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Due Diligence Checklist for Launching an STO

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Due Diligence Checklist for Launching an STO

If you are planning on launching a security token offering there’s an extensive due diligence checklist which should be performed. This checklist will be divided between business and legal compliance. The business aspect is somewhat globally consistent while the legal may vary from jurisdiction to jurisdiction, and this should only be a guide, with full legal-compliance being performed by an attorney.

Business Due Diligence:

This due diligence involves basics which are not unique to tokenized securities, but there are also additional due diligence reviews which cater specifically to cryptocurrencies and STOs.

  • Whitepaper should be reviewed by unbiased third parties which have reviewed these type of documents before. Common mistakes include promising high returns, failure to communicate effectively the technology, or explaining what the company is designed to perform.
  • Tokenized securities should include enough details to actually make sense to investors. If it’s a tokenized real estate fund, are we investing in residential or commercial properties? In what cities? Is the goal to flip distressed properties or to invest in luxury high rise accommodations? These are the types of questions which are important to investors but are often overlooked.
  • Business plan. If it’s a start-up that’s seeking to raise funds via an STO, we need details on what the business is setting out to achieve. Simply being an “AI” or “Blockchain” company is not enough.
  • Profit Sharing – This should be broken down. Investors should understand if dividends will be paid out quarterly, annually, the payout, etc.
  • Does the product or business make sense? Simply tokenizing a business and calling it “AirBNB on the blockchain” is not enough. We need to understand what the business model is, why now, and how the company plans on accomplishing its goals.
  • Differentiating factor – Having reviewed 100s of businesses this is often where business plans, whitepapers, and founders fail completely. It’s a competitive landscape, and this level of competition is simply increasing over time. Explain what differentiates your product/company from competitors and explain this in details. It can be the team, the technology, patents, etc.

Legal Due Diligence:

At its root level legal due diligence is performed to ensure that the corporate entity is formed correctly, with sound corporate governance in place.

It is always significantly more cost effective to be legally compliant from the start, then it is to retroactively change the corporate structure.

Due diligence will ensure that all shareholders and other entities are legally authorized to perform the investment. Additional due diligence may reveal additional risks and liabilities which may not be obvious to someone who does not practice law.

Hiring an attorney to perform due diligence can raise red flags while it is still early enough to take corrective action. This can include discovering undisclosed risks, potential liabilities, compliance/tax issues, litigation issues, or simple contractual issues.

These are what a legal team should be hired to uncover.

  • Background checks of management and shareholders. This includes running them through multiple international watchlists which include OFAC sanctions list, and the exposed persons list which is also known as PEP.
  • Preparation of essential corporate documents which include articles of incorporation, bylaws, minutes of stockholder meetings, partnership agreements, shareholder agreements, fund offering agreements, and capitalization tables, etc.
  • A legal team should review material contracts with partners, management, employees, service providers, and other, which could potentially cause legal issues.
  • Trademark & Intellectual property rights.
  • Compliance review, this includes but is not limited to registrations, SEC form filings, state filings, licensing, and compliance policies.
  • Ensuring that proper KYC and AML is performed for the jurisdiction that you operate in, and based on where investors are headquartered.
  • Whitepaper review to ensure that securities regulations are adhered to. For example, specific returns should never be promised.

Summary:

While this breakdown may offer some clarity on some of the due diligence that should be performed,  SEC regulations are complicated and it is important to hire a legal professional. The information on this page is for entertainment purposes only and is not meant to be construed as legal advice.

Below is a list of companies that are currently assisting STOs with the legal process:

Company:Website:Location:
BX3 Capitalwww.bx3.io261 Madison Avenue New York, NY 10016
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Antoine Tardif is the CEO of BlockVentures.com, and has invested in over 50 blockchain projects. He is also the founder of bitcoinlightning.com a news website focusing on the lightning network, and a founding partner of Securities.io

Security Token News

Healthereum Announces STO

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Healthereum Starts STO

The global health care rewards platform Healthereum announced the start of its STO this week. The firm seeks funding to further development on its blockchain-based patient mobile application.  The move coincides with the release of two Beta products, HELIO, and HELIO(S), which could help drastically reduce inefficiencies found in current healthcare systems.

