or get a referral from your colleagues for the writing task.

What to include in your whitepaper

Let’s now look at what your whitepaper should look like. We shall first give a general template and then get to explain what should be included in each section of the template.

You could use the following template when writing your whitepaper. It has all the necessary sections that a good blockchain whitepaper should have.

The above headings should cater for everything that a good whitepaper should have.

Now let’s get into explaining what should go to each section.

Introduction

This introduces your blockchain project to the reader. It should be a summary of the entire project and it should be presented in a compelling manner that leaves the reader in thirst of knowing more about the project.

You could choose to use an executive summary or introduction as the title of this section.

In some cases, the summary is written as a letter from the CEO addressing future token holders or investors.

Disclaimer

In this section, you should place any legal notice or disclaimer about your project or the ICO, IEO or STO you intend to issue. The disclaimer or legal notice should contain information on any restrictions or notifications.

This is the section where you should explain any exceptions of countries if any. For instance, it would be an exception of residents from certain countries from buying the tokens. This could save you a great deal in future since you may not have registered with the regulatory authorities from those countries. It could save you from issues like the ones we witnessed with Telegram where investors from the USA bought the tokens without Telegram following the rules outlined by SEC for issuing ICO tokens to US citizens.

Table of content

The table of content gives a clear outline of all the heading and subheadings used throughout the whitepaper.

You could also include a table of the graphics that you have used.

These help the reader in navigating within the whitepaper, which is normally a large document.

Problem statement

In this section, you should outline the problem that your blockchain projects seek to solve. You may delve into why it is important to solve the problem or explain its effects on society.

You could also explain the consequences of not solving it.

You should capture the readers’ attention and give him/her enough reasons as to why they should read the document and even give an overview of what they expect to come across.

You could use graphics, photos or charts to expound more on the problem and its effects.

Market description

This section is especially important for ICO, STO or IEO whitepapers. Investors would like to see how your project shall perform in the market.

You should, therefore, explain to the investors where your project fits in the market. Though numbers are sometimes convincing, if you choose to include them, they must be backed by facts, research or analysis.

You should give a clear picture to investors of how your project shall be adopted and its growth projection.

Product description (how it shall solve the problem)

This is the key part of the whitepaper. You should start by explaining the technology behind your solution. How it is unique from any of the currently available solutions if any.

Secondly, you should explain how the users shall benefit from the project.

You should use diagrams, graphics and photos to explain hard concepts so that the investors can get a clear picture.

Tokenomics (Token Economics)

Since your solution is blockchain-based, you have to explain the token that you intend to use for your project. You should clearly state the type of token it is; is it a utility or security token? Is it an ERC-20 token?

This is the section where you also state how and when you intend to distribute the tokens. You should state the date when the token issuance shall start and state the price of each token.

If possible, you should draw a graph showing what percentage will go to who.

Fund distribution

In this section, you should outline how you intend to use the raised funds. Investors need to know where their money is going. They also need to see how much is needed to accomplish certain tasks.

It is not a must for you to go into the details of the expenditures. Just group them generally. Like product development, marketing, team and so forth. However, it is important to allocate more funds for product development. You should avoid using terms like miscellaneous.

The team

This is an integral part of any blockchain project. Besides the whitepaper, you should also indicate the team on your project’s website.

You ought to include photos and short biographies of all the members of your team.  You should also include their contacts. The biographies help in instilling confidence to investors that the team behind the project is qualified and that they shall deliver. The contacts make it easy for investors to verify that the team members are real and not just a scam.

It is also important to state any past projects or positions that the team members have held in other institutions or projects.

A good number of investors will invest in your project because they are confident in the development team. That is why it is important to use qualified individuals for various positions.

The roadmap

In this section, you should include a detailed development roadmap of your project. The roadmap should clearly outline the milestones of the project while clearly outlining the timelines.

The roadmap should be for the next 12 to 24 months.

If some milestones are already accomplished, it is important to state that too. That will go a long way in convincing the investors that the team is serious about the project. Majority of investors will only cash in on projects that already have something to show. Nobody wants to invest in something that only appears on paper with no hopes of it ever starting; some have turned out to be mere scams!

The roadmap should also state when investors can start getting returns from their investments. This could include things like when the token shall be listed on crypto exchanges for trading.

You could have a graphic of the roadmap and also explain each of the milestones outlines on the graphic.

