How to Create a Legal and Compliant STO Project (Part 1)——Business Closed-loop and Early Strategic Planning Preparation

特邀专栏作者

2018-11-22 04:31

This article is about 4754 words, reading the full article takes about 7 minutes

A qualified STO project includes the following four links: preliminary strategic planning and preparation, legal and financial compliance, tokenization of securities, and circulation of ST. The four links are progressively related and interlocking, and f

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This article is from Digital China (ID: shenzhoushuzi_group), author: Sun Jiantao (CEO of Digital China, founder of Goopal Group), please indicate the author and source when reprinting.

Two recent news once again verified that STO (Security Token Offering) is gradually heating up, and it has quickly entered the public eye from theoretical discussion.

The first news is that the electric vehicle blockchain company EVAIO has approached Faraday Future (hereinafter referred to as: FF) and the American investment bank Stifel. EVAIO hopes to invest a total of 900 million US dollars in FF through STO within three years. The specific investment details are yet to be announced. Not entirely sure, and storytelling is not ruled out. Compared with previously completed and ongoing projects, Faraday's magnitude and popularity are clearly beyond the scope of traditional blockchains. Jia Yueting, who has always been famous for his daring to think and act, and strategic madness, and is known as the "Chinese version of Musk", embraces the brand-new STO within reason, which is not only a new choice but also the general trend. Its team and partners should have been discussing various details of the operation of STO financing.

The second news just happened this weekend. The U.S. Securities Commission (SEC) issued the "Statement on the Issuance and Trading of Digital Asset Securities", which covers the offering and sale of digital asset securities, investment in digital asset securities, digital asset securities transactions, and trading of digital asset securities. Clear guidance is given on the registration of brokers and dealers. The day before this opinion was promulgated, the SEC had just imposed a total fine of $500,000 on CarrierEQ and Paragon Coin, two US companies that conducted illegal STOs. currency.

In fact, since the beginning of this year, there have been more and more projects under the banner of STO, but in fact, more of them are pseudo-STO projects called STO. So, what is a truly qualified STO project, what should its complete commercial closed loop look like, and how to create a legal and compliant STO project?

In my opinion, STO itself includes the two attributes of asset securitization + securities tokenization. Having these two attributes is a necessary condition for an STO project; at the same time, the entire link of the project needs to be legal and compliant, and there must be The clear current law is used as the basis, which is a sufficient condition for becoming an STO project, and the two conditions are indispensable.Specifically, the project party tokenizes existing traditional assets, such as physical assets, equity, creditor’s rights, and other subject matter with asset attributes, through blockchain technology. Security certificates have complete securities attributes. At the same time, the project must comply with the corresponding laws and regulations, that is,

Even a project that has completed asset securitization and securities tokenization cannot be called a real STO project if it does not comply with the corresponding laws and regulations.

Not only that, after the STO project completes asset securitization and securities tokenization, and is legally compliant, it also needs liquidity, that is, the issuance and trading links. This kind of liquidity can be present or visible in the future . According to the laws of some countries, project issuance can only be faced with qualified investors or institutions, and it needs to be locked within a certain period of time (one year or half a year) before it can enter the secondary market and face ordinary investors.For any asset, liquidity is the guarantee of value circulation. If you simply complete asset securitization and securities tokenization without liquidity or the possibility of liquidity, it still cannot become a truly qualified STO project . in my opinion,

1. Preliminary strategic planning and preparationFor any STO project, the preliminary strategic planning is the root of the project's success.It contains four elements, namely business development strategy, Token structure design, selection of regulatory jurisdictions, and time planning.

To complete the entire preliminary strategic planning and preparation, for most projects, choosing a reliable STO service provider should be the best path at this stage; however, project parties with STO-related experience can also operate by themselves.

1. The business development strategy determines the direction of the project, especially the asset subject preparing for securitization, which will directly determine whether the project can have the two attributes of STO and the future market space.