HELIO BETA

The HELIO platform utilizes incentivized utility tokens called Healthereum Tokens (HLTH) to create more communication between healthcare practitioners and their patients. Patients receive tokens for their participation in certain tasks and activities such as surveys, reviews, or verifying an appointment. All of these tasks are critical to the improvement of healthcare systems.

Biometrics

Also, the Dapp allows users to verify their identity via biometric authentication.  This is a critical feature as it allows users to access a host of sensitive information while not putting the information at risk of theft. The HELIO app also allows for additional security such as pin codes to be used.

HELIO Dapp via Healthereum Website

HELIO Dapp via Healthereum Website

Advanced Features

HELIO combines a multitude of helpful healthcare information into one easy to access Dapp. Here, users can locate items such as their Emergency Identification Card (EID). This holds all relevant information in case of a life threating scenario including your blood type and first contact. HELIO also features a section for all of your insurance information.

The Power of Patient Feedback

Surveys help practitioners improve their services but are highly disregarded by patients who see little to no reason to fill them out. This platform could reverse that trend and bring some much-needed communication back into the industry. By incentivizing patient participation, all parties gain valuable insight.

Blockchain Rating System

HELIO permits patients to rate their experience and practitioner. Since the patient is verified via the blockchain, you only have real patient reviews. Currently, the industry contends with a number of influencing factors including paid reviewers. This leaves clients at a disadvantage.

Appointment Verification

Missed appointments are another point of lost revenue within the health care industry. Healthereum wants to incentivize confirmations. Users can earn tokens which can go towards discounted healthcare by confirming their appointments the day of. The platform provides both practitioners and patients with an easier alternative than the status quo.

Healthereum STO

Interested investors can purchase HLTH tokens through the company’s STO for $0.10 each. Each token represents a single non-voting unit according to the company’s website. The company states that it intends to list its security tokens on regulated exchanges pending SEC approval. All tokens will be distributed upon the completion of the ICO and cannot be transferred from the original owner for the one year. HLTH Tokens are ERC-20 tokens and can be stored in any ERC-20 compliant wallet.

Healthereum Aims for the Future

Healthereum wants to leverage blockchain technology to eliminate a host of issues currently plaguing the healthcare system. The platform’s focus on micro level inefficiencies could greatly improve care delivery and patient accountability. If successful, your next doctor visit might require you to download a Dapp.

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Security Token News

The Best Countries to Launch Your Security Token

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Best Country to launch security token

Security token offerings (STOs) are now commonplace in the cryptomarket. This unique fundraising strategy gives companies the ability to easily monitor, distribute, and regulate their campaign utilizing blockchain technology. STOs combine the best features of ICOs with the stringent regulations found in particular markets.

Aside from the benefits achieved by companies that use an STO strategy, there are also many reasons why an investor would seek out this type of investment. For one, STOs are far more transparent than an ICO. Companies involved in STOs must reveal sensitive company information including their address, upper management, and financials.

This information further protects investors from the ramped scamming that occurs in the ICO markets. One report published by the Statis Group showed that as much as 80-percent of the ICOs conducted in 2017 turned out to be scams. It’s exactly this fraudulent activity that led to the development of security tokens.

Now that security tokens are more popular, many countries want to host STO related businesses. In order to entice these businesses onto their shores, government officials are ready to make some serious concessions. Below are the best countries to launch your security token.

Malta

The island country of Malta is one of the premier locations to launch your security token. The country embraced blockchain technology from the start. The Maltese Prime Minister, Joseph Muscat, issued a public statement this year in which he acknowledged both the fears of regulators “and the fact” that this technology is quickly changing industries across the globe.

