Episode 3: Demystifying Security Token Offerings: The Real Process Behind the Buzz

Welcome to “Old Men, New Money,” where we dive deep into the world of Security Token Offerings (STOs). I’m Douglas Borthwick, here to pull back the curtain on the complex process behind STOs. In our last episode, we discussed the regulatory framework, but today, we’re walking through the actual process involved in an STO, identifying the key players, the timeline, and the costs, while offering insights into common pitfalls.

The Complexity Behind Tokenization

Contrary to the magical perception of tokenization, an STO is a multifaceted venture involving regulatory compliance, serious legal work, and technical integration. I’ve navigated this landscape as the Chief Business Officer at INX during the first SEC-registered digital security offering. I’ve also consulted for companies in their capital raises, witnessing firsthand what works and what doesn’t.

The Players in an STO

Every STO typically involves six main roles:

1. The Issuer: The company raising capital—everything revolves around you.

2. Securities Lawyers: Specialists who draft your offering documents and handle necessary filings.

3. Blockchain Developers/Platforms: Technical experts who create tokens and smart contracts.

4. Transfer Agents: They manage your cap table and ensure compliance with securities laws.

5. Broker Dealer/Funding Portal: They solicit investors and handle securities sales.

6. Custody Providers: Especially for institutional investors, these entities store assets securely.

The Timeline and Costs

The process from start to completion typically takes three to six months and costs can range from $150,000 to $500,000 depending on complexity. The journey involves meticulous planning and execution with cost predictability often underestimated by companies.

The Step-by-Step Process of an STO

1. Month One - Planning and Team Assembly: Decisions, team building, and initial costs between $10,000 to $20,000 are dedicated to strategic planning and selecting a blockchain platform.

2. Month Two - Documentation and Technical Build: Heavy work on legal documents and smart contract development, with costs reaching $50,000 to $100,000.

3. Month Three - Testing and Regulatory Filings: Testing, final revisions, and filing to regulatory bodies with expected costs of $30,000 to $50,000.

4. Months Four to Six - Capital Raise and Marketing: Active fundraising and compliance monitoring. Factors like network reach and market conditions affect the timeline and cost.

Key Documents

Critical paperwork throughout this process includes the Private Placement Memorandum (PPM), Subscription Agreement, Operating Agreements, and form filings like the SEC’s Form D. Each document plays an essential role in laying out the offerings, risks, and governance procedures, making accuracy vital.

Building on the Blockchain

The technical side features creating smart contracts that govern securities. Ensuring secure, compliant transactions through processes like KYC/AML verification is paramount.

Common Pitfalls and Success Tips

• Underestimating Time/Cost: 3-6 months and $150,000+.

• Inexperienced Legal Counsel: Use only seasoned securities lawyers.

• Inadequate Investor Relations: Transparency builds trust.

• Ignoring Secondary Trading Options: Investors need liquidity paths.

Success at INX involved strategic partnerships, rigorous compliance, established investor networks, and maintaining open communication with investors.

Conclusion

STOs offer powerful capital-raising opportunities but demand thoroughness and professionalism. Companies that embrace the complexity with the right strategy and resources can achieve successful outcomes. Our next episode will explore the infrastructure supporting digital securities, like trading systems and custody providers.

Thank you for joining “Old Men, New Money.” Share this with someone considering capital raises through STOs.