Security tokens could grow exponentially as security token industry players publish optimistic forecasts based on growing demand. As reported by area2invest, the market size could reach the $ 3 billion mark by 2025, as reported by area2invest, a market for security tokens. Studies of the Liechtenstein market for security tokens also show an average annual growth rate (CAGR) of the market of 56.9%.

As Bernhard Thalhammer, Head of Issuer Relations at area2invest, told Cointelegraph: “We receive a number of inquiries every day, not only from blockchain or crypto companies, but also from traditional companies. Other systems have very specific STO projects.” He added, “We were actually quite surprised at how well informed they were and how much progress they made in the decision-making process.”

Large institutions have discovered their crypto security experiments, with recent examples like the European Investment Bank, Central Bank of Thailand, and Union Bank of the Philippines in partnership with Standard Chartered Ventures.

In May of this year, the INX cryptocurrency exchange hosted its first SEC-registered Securities Token Offering (STO) with over $ 125 million in fundraising proceeds.

As STOs become increasingly popular with blockchain industry companies, growth opportunities for the security token market can be attributed to companies in traditional sectors that are less experienced with encryption technologies.

Ultimately, cryptographic security can transform the traditional stock and bond issuance model, but the knowledge gap will curb the growth of the STO market beyond regulatory hurdles. However, the security token issuance process is easier than expected. It can be divided into four steps, as area2invest reports. The preparation for a token sale can take up to 18 to 24 weeks, followed by an investment period of 15 to 52 weeks.

Ideas to create

The report suggests that the first phase of the STO focus on developing the ideal model of security token offering and outlining the plan to launch the token. In this phase, the potential issuer has to answer a number of questions about the investment idea, including the specifics of the upcoming investment product, the type of investors the product is aimed at and the investment volume.

Recent STOs show that digitizing the fundraising process gives companies flexibility in the types of securities they want to issue and the types of investors they want to target. For example, the Exodus wallet entered into an SEC-approved STO in April 2021 and made its shares available to both professional and retail investors through its wallet. The issuer can also choose a different combination. This May, Singapore-based DBS Bank issued $ 11.3 million in digital bonds that are only available to professional investors.

Organizations starting their journey of offering security tokens must also consider their marketing and sales strategies, the unit that will implement the STO, market sentiment and the regulatory framework.

Ultimately, when dealing with aspects of the upcoming STO, the issuer must determine the project budget – how much will it actually cost to host an STO? Does the publication based on the numbers make sense? “As with any issue, there are initial fixed costs, which is also the case with STOs like the prospectus. There are also costs associated with the funding volume, ”added Thalhammer.

Structure of an STO

Since the security token offering is already in place, the issuer should have a more nuanced conversation about the financial aspects of the upcoming STO. The token price should reflect the real value of the company, so the issuer should check the company’s financial advice to confirm that the soft and hard boundaries are in line with the fundamentals.

Another question that arises in the second phase is the rights and obligations of potential investors and how security tokens should be structured as a product in order to protect all participants.

An important task is to identify the most attractive issuing authority and ensure that the token offering complies with the country’s regulations in all requirements, including taxes. In order to find the most effective ways to resolve a legal problem, the report recommends hiring a legal advisor.

On the basis of the above information, the issuer should prepare product documentation that can be presented in the form of a share prospectus or an investment memorandum and distributed to potential investors.

The digitization of securities requires issuers to be aware of the technical details of the STO. Intelligent contract programming is an important factor in this, but it is also important to ensure that the tokens are kept safe. This requires working with crypto-asset-specializing market participants and custodians for STO execution to go according to plan.

The main criterion to consider is the crypto company’s track record, as well as the fact that the interfaces and information sharing are well integrated into the STO ecosystem. A cryptographic partner should recommend the appropriate blockchain.

List and distribute

In the third stage, the issuer has to put the tokens on the market and the report names five steps. Before the token is generated, the final preparatory steps must be carried out. The token model needs to be verified by an outside source, usually a broker, and a token marketing campaign carried out.

The company’s security tokens are then minted and investors who qualify through Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements have access to token sales. Once the purchase is complete, the tokenized securities are transferred to the investor’s wallet. Although the process is simple, the token sale can take up to 52 weeks depending on investor demand.

Property maintenance

Post-release support, which includes many administrative measures, is an integral part of an STO, although it is often overshadowed by a token sale. As official security, tokens must be properly maintained. This implies the development of reporting standards for crypto assets and investor relations organizations.

A sustainable token-based model should also include user-friendly systems for paying out coupons or dividends depending on the type of security, as well as allowing investors to vote on actions taken by the company.