Malta via Master Explorer

Malta via Master Explorer

Maltese officials are serious about their desire to be the leading blockchain country in the world. In the same statement, the Prime Minister stressed the importance of heading the digitization of the economy. He went as far as to state – “we must be the one that others copy.”

Malta is home to some of the largest security token projects currently in the works. In September the Malta Stock Exchange (MSX) announced a partnership with Binance, the world largest exchange by volume. Binance seeks to create a new security token platform in the country in the coming months.

Lithuania

Lithuania made some significant headway last year towards their goal of becoming EU’s security token capital. The country introduced security token friendly regulations. The country’s Minister of Finance issued broad security token regulations that covered the taxation, accounting, issuance, and compliance.

Blockchain companies send their project to a supervisor of financial markets and their office well send back a reply regarding the status of your token. Basically, Lithuanian officials do their version of the Howie Test to your project and give you a solid answer prior to your firm moving forward on their project.

Since Lithuania is a member of the EU, they gained a huge advantage by legalizing and regulating STOs in their country. Government officials hope to entice all of the EU to host their STOs in the country.

Switzerland

Switzerland has a long history as a financial safe haven. The country features low taxes and a crypto friendly environment. Switzerland was one of the first countries to adopt cryptocurrency regulations.

Switzerland has had a pro-crypto stance since 2014 when regulators released a report detailing the significance of cryptocurrencies. Interestingly, the report acknowledged cryptocurrencies handle the same tasks as money but stopped sort of labeling it legal tender due to the lack of an issuing country.

STOs submit their project to the Swiss Financial Market Supervisory Authority (FINMA). This regulatory body reviews each STO to confirm what designation the project falls under. Token labels include payment, utility, asset, and hybrid tokens.

Israel

Israel is home to numerous blockchain-based startups. The country leads the world in research & development according to a recent Bloomberg report. The report placed Israel in the number two spot, only behind South Korea in terms of innovators. Israel welcomed blockchain companies by cutting crypto taxes in half in October of this year.

Tel Aviv, Isreal

According to a Cryptoslate report, Israel started 2018 with 88 blockchain startup in operation. In March 2018, Israel released an interim report which detailed the regulations for ICOs. The report was intended to strike a “balance between technological innovation and the protection of investors.”

The Israel Security Authority’s ex-head, Prof. Shmuel Hauser went as far as to recommend the country foster the creation of an international blockchain center on his retirement. This move ensures Israel remains a dominant force in the cryptomarket.

Canada

Canada continues to lead the North American crypto revolution. The Canadian Securities Exchange (CSE) announced in February plans to launch a new securities token platform. The platform is based on the Ethereum Blockchain.

Toronto, Canada is the birthplace of Ethereum and the city continues to be a strong hub for crypto activity. Additionally, the platform allows users to launch their own security token easily. This decision is consistent with Toronto’s desire to be an industry leader.

According to the press release, the new security token platform is designed to give companies an alternative to the ICO space.  Kabuni Technologies is the first security token scheduled for launch on the platform. The company also filed a prospectus with the British Columbia Securities Commission (BSCE).

Dubai

Dubai remains a powerful influence in the cryptomarket. The country was one of the first to issue a state-backed cryptocurrency back in October 2017. In February of this year, The Dubai Multi Commodities Centre (DMCC) began to facilitate a market in cryptocurrencies.

The DMCC is a member of the Global Blockchain Council. The project initially began as part of the Dubai Smart City initiative. Speaking on cryptocurrencies, the project’s director, Franco Bosoni, discussed how he could see a commodities-like future for these digital assets. Dubai is now in the middle of developing a robust framework for the security token commodity to operate within.

Security Tokens – A Smart Move

The countries exemplify the innovative spirit and their decision to position their markets in line with the digitization of the economy is sure to pay off. The security token market continues to expand and these countries are now seeing the benefits of their pro crypto stance. You should expect more countries months.

