A Guide to Security Tokens

Global Private Equities

Disclaimer

This presentation is not to be considered legal or financial advice. EquityUp is a software

company and is not a broker-dealer or crowdfunding portal. Any benefits implied or stated in this
presentation are based on an emerging technology and these benefits are not guaranteed.
EquityUp cannot be held liable for any adverse actions or otherwise negative effects resulting
from security token issuance, crowdfunding, or any other activities mentioned in this
presentation and by proceeding, the reader assumes all potential liabilities and risks associated
with the activities described within this presentation. This is not a proposal, EquityUp reserves
the right to make changes or modifications to its process, structures, and other activities unless
formally agreed to by the client and a representative of EquityUp in writing in the form of an
agreement.
 Disclaimer

“2019 will belong to the security token.” – NASDAQ June 2018

Contents
1. What is a security token?
2. What do security tokens solve?
3. Industry Use Cases
4. SEC Excemptions
5. Security Token Creation
6. Security Token Fundraising
7. Choosing the Right Exchange
8. What is a Smart Contract?
9. Industry Use Cases
10. Helpful Resources
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What is a Security Token?

A security token ‘STO’ is a digital representation of a security (e.g. c-corp stock, real estate, energy
trading) and many have standard investment provisions automatically enforced called ‘smart contracts’.
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Security tokens can be globally traded like Bitcoin or Ethereum without ‘going public’ and being listed on
the NASDAQ or OTC.

Security tokens function almost identically to initial coin offerings ‘ICO’ which have raised $20 B +,
because of the many advantages they deliver to investors. Many variations of the term are also used and
should not be confused as separate such as equity token ‘ITO’ or asset token ‘TAO’.

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Why use a Security Token?

Efficient Liquidity Smart Contracts Fractional Ownership
Security tokens can have smart Security tokens create an efficiency
Security tokens are useful in private
contracts built-in which automatically that enables fractional ownership in
investments because they enable
enforce investment structures. an asset, particularly complex assets.
liquidity. Rather than the costly and
Presently, investors are hesitant to This allows investors to ‘cherry pick’ +
time consuming transfer of physical
enter transactions because investment assets within a pool or specific aspects
asset ownership or private stock
structures (E.g. first right to refusal, of a single asset that they choose to
ownership, shares can be instantly
dilution rules, dividends) are all purchase ownership in. In most cases,
transferred legally with security token
difficult to enforce without legal assets are grouped together because
protocols and in compliance with
mediation, which may be infeasible in the legal complexity and transfer of
regulations using clearing house
foreign transactions. Smart contracts ownership far outweighs any
protocols. In the public markets, the
build self enforcing investment advantages and adds an unnecessary
same liquidity dramatically reduces
structures that automatically execute. layer of complexity to the transaction
transaction costs.
What is agreed to clearly and up-front that security tokens avoid.
is enforced.

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Why use a Security Token?

Institutional Money Private Investors
• Collectively may acquire control over • With anonymity, unlikely to collude and
the company as preferred shares are collectively gain control over the company.
issued.
• Wider range of industries and geographies +
• May attempt to influence a company they consider.
in a fashion that is in their best
interest. • Larger numbers resulting in varying target
holding period and therefore liquidity.
• Do not typically invest into deals
outside of target industries and
regions.

• Typically will not sell their stake until

an acquisition or an IPO.

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Why use a Security Token?
All-Time Cumulative ICO Funding
25
20

USD (Billions)
15
10
5
0

6/1/2016
8/1/2016

2/1/2017
4/1/2017
6/1/2017
8/1/2017

2/1/2018
4/1/2018
6/1/2018
10/1/2016

10/1/2017
12/1/2017
12/1/2016
Initial coin offerings ‘ICOs’ have raised a substantial amount of capital at scale, but the majority of this
funding is generated from the United States and Asia, in both markets the initial coin offering is illegal, but
issuing it as a security infers all the same benefits of the ICO as a financial instrument.
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Why use a Security Token?

To further illustrate the advantages that

security tokens offer, consider this +
comparison chart, which highlights the
various advantages security tokens offer
compared to ‘utility tokens’ commonly
referred to as ‘initial coin offerings’ and
‘traditional vc’.

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Disclaimer

“Every ICO I’ve seen is a security.” – SEC Chief Clayton

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Industry Use Cases

Real Estate
Multi-phase commercial development project which issues 30% in equity and the remaining 70% in debt for a
commercial real estate development project with a three year holding period. Developer makes money after loan
repayment - generates a cheaper cost of capital from distributed token ownership, and creates liquidity for short-term
investors exiting after first phase.

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Private Equity
Private equity group buying out a chain of restaurants that seeking to liquidate a portion post-acquisition and later
buy-back the equity on a liquid secondary market rather than being tied to a few investors that wish to indefinitely
hold that asset or demand a high rate of return.

Venture Capital
Growth stage technology company that wishes to create a liquid private market to allow employees to exercise
options and easily issue more tokens rather than conducting a formal financing round, while structuring a smart
contract to buyback tokens at the current valuation at acquisition or initial public offering price.