Partnerships

In this section, you should list any company that you have partnered with. Also, you should list any venture capitals that may have invested with you already.

Partnerships go a long way in promoting your blockchain project since they show that companies are confident that your project shall become a success.

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.

According to WeeTracker media firm, African startups raised about $1.3 billion from venture capital funding in 2019, which is an improvement from the past years. Nevertheless, startups in Africa still face enormous challenges when it comes to funding projects due to a lack of liquidity.

Blockchain technology could step into the gap and help startups especially in the emerging tech hubs like Kenya, Nigeria, and South Africa to raise funds for their projects through blockchain-powered equity crowdfunding. Equity crowdfunding has helped revolutionize the way businesses raise funds from investors.

By adopting blockchain technology, startups do not have to go through the tedious process of getting their companies listed on the stock markets to sell their shares.

Why investors hesitate

In Africa, the ecosystem for doing business is still not that favourable for startups to achieve reasonable growth in a short time span. Most startups struggle to make ends meet due to factors like high taxes, which are common in many African countries. In some worst-case scenarios, some startups end up closing shops. This makes investors shy off from investing since they are not sure if they will live to get the returns.

Also, in Africa, secondary markets are scarce resulting in low market liquidity for investors to exit from investments. Venture capitals, for example, look for entrepreneurs that build sustainable businesses with promising exit opportunities. For a startup to win a venture capital investment, it has to have at least an IPO, merger, or some acquisitions, which are only possible if a startup achieves a certain level of growth.

To create the necessary liquidity, startups in Africa could adopt blockchain technology to enable them to tokenize their assets.

 How token-based financing increases market liquidity

By using blockchain, startups can create tokens (either utility or security tokens). They can then go ahead and sell the tokens through Initial Coin Offerings (ICOs), Initial Exchange Offerings (IEOs), or Security Token Offering (STOs) for the case of security tokens.

Investors will find it safer to invest in startups by buying tokens since the tokens are easily traded in exchanges where the liquidity is high. If an investor purchases some tokens from a startup, and the startup succeeds to get the tokens listed on a cryptocurrency exchange, then the investor can trade the tokens and make some profits. In most cases, the price at which the tokens are listed on the crypto exchanges is usually higher than the price of the tokens during the initial offerings.

Therefore, an investor could decide to exit the market immediately the tokens of the startup get listed on an exchange.

Besides, since a good amount of investment in Africa comes from outside Africa, token financing offers the best opportunity to tap into the external sources. Blockchains are usually decentralized and they allow cheap and fast cross broader transfer of funds. Therefore, investors from any corner of the world can easily purchase the tokens of a startup in Africa without necessarily having to travel to a specific country or sign huge volumes of paper agreements.

Examples of African startups that have reaped big from token financing

Below are some startups that have raised funds through token financing by conducting ICOs, IEOs, and STOs.

  1. Golix

Golix, a Zimbabwean crypto exchange that was started in 2014. In 2018 Golix conducted an ICO that raised $23 million by offering their GLX token.

  1. BlockBank

The UK’s BlockBank that acquired some stake in Kenyan Spire Bank. BlockBank was able to raise about 12.8 million in its pre-ICO conducted in 2018.

  1. Wala

Wala, the “zero-fee money app” South African startup that was able to raise $1.2 million through an ICO conducted in 2019.

  1. Mazzuma

Mazzuma, a Ghanaian startup that was raised over $45,000 in its third token sale phase after successfully conducting a pre-phase, first phase, and a second phase.

Access to capital is essential for Fintech companies looking to embark on rapid growth. However, the available traditional fundraising methods have lots of drawbacks that hinder Fintech companies from realizing their full potential.

Most of the traditional fundraising methods rely on middlemen, who end up making the process too expensive. Also, the process involves a lot of paperwork, which ends up slowing down the whole process.

The rapid evolution being witnessed in the cryptocurrency and blockchain arena has stepped up the efforts of removing intermediaries from most business transactions. The invention of blockchain-based fundraising methods like Security Token Offerings (STOs) has completely revolutionized the way fintech startups and companies engage their customers in raising funds.

Security Token Offerings have stood out among the blockchain-based fundraising methods and offered great competition to methods such as the Initial public offerings which are quite expensive due to reliance on middlemen.