Aspen coin, which appeared in August this year, is the first STO of a real estate project. St. Regis Aspen Hotel is located in Aspen, a famous resort town in Colorado, USA. Its customers are mainly celebrities, high-net-worth individuals, corporate executives and some individual guests. The hotel has just achieved profitability in 2017, but the future traffic revenue is still Worrying. In this case, it opted to conduct an STO of the resort assets, which is subject to SEC Reg D 506 (c) regulations. Relevant information shows that it raised a total of US$18 million in funds during the two-month fundraising period.

The "22X Fund" project comes from the famous American accelerator 500 Startups, which is a security token fund jointly established by the 22nd batch of startups. According to the strategic plan, among the 500 Startups 2017 Entrepreneurship Camp graduates, no more than 30 winners will receive investment from 22X Fund, which will hold 2.5%-10% of the equity of each start-up. Holders of the tokens issued by 22X Fund can obtain returns through the trading of tokens on the exchange or the repurchase mechanism.From the above two cases we can see that:

The final targets of the two STOs are more pragmatic and have a certain reputation. The assets corresponding to Aspen coin are relatively scarce and unique resort hotels, while Aspen Digital has a strong strategic awareness. They intend to build a real estate in the encrypted world ecology. The subject matter of "22X Fund" is the equity of start-up companies incubated by famous incubators. It is in the field of cutting-edge technology, and it is reasonable to embrace new things STO. The two STO projects can be said to be at the forefront in terms of business development strategy, which also determines that their markets have a certain imagination space, can support future transaction depth, and activate liquidity, of course, it does not rule out its risks.

2. Token structure design depends on the attributes of the assets themselves, and will affect the people covered by the STO project, thus determining the vitality of liquidity and the magnitude of potential investors in the future.

For example, PropertyCoin (property currency), which is an STO project managed by Aperture. Aperture is a California-based real estate technology and investment firm that is innovating the way technology is used to acquire, renovate and dispose of residential real estate. PropertyCoin leverages the real estate market through a 100% asset-backed token, and Aperture, the operator behind the token, plans to use the raised funds to invest in two major sectors: residential housing price depressions; and lending to other real estate investors. Through reinvestment, the token holders share 50% of the fund's profits.

Let’s look at another case, Sia, which is a blockchain-based decentralized cloud storage platform. Leasing companies can rent corresponding services from hosting providers. Sia has designed two tokens: Siacoin and Siafunds. Leasing companies use Siacoin, and hosting providers use Siafunds to enter into contracts on the platform. Rental companies and hosting providers need to pay Sia 3.9% of all expenditures on the platform as a network service fee. The service fee is divided proportionally among Siafunds holders.

Notably, Nebulous, the operator of the Sia platform, is offering 750 of the 10,000 Siafunds tokens as security tokens in compliance with SEC regulations. This is one example of a “two-tier issuance” of tokens, where the issuer issues both a security token and a utility token.From this it can be seen thatAssets with different attributes are differentiated in the Token structure setting, and physical assets are relatively simpler and clearer.Due to the special properties of assets, real estate projects will give investors a certain sense of security. At the same time, after the issuance of Token, the dividends can come from both the appreciation of the real estate and the rent of the lease.This is why many real estate companies, a seemingly traditional field, are better integrated with STO at this stage.

After Aspen, earlier this month, also in the United States, a high-end apartment property in Manhattan, New York was successfully tokenized on Ethereum.

For non-physical assets, the Token structure setting can be more complex than that of physical assets, which may require more efforts in concept popularization and market education, but at the same time, it will be more flexible and differentiated.

3. The choice of regulatory jurisdiction indicates the choice made by the project party between sandbox regulation and penetrating regulation. Different jurisdictions will directly affect the policy risks the project bears and the trust risks brought about by the degree of openness.Aspen Coin, as the first real estate STO project, is issued based on the Reg D 506(c) regulations of the US SEC.The advantage of Reg D is that there are no financing restrictions for qualified investors, low compliance requirements, low costs, and relatively fast speed, which contributed to this project becoming the first real estate STO project.