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 SEC Exception Types
Regulation D
This allows an offering to avoid being
registered with the SEC, but requires an
electronic filing of “Form D” after the
securities have first been sold. The
individuals offering the security may
generally solicit investors for an offering that
meets the requirements of Section 506c,
which requires verification that the investors
are accredited and the information provided
during the solicitation must be “free from
false or misleading statements.” In most
cases, investors who purchase a Regulation
D offering may not sell their ownership stake
for at least 12 months after their initial
purchase.
Regulation A+ Regulation S
This exemption allows an issuer to offer a This is when an offering of securities is
deemed to be executed in a country
security qualified with the SEC to non-
accredited investors through general solicitation other than the US and therefore not
subjected to the registration
for up to a total of $50,000,000 in investment.
Due to the requirement to register the security, requirement under section 5 of the 1933
Regulation A+ issuance can take longer Act. Issuers of the security are still
required to abide by the security
compared to other options. Regulation A
offerings require qualification of a Form 1-A regulations in each country where they
offer their security.
offering circular, including audited financials.
Due to the requirement to qualify the security
and complete an audit, Regulation A+ issuance
can cost more and take longer compared to
other options. Regulation A+ offerings treat all
money raised as revenue and tax it as such if the
money doesn’t represent equity in the
underlying company.
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Creating a Security Token

File with the SEC Launch Your Token
Companies must first file their Launch your token on EquityUp and
security with the SEC as they allow the public to purchase shares
normally would (E.g. Reg D). in your company instantly.

Create your Security Token Go to an Exchange

There are many companies that can Once fully sold, EquityUp will help
assist with this cheaply, EquityUp your company get listed on an
can also help with this. exchange to buy/sell the tokens.

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Security Token Fundraising
Security tokens are granted the same privileges for advertising to the general public as initial coin offerings, so long as the
company files under Regulation A with the SEC. This costly process is reduced by protocols developed which build compliance
into the tokens.

1. The private crowd sale was typically offered to family office and institutional investors
which provided a discount from the public sale price.

2. Reg A compliant securities are not restricted by Google, Twitter, and Facebook. The
primary mediums initial coin offerings, now banned, used as a fundraising channel. In many
cases, funds for ads used money received from the private sale discount.

3. In addition to these channels, the company can engage third-party marketing agencies to
conduct public relations, work with asset managers, or promote on token investor networks.
Choosing the Right Exchange
Securities Exchange Alternative Trading System
There are several securities exchanges Limiting volume on an alternative
that are considered public. We expect trading system allows companies have
securities will be traded in a similar greater knowledge and control over
way to public markets and offering high how their shares are being traded; this
volume, but offering limited control to is important to companies that are
companies. only issuing a portion of their
company as security tokens.
Examples:
Examples:
• tZero
• EquityUp
• Open Finance Network

Recommended Use Case: Recommended Use Case:

• Public offering • Private equity
• Commodities • Venture capital

Note: Security tokens must be listed on a securities exchange alternative trading system licensed with the SEC.
Be sure to review the compliance of any prospective exchange before considering it as a viable option.
Choosing the Right Exchange
Share Liquidity

Investment Control

Equidate was the first company to allow investors to buy shares in private companies. It offers tight controls to the extent it is
limited to allowing employees to exercise options. EquityUp works to create tightly regulated security token offerings and
exchanges that allow liquidity, without loss of investment control.
Choosing the Right Exchange

The chart on the left illustrates trading on an alternative trading system with lower volume. In general people are entering or exiting
positions with a fewer number of larger orders distributed over a longer period for purposes of portfolio restructuring,
macroeconomic shifts, information discovery, and more.
 Disclaimer

“The asset itself is creating nothing.” – Warren Buffet on Bitcoin

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What is a Smart Contract?

A ‘smart contract’ is a self-enforcing legally binding contract. Anyone familiar with civil law is aware that
even contracts with the intent to be clearly defined can often be interpreted differently with sufficient
persuasion and are difficult to enforce in a foreign country.
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The ‘smart contract’ is more effective than legal mediation because the terms were clearly agreed to up
front and are automatically executed or prevented entirely. Smart contracts can be applied in nearly any
financial instrument so long as all participants are on the same distributed ledger.

Smart contracts are particularly valuable when conducting business in another state where the case
would need to go to federal court or possibly be subject to the non-Western law system in a foreign
country.

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What is a Smart Contract?
An option contract between
parties is written as code into
the blockchain. The
individuals involved are
anonymous, but the contract
is the public ledger.
A triggering event like an Regulators can use the blockchain
expiration date and strike to understand the activity in the
price is hit and the market while maintaining the
contract executes itself privacy of individual actors.
according to the coded
terms.

Why use a Smart Contract?
Build Trust
By issuing a smart contract, companies
establish trust by removing the concern
that at some point the deal will require
legal mediation. Realistically, this is
always a concern in every transaction,
despite how transparent and secure it
may seem. In the event of ‘high risk’
transactions, the smart contract may
bring a new class of investors which
were not previously interested.
Less Expensive
Smart contracts are less expensive
than legal mediation. Eventually smart
contracts may be simply ‘plug and
play’ scripts, but for the time being,
they save money in legal mediation
fees to resolve a dispute over the
investment structure.
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Maintain Asset Control
Smart contracts do not only protect
investor interest, they also protect
those of the company and its +
principals and/or founders.
For instance, a company may issue a
token using a ‘smart contract’ to state
tokens may be retracted in the event
of an acquisition either broadly
defined, or at a specific multiple. If
explicitly defined in the contract, all
shares will be retracted at a defined
point.
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Industry Use Cases

Real Estate
A real estate developer may structure a smart contract with stakeholders to provide a ‘loyalty program’ contract
whereby the provide a price discount for investors that shares in each of their deals, such a system would likely not be
trusted and difficult to execute, especially for more than a few investors.

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Private Equity
Funds can embed commissions into the dividends prior to delivery send directly to the exchange account of the
stakeholder that are automatically sent to reporting agencies, increasing trust for stakeholders and reducing investor
payout time and energy.

Venture Capital
A venture capitalist, as a good faith effort, may make a commitment to execute funds in ESCROW if certain conditions
tracked on the public ledger are met (E.g. key performance indicators, financial performance). A physical contract for
this is not always enforceable and resource heavy consuming to mediate.

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Helpful Resources
Security Token Protocols Influencers
• Polymath • Lou Kerner
• Harbor Protocol • Jamiel Sheikh