Security Token Offerings within the Fintech industry

Security Token Offerings (STOs) issue security tokens, which are digital financial products that experts and analysts believe could replace the way everything is conducted in the future. Despite being secure and highly liquid (making them easier to buy and sell), they have also provided a better opportunity for transparency and oversight among investors, businesses and regulators.

Security tokens have provided an avenue for digitizing almost anything in the world. A host of industries, among them the real estate industry, and the capital markets, among many others, have seized the opportunity by tokenizing their assets and offering them as security tokens.

Security tokens can easily be offered through smart contracts or STOs.

While STOs allow the Fintech startups and companies to net serious investors, the investors also benefit since the STOs makes it easier for them to monitor the performance of their portfolios. STOs are also easily regulated since the security tokens have an added layer that makes them able to comply with regulations.

Investors who purchase security tokens through STOs are entitled to a given stake, voting entitlements or dividends in the company.

Some of the STOs that have stolen the show recently include that of AssetBlock, a real estate investment firm that has embarked on tokenizing about $60 million worth of exclusive hotels in partnership with a luxury hotel asset manager, for investors to cash in.

There is also another case in Manchester, UK, where a luxury residential development it tokenizing about $25 million worth of assets on Tezos blockchain, with a plan to tokenize over $600 million real estate within the United Kingdom.

Comparing STOs to other blockchain-based fundraising methods

STOs are among several other models for fundraising blockchain projects, among them Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs). Among the three, STOs have stood out after gaining prominence following the regulatory issues facing ICOs.

Initially, ICOs were the go-to fundraising option since they were very simple to orchestrate and required no regulations at all. However, scammers noticed the loophole and started issuing fake ICOs to milk vulnerable investors, thus making investors keep off from them or at least be very careful when participating in one.

The fall away of ICOs saw the invention of the IEOs, which are safer compared to the ICOs. However, most IEOs do not offer security tokens due to the strict restriction that goes with offering security tokens. In the US for example, if an IEO offers security tokens, the IEO should be issued through a registered/regulated securities exchange and the company behind the IEO should disclose adequate information about its business, the token sale as well as the terms of the token sale.

Therefore, though IEOs solved the issue of safety with ICOs, it hasn’t been able to attend to the need of the evolving trend among most Fintech companies to use security tokens instead of using utility tokens. Security tokens are best issued through STOs.

As a result, Fintech companies and startups are opting to run STOs even though they are more involving compared to the ICOs and IEOs. And since the STO landscape is persistently evolving, companies are forced to constantly conduct in-depth market research to thoroughly understand the anticipations of their target audience.

 

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.

With blockchain security tokens garnering interest throughout the world, Autorité des Marchés Financiers (AMF), the French regulator has seen an opportunity that the rest of the European nations should not miss. The AMF recommends that the European nations should create a European digital lab or sandbox that should enable the nations to ease the legal regulations governing security tokens.

Security tokens are known to be the most regulated digital products in the cryptocurrency and blockchain industry. The reason being that the security tokens fall under securities, although they are digital tokens. Therefore, they are subject to the regulations that govern both the cryptocurrencies or digital assets and those that govern securities.

Other countries like China have also suggested allowing security token offerings under a sandbox mechanism.

AMF’s legal review on security tokens

The French regulator recognizes that security tokens have gained a lot of interest across the world. Both incumbents and blockchain ecosystems seem to gracefully embrace security tokens. The IMF looks at tokenization as an accepted step towards the automation of most financial/trade processes.

The French regulator explored two legal facets in its report on security tokens. The first facet deals with the issue and sale of the security tokens. The second deals with the inclusion of security tokens in investment funds.

Normally, there are no regulatory impediments when it comes to including security tokens as investment funds, either in France or any other European nation. The only thing that asset managers that deal with security tokens should do is to apply for a license with the AMF.

The main issue lies with the issue and sale of the security tokens, especially through Security Token Offerings (STOs). For the case of centralized Distributed Ledger Technology (DLT) platforms there are no challenges since the involved parties can comply with the already set licensing requirements.

However, when it comes to decentralized blockchain projects it is quite challenging for the token issuers and sellers since it is difficult to identify a manager. Concerning this, the AMF suggested an outlined a proposal where parties can list buy and sell orders without requiring the endorsement under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID 2 Directive), which has been in effect since November 2007 among European Union nations.

AMF’s suggestion on the issue and sale of security tokens

Currently, the legislation of a security token issue and sale requires a central securities depository.