But the disadvantage is that the issuer is obliged to review the investors and needs to review the bank and tax documents of qualified investors, which increases the financial burden and time period of the issuer. At the same time, the restricted securities acquired by investors have a sales restriction period of 6-12 months, which will affect the liquidity of the acquired securities. In addition, Reg D also requires that if the company’s assets exceed US$10 million and the number of investors exceeds 2,000, the company needs to register with the SEC; that is to say, for companies with assets of more than US$10 million, the number of investors is limited to 2,000.

This is the policy risk brought about by the penetration of SEC supervision, which will affect the time period of the project and have a huge impact on the market. If the SEC’s supervision is not followed, the two companies mentioned above, CarrierEQ and Paragon Coin, will be punished by the SEC.

Choosing sandbox regulation will naturally be relatively loose at the policy level, such as HydroMiner (H3O), which is the first security token financing experiment in Europe that tries to comply with current regulations, and the funds are used for large-scale, environmentally friendly electronic currency mining project operations. According to the data, HydroMiner completed the pre-sale of 2.5 million US dollars of security tokens (it is conceivable that if this project is under the supervision of the SEC, it will be subject to many restrictions).

However, in terms of amount and influence, HydroMiner (H3O) is obviously not as powerful and well-known as those projects supervised by the SEC. After all, for emerging things, how to gain the trust of capital parties, investors and the general public may be the most difficult problem they face. Regulation has always been a double-edged sword. On the one hand, it seems to delay efficiency, but on the other hand, regulation is also trying to protect the interests of investors.

4. Time planning is the understanding of the project itself, the prediction of the market prospect, and the in-depth understanding of relevant regulatory laws and regulations. It is an important factor that determines whether the project will become a martyr, a pioneer, or a latecomer in the STO tide.

In fact, whether it is the first Ethereum STO project tZERO or the first real estate STO project Aspen Coin, at least from the current point of view, they are all pioneers in this industry.

Aspen REIT (trust company), the investment subject of the tourist resort town of Aspen, applied to the SEC for an IPO about a year ago, issuing 1,675,000 shares at a price of $20 per share. If successful, it will become the first A single-asset REIT real estate investment trust traded on a U.S. exchange. However, management ultimately decided to withdraw the IPO and subsequently began an STO under Reg D 506(c). That is to say, as early as a year ago, their STO preparations have already started. This is obviously a decision made after their evaluation of their own assets, judgment of the STO market, and interpretation of relevant SEC laws and regulations. From August to October this year, when STO began to spread gradually and develop rapidly, Aspen Coin raised a total of 18 million US dollars.

There is another project worthy of our attention, Nexo, the first STO project that entered the secondary market and can be traded on exchanges. Nexo is a decentralized lending platform. The entire mortgage process uses blockchain technology to ensure fairness, transparency, flexibility, and greatly reduce all operating costs. Currency holders enjoy 30% of platform loan income dividends , which submitted the Reg D form to the SEC, and at the same time applied for a Reg S registration exemption to be registered as a security token.

However, its tokens have no restrictions on circulation and can be transferred freely, and can also be traded on decentralized platforms such as IDEX. The reason why there is no circulation restriction period is likely to be the Reg S exemption in the SEC at the same time . Reg S is a good complement to Reg D, allowing non-U.S. investors to invest in U.S. companies on a similar basis to Reg D terms, without the need to be accredited as an accredited investor, and without any restriction periods.

It is still difficult to judge whether Nexo is a pioneer or a martyr, but they obviously made a decision based on the above elements after a detailed analysis, and became the first project to enter the secondary market.

It can be said that for STO, in addition to whether the loose regulatory policies of various jurisdictions will affect the fundraising, it is also necessary to grasp the various restrictions brought to ST by regulatory regulations, such as qualified investors, lock-up period, etc., which often It will affect the volume and progress of the project's fundraising. So plan as early as possible. If you want to be a pioneer, you must be ahead of most people. Of course, you must study different regulatory policies in the process, otherwise you may become a martyr.

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