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How to structure a security token offering (STO) business idea and its revenue model successfully ?

March 14, 2019

Security token offering remained a burning topic throughout 2018 and came as a sigh of relief for those looking for alternative methods to raise money. In 2019 things are not the same. STO is now mature and composed, unlike a wildfire; gaining land without efforts and motive.

With a lot more regulations and increased scrutiny in the play, now it requires a proper blend of efforts and professional approach to bring STO. The thing needs to be proved is – It’s not a trap.Now there is a strict need, even stricter than before, to structure STO’s and design a nice revenue model.

Let’s find what all boxes need to be ticked while creating a structure for STO and planning for revenue model of STO business.

Necessary Checkpoints to Structure your STO Business Ideas :

The first step is to have a solid base and in the case of STO, it’s the team. A team consisting of consultant, legal & financial advisor, developer, blockchain expert, innovator and a person well versed of tokenomics, is a perfect one to go with.

James Cash Penney said: “The best teamwork comes from men who are working independently toward one goal in unison” which means hire the best STO development company like alwintechnologies. If the team selection goes wrong, STO is like a lame goat; no one knows how far it will reach!

STO needs to be legally compliant and therefore taking care that STO is legally compliant and adheres to all the rules and regulations is the must. In the US, Securities Act of 1933 & 1934 regulates STO while in European Union Markets in Financial Instruments repealing Directive 2004/39/EC (MiFID II) and the Regulation on Markets in Financial Instruments (MiFIR) is there. Almost at each place, it’s basic to remain adhered to AML and KYC laws apart from which each country has its own laws to protect the interest of investors. Also, each country allows an exemption in each case like the US have Regulations like A+, D, S and CF which allow certain exemptions under each. So all these compliance and exemption things should be sorted well not only for offering but to check residents from which country can participate and from where they cannot.

Another thing to keep the structure of STO aligned is the development phase. It needs to be planned way ahead of its execution. Development does not only need to be fit technically but with STO it has lot more things to do. To be compliant and execute the business idea in STO, having cleverly built smart contracts are the must.

To reap great cost benefits it’s better to develop on available frameworks rather than starting from scratch. The development process can gear up the project or make it junk. Due diligence is essential to make sure that the product is as per the designed structure. The development team should work closely with the marketing and PR team to bring the best of the project to the public.

Furthermore, selecting the best platform to offer tokens is one which accelerates the STO project. The trading platform or the exchanges infuses life by providing the much-needed liquidity to the project. It’s easy to get tokens listed on exchanges but note it can make a hole in the pocket. So cost is one aspect to be taken care of, while selecting an exchange. Besides this exchange should have superior security practices and it should be a decentralized one so that all the intermediaries and the related hassle can be eliminated.

These are the things which design or destroy the structure of STO. But these are only useful when the core structuring and framework is solid. It’s of paramount importance to nail the crucial aspects correctly while making the Structure and Revenue Model of STO business setup. As there can’t be any specific structure for STO, therefore based on various aspects this structuring should be based on.

 

The Framework

#1 focus on Money & Participation of STO

STO can only be successful if issuers are well aware of their target audience and requirement of their own. The first thing is to know the amount of money to be raised. Whether money is required to expand or to upgrade, how this money will be utilized to reap profits? If the answer to these seems satisfying then on its basis, structuring decisions related to money can be taken.

Selection of participant is essential to be successful. Deciding whether only accredited investors are allowed or non-accredited can also invest their money, is necessary. Then the next thing to be decided is whether the token will be offered on a private basis or to the general public as well.

If tokens will be offered to private investors and the general public, then, what would the ratio? Whether the offeror wants to get registered or make use of available exemptions? If all the decisions are made then will project be able to attract enough liquidity to get through the infant stage? These thoughts will clear to whom token needs to be offered by remaining compliant and having liquidity too.

 

#2 focus on Value & Future of STO project

At this point doubts regarding capital and sourcing is cleared. So, to move on now tokens and its offering must be pondered upon.

The first thing to have a look is: What tokens actually represent, whether an asset like a building or are part of the company’s capital thereby representing a company! Is there anything in the offering which can be termed as ‘Unique’? How tokens will gain value over time if someone HODL tokens? Are there any rights which token holder will get along with the security tokens? Whether or not token owners will earn a share in profit and/or some discount, if yes, then how airdrop will be managed?

Thus by looking at these aspects, issuers can structure the way in which the value of token increases over time and to include an out-of-the-box aspect in the offering is what attracts the investors.

Apart from this, there are few things which require an eagle’s eye to get the STO structuring right. First, what options initial investors have when they look to exit and second the cost of the token in STO offering?

 

How to Structure Revenue Model of STO Business ?

The best revenue model is which spends less or earns more than the spending. In STO nothing comes cheap. Each and every step and activity demands a large amount of money. So using money wisely and creating a token which plays a long inning are the only options to generate revenue.

A small mistake can impact the revenue at large. Whether offering authorities lack in security, compliance and development or in structuring and designing a token with long term prospect; each is capable enough to ruin the whole energy and cost involved in bringing the STO. At the end, if the token is not capable enough to add value to itself in long run then surely it won’t add to the invested resources, whether by issuers or investors.

For this reason consultation and experts guidance of Alwintechnologies plays an important role while bringing STO. And without which structuring STO and aligning revenue model with it can be like finding water in the desert.