AMF suggests that the creation of a sandbox or digital lab would allow regulators in the various counties in the European Union to wave certain regulatory requirements. However, it suggests that this should be done as a trade-off.

According to the AMF’s suggestion, the applicant can only be given a waiver or exemption if they are compliant with key regulatory ethics giving the regulators a higher oversight role.

Earlier on, the AMF had released a working document that sought to inspire the European Commission to create a European digital lab that can deal with the financial services around security tokens.

The French regulator is set to release several other papers in support of its security token research in the coming days or months. Most importantly, the regulator recommends that the use of intermediaries in an age where blockchain technology is available is outdated. The AMF would, therefore, like to see the use of more technologically oriented approaches which gives public adoption of blockchain technology a green light.

A few months ago, Polymath one of the most reputable security token offering platforms decided to move its Polymesh Blockchain platform from Ethereum to Parity Substrate, a platform that was developed by Parity Applied Sciences that is owned by Gavin Wooden, who was Ethereum’s co-founder.

This came just a few months after introducing Polymesh, which is a security token specific blockchain. Polymesh was initially built on Ethereum and Polymath had also gone ahead and built an SDK (a suite of developer tools for security token issuers and white-labellers) that want to issue security tokens on Ethereum.

Reason for migrating

The main reason for the fallout is the fact that Ethereum uses proof-of-work (PoW) consensus mechanism, which does not go well with security tokens, though it plans to upgrade to proof-of-stake (PoS).

Adam Dossa, the head of Polymath’s blockchain, had earlier stated in a telephone interview that though Ethereum has some great attributes, the world of regulated security tokens is quite different from that of Ethereum. Dossa was quick to identify that PoW posses a serious problem known as block reorgs where blocks of data containing transaction information can be rolled again to annul a disputed transaction.

Dossa also touched on the way Ethereum settles transactions, saying that since it uses mining to settle its transactions and miners can operate from any location in the world, establishments dealing with securities could be scrutinized by authorities if the charges paid to the miners are traced to a nation that is already sanctioned.

What did the migration mean?

By changing the platform on which its products are built on, Polymath decided to embark on a journey to migrate its ST20 security token development standard, which was initially constructed through Ethereum’s ERC-1400 token standard, to Parity Substrate. Besides, Polymath also had to migrate its token, the POLY (which is an ERC-20 token) from Ethereum to Parity Substrate.

Adam Dossa, however, stated via an email that they shall maintain a bridge for the POLY token for at least one year.

On their part, Parity agreed to develop a sure business-logic option on the base layer of Ploymesh. It shall also construct decent runtime and contract communication modules.

Why Substrate?

The head of Polymath’s blockchain stated that other candidates had been considered before settling on Substrate. One of the Candidates was Hyperledger Cloth among others.

However, Dossa described Parity Substrate as a “modular, versatile framework”. He also pointed out that it is simple to construct good contracts from the bottom up on Substrate, which is a great thing for Polymesh.

Parity Substrate has offered solutions to a number of consensus mechanisms in the past, some of which are even customized. Also, transactions performed via Substrate are final and cannot be undone.

Commercial real estate business in Japan is undergoing a radical revolutionization as tech companies come up with new innovative ways to make the industry more efficient and tech survey. These tech companies in collaboration with the real estate developers have devised ways of tokenizing real estates using security tokens.

Several companies in Japan among them Securitize, LIFULL, and Lead Real Estate, have announced the creation of real estate investment platforms that will allow the use of digital securities better known as security tokens.

In partnership with LIFULL, Securitize, which is a tokenization firm aims to promote real estate crowdfunding through blockchain technology and it is being sponsored by Nomura, MUFG and Sony Financial Ventures.

LIFULL, which is listed on the Tokyo Stock Exchange, provides real estate information services in Japan and it has 14 subsidiaries. LIFULL is the one that started the development of the real estate crowdfunding platform in partnership with BUIDL, which was later acquired by Securitize. In their trial version, they were able to reduce the costs of operation, improve the efficiency of divided payments and automate the distribution of the security tokens.

To their advantage, Securitize developed a tokenized securities compliance platform that makes it possible for the security tokens to be traded on secondary marketplaces.

Lead Real Estate, on the other hand, is already using blockchain with the help of Securitize to fund the construction of hotels and condominiums ahead of the Olympics 2020, which will be held in 2020.