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STO Launch

Recruiting STO Advisors

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Recruiting STO Advisors

Launching an ICO is a complicated process, but launching an STO is even more perplexing. The reason is due to the additional legal compliance that is required, and the necessity to complete proper ongoing KYC and AML on investors.

Businesses, and start-ups should be focusing on what’s important, and that is the success of their business. Learning all of the ins and outs of launching an STO should not be the role that you play. It’s too complicated of a marketplace for beginners, and any accidental error or omission could end up costing the company far more in the future then had things just been done properly.

Below are some of the problems that you will encounter if your STO is not performed according to code.

  • Exchanges will not list any STO which has potential legal issues. Even the loss of one exchange can dilute the future liquidity and value of your brand.
  • The SEC or other government bodies can either slap you with a penalty or in a worst case scenario shut down your operations.
  • Failure to KYC or AML properly could jeopardize future banking relationships, and could result in the confiscation of funds.
  • You could appear to be unprofessional to those in the space.
  • De-optimization of the potential raise amount.

These are a sample of the legal and financial reasons why you should outsource as much as possible. This is not factoring in the lost opportunity cost, of having your staff focusing on the technology of an STO versus running a business. Specialize in what you are good in, which is running your business, and outsource the rest.

It can be difficult to know where to start. The natural inclination is to seek out an advisor. The wrong approach to finding an advisor is by searching for “STO Advisor” on Google and using the first service that you find. This does not make someone an STO Advisor, it simply makes them someone who is good at search engine optimization.

You should become familiar with the tokenized securities industry. Learn who you can trust in the industry, and who is simply out to benefit themselves. Attend a few Security Token Conferences if you can. Mingle, network, but most importantly learn.

The crypto industry is full of conmen, but what’s more shocking is the high number of people who simply lack any type of business sense. Make sure that whoever you hire as an advisor has experience and is a credible name.

A valuable STO advisor will only sign on with your company if they believe in the project. You do not want an advisor who blindly advises anyone who contacts them. The reason for this is that the most valuable role of the advisor is as someone who introduces you to the right contacts. If an STO advisor attempts to connect junk projects with his existing network, that network will quickly learn to ignore the advisor. This is why the best advisors are very selective on who they work with.

The second most important role of an advisor is as a sounding board. Are you unsure on how the market will react to your business idea? If so, the advisor can be someone that you consult with. A good advisor will be honest with you if they feel that something will backfire and damage your reputation.

An advisor can also perform the following:

  • Introduction to proper legal council
  • Introduction to token issuers
  • Introduction to potential investors
  • Recommendations on jurisdictions to incorporate
  • Optimization of whitepaper/business plan.
  • Connecting at events to discuss project.
  • Recommending changes to planned corporate structure.

How do you compensate an advisor? This can take the form of equity or tokens. It is important that the advisor is actually involved, and is simply not compensated for having his profile on the STOs website. Compensation can be as high as 3%, but this is a little high and it depends on the value of the project, it’s potential to scale, etc. If someone believes in your project they should be willing to be an advisor for 1 to 1.5% in equity or tokens.

What’s important is that you use someone who becomes a business partner. They have your success in mind, and due to this they will do their best in order to ensure your success.

Additional Commentary: As a Co-Founder of Securities.io and BlockVentures I am occasionally approached regarding STO advising/consulting. I will only consider this after meeting with the founders, and being comfortable in the project.

 

 

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STO Advisors

Company:Website:Location:
Block Venturesblockventures.com2179 West Bay Rd, Grand Cayman, Cayman Islands
Moonwhale Venturesmoonwhale.ioChoa Chu Kang Ave 2, Block 254, Singapore

Marketing Partners

Company:Website:Location:
BX3 Capitalwww.bx3.io261 Madison Avenue New York, NY 10016
Priority token LLP
www.ptoken.ioSuite 6, 5 Percy Street, London, Fitzrovia, W1T 1DG, United Kingdom

Lawfirm Partners

Company:Website:Location:
BX3 Capitalwww.bx3.io261 Madison Avenue New York, NY 10016