Preparing a Security Token Offering? Here's Your Marketing Playbook.
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As the SEC comes closer and closer to a crackdown on the “utility” tokens that function as unregistered securities, a new breed of token is emerging: the security token, backed by real-world assets, and fully SEC-compliant.
Securities-backed tokens are different from pure utility tokens, such as Ether, or true value storage tokens, such as Bitcoin. As a crypto marketer, I’ve seen more and more of these companies launch advertising campaigns. Here’s what helps them succeed:
Knowing your target consumer
Token sellers can seek full registration with the SEC, but few companies choose that path (and it’s hard to blame them for it): Full SEC registration is a logistical, legal and financial quagmire. To skip that move, though, companies must choose an SEC exemption. Here, most companies go with the Regulation D exemption, which generally forbids sales to non-accredited U.S. investors.
Then there's the Regulation A exemption. Securities group Tripoint Global is a strong contender to become the first company approved to offer securities-backed tokens under Regulation A, which means it can sell to non-accredited U.S. investors -- if it's willing to do some extra paperwork.
But for the time being, marketing a securities token means marketing to a mix of accredited and non-U.S. investors. Accredited investors are generally either institutions or individuals with a net worth of $1 million or higher. Successful securities token sales target their marketing for this income group.
Tailoring marketing for both crypto natives and finance natives
Security tokens hit a marketing sweet spot between forward-thinking (but often risky) ICO tokens and conservative, SEC-sanctioned products backed by real-world assets.
Rohit Kulkarni, managing director of SharesPost, argued in a guest contribution to the Nasdaq blog, for example, that security tokens represent a perfect mix of utility tokens and venture capital. Venture capital boasts: issue-investor alignment (with everyone incentivized to help the venture succeed); access to expert networks; KYC-AML compliance (which protects investors and companies from fraud and money-laundering); and regulatory oversight. Utility tokens offer investor liquidity (quick access to cash via exchanges) and a dynamic investor community. Security tokens offer the whole shebang.
Crypto-natives with first-hand knowledge of how quickly crypto fortunes can be made or lost are increasingly looking to diversify their portfolios. These consumers want to keep the blockchain benefits they know and love while embracing the security of more traditional investment products.
Picking your partner exchanges carefully
One of securities tokens’ biggest selling points is that they bring liquidity to traditionally illiquid markets. Before Blockchain, exchanging fractional ownership of an illiquid asset such as a real estate investment or a private equity fund was challenging or even impossible. With Blockchain, it’s as easy as selling a token.
There are a few catches, of course. Tokens must remain compliant as they change hands, which requires an ongoing KYC/AML process throughout the token’s lifecycle. Token purchasers and buyers must have a place to find one other: a token exchange. The SEC has decreed that all exchanges listing security tokens must register as securities brokers.
We’re still seeing how that rule is going to play out. Coinbase, for example, recently walked back claims that it had the SEC’s blessing to list securities. But hopefully, you still get the takeaway: Securities tokens aren’t worth much without good exchanges to trade them on. This is doubly true considering that some exchanges have experienced massive thefts, and nothing’s going to scare off safety-oriented investors faster than news of a hack.
So, screen your partner exchanges carefully, and make sure the ones that fit the bill show up in your marketing.
Networking and educating to build trust
In the early days of ICOs, casual crypto-buyers could buy a few tokens from a new company just to see what might happen. It’s fair to say that today the stakes in many modern crypto transactions, and particularly in securities tokens transactions, are much higher due to the volumes of real-world assets involved.
That’s why trust is paramount for securities token purchasers. Telegram’s ICO utilized Regulation D and raised almost $2 billion. The company didn’t accomplish that through a marketing blitz. It did so by participating heavily in the crypto world and networking in the finance one, exploiting social connections among investors.
You can’t get potential token-buyers to trust you overnight. As the old saying goes, trust is earned. I’ve found that two practices are essential to any trust-building campaign in crypto: The first is networking. Companies offering security tokens need to advocate for their product, in person whenever possible. That means attending crypto events, meeting movers and shakers and participating in the crypto community. If your company includes people who are well respected in the crypto or finance worlds, your marketing campaign needs to lean on that point heavily, as these people have built up the social capital that engenders consumer trust.
The other practice is providing information. We’ve all heard of poorly designed or even scam ICOs that rake in a ton of cash with only a flashy website. Securities-token purchasers aren’t going to fall for that. They’ll expect to be able to perform due diligence; and your marketing should invite them to do just that, by providing details such as an impressive executive team and a well-written, thoughtful white paper front and center.
The age of the security token is here. We’re likely to see the regulations surrounding these investment products change, but I think that these principles for marketing securities tokens will change less than you’d think.