What is Real estate tokenization?

Commercial real estate business is recognized to be among the most profitable businesses in the world. However, the traditional business model employed in real estate limits many investors from investing in the business since it requires a substantial amount of capital even though it is a viable investment option.

Thanks to blockchain technology through asset tokenization, the commercial real estate industry can now be tokenized.

Real estate tokenization refers to the practice of using tokens to represent real estate assets. The tokens can then be sold out or offered at a price to investors. By owning the real estate tokens, the investors respectively own a share of the real estate project and they are entitled to a share of the rental yield accordingly or profits originating from the sale of the assets.

Advantages of real estate tokenization

Blockchain is known to be an incontrovertible distributed ledger, whereby the data/information stored/recorded cannot be altered unless the whole network is brought down. As a result, it brings transparency, enhanced security, reduced costs of processes, traceability, and storage of immutable documents.

Of utmost importance to the real estate market is the ability of blockchain to allow the execution of transactions without the need for an intermediary. The transactions are only between the involved parties and they are stored in a ledger that holds the history of the transaction, the property involved or the asset involved and the title. Therefore, real estate tokenization eliminates the need for lawyers, brokers, and agents.

Tokenization also offers investors the ability to transact using digital currencies like Bitcoin and the like. This, in addition, is cheaper since the buyers bypass the fees that banks could have included.

Furthermore, the use of Escrow and smart contracts makes it easier and efficient to transfer title deeds upon payments.

Most importantly, real estate tokenization makes it easy for the common man to own a share of a real estate through crowd ownership. A person can invest a small amount of money by purchasing the minimum required amount of security tokens in real estate to become a shareholder of real estate. Also, the security tokens are more liquid and owners can trade them thus fostering growth-financing.

Below is a case study of a process done using blockchain technology without the use of middlemen or the need for an agent.

After unveiling major announcements, towards the end of 2019, about the future of blockchain technology in China, the Bank of China is set to introduce a tough security token protocol soon. The bank is also seeking to create its cryptocurrency that will be centralized and pegged on the Chinese RenMinBi (RMB).

This has brought hope to blockchain startups in China where Security Token Offering (STO) campaigns were banned almost immediately after the Initial Coin Offering was banned in 2017.

China’s hard stand on Cryptocurrencies

Despite being the country with the most blockchain startups and cryptocurrency adopters worldwide, China has had a hard stand on cryptocurrencies. In 2017, just as cryptocurrencies were making their debut, China banned exchanges, ICOs and STOs making it practically impossible for blockchain startups to raise capital for their projects through fundraising campaigns.

Interestingly, China has also been very hard on the cryptocurrency miners even though the government controls some of the largest cryptocurrency mining rigs/facilities.

The turnaround

It appears Chinese officials, especially at the Bank of China, have finally realized that blockchain technology is here to stay.

China outlined its new strategy on cryptocurrencies and blockchain technology through Weimin Guo, the Chief Scientist at the Bank of China, in a Finance Technology Summit held towards the end of 2019.

Among those new strategies is the intention of China to release its cryptocurrency that shall be called China’s Digital Currency Electronic Payment (DCEP). The DCEP shall be a stablecoin pegged on the Chinese RenMinBi (RMB).

According to the DCEP developers, the introduction of the digital coin will streamline the obsolete traditional financial practices currently in use. They also anticipate that the digital coin will rival Bitcoin, one of the most adopted cryptocurrencies in the world.

According to Weimin Guo, Bitcoin failed in its purpose to provide a better financial market compared to avoid the manipulations of the traditional markets.

Proposed strict regulations on STOs

As China loosens its stand on cryptocurrencies and blockchain technology, it still wants to ensure that the technology is kept in check.

Among some of the strict regulations that China seeks to introduce is the tough security token protocol that will see all Security Token Offerings (STOs) operate within an austere “regulatory sandbox mechanism”. By giving STOs a leeway, the country seeks to promote blockchain technology innovations as it maintains complete control of the sector.

However, as China inches back into the game, it is interesting to see how the Chinese regulators continue to embrace blockchain technology. The country seems to be realizing that times are changing and changing fast. Regulators seem to have realized that the country has to embrace blockchain technology or get left behind as the completion across the world hits up. Other countries are doing all they can to ensure that they conform to the technology by introducing laws and regulations to govern it.