13 Apr Quick guide to the Digitization of financial assets to raise funds
This post is also available in: Español
The digitization of assets has been become a popular topic in the financial industry over the past year, and we get why: digital assets enhance liquidity as they can be traded 24/7 on exchanges globally, and its valuation becomes real-time and market driven. For startups this means they can raise funds globally by issuing digitized equity or debt, and that they can automate tasks such as the payment of dividends and interests. Before we continue, let’s take a quick dive into the jargon you will encounter around this topic: the process of digitizing assets and securities is often being referred to as “tokenization”) and the subsequent initial sale of these digitized assets (the fundraising process) is often named by STO or Security Token Offering.
A variety of financial products can be tokenized, such as equity (with or without voting rights), different types of debt and projects with shared ownership, such as Real Estate or art. The financial products that are issued during a STO remain their traditional legal structure, however, by digitizing them, they get a digital representation in the form of a token that is linked to a blockchain. The rights for the investors are programmed in these digital assets (security tokens).
The procedure of launching a STO consists of different processes, such as the set up of the legal structure, the technical development of the token, and the initial sale and issuance of the tokens.
Legal preparation of a Security Token Offering
Financial regulations require those who issue securities to comply with specific requirements, such as the implementation of a KYC process, a suitability test for investors and the intervention of an investment firm to oversee the issuance.
As most STOs fall under the classification of a private placement, it is not necessary to publish a prospectus approved by the financial regulator. However, it is necessary to have an investment firm overseeing the sale. The role of this firm lays in validating the investment memorandum, making sure all the information provided is clear, objective and sufficient for an investor to make a well considered decision on whether to invest. This investment firm does not have to take care of the placement and / or custody of the digitized assets.
The first step of setting up the legal structure of an STO is the definition of the financial product to digitize (i.e. equity, debt) and the rights for its investors (i.e. voting rights, dividend/interest, etc.). Once this has been done, an investment memorandum will be written, which has to be approved by an investment firm.
Technical development of the security token
The token holds the investor’s rights and acts as the digital representation of the financial product to be issued. Once the tokens have been designed and explained in the investment memorandum (i.e. product it represents, dividends/interests, etc.) its structure will be developed in smart contracts linked to a blockchain. As of today, most security tokens are issued on the Ethereum blockchain.
The sale of tokens
Once the legal structure and the token is ready, the STO can be launched and the fundraising process will start. It’s important to onboard investors through a KYC process, as this is a legal requirement. Once investors have passed the KYC/AML process and are approved to invest, they can invest in the project. Icofunding’s platform is designed to onboard investors in an easy and compliant way and allows investors to participate in STOs through fiat and crypto.
Timings and Costs of launching an sto
The legal and technical preparation of a Security Token Offering takes about 6 to 8 weeks. After this, most companies dedicate several weeks to promote the project and pitch it for investors before opening the initial sale. The duration of the token sale varies from company to company, often with a minimum of 6 weeks and a maximum of a year. However, we recommend a duration between 2 to 3 months.
The cost of launching a STO varies from country to country, as the fees of lawyers and investment firms are a lot higher in certain countries than in others. It also varies whether one works with an all-round STO platform, such as Icofunding, or whether the company decides to work with different service providers for each need, which often tends to have a higher price.
Launch a STO on Icofunding
At Icofunding we take care of the legal structure of Security Token Offerings and develop the token, which can be sold on our tokenization platform. Our platform includes an investor’s onboarding process, that includes KYC process and suitability tests, and allows investors to participate in investment rounds with both fiat money as cryptocurrencies. On our website you can find more information on how to issue security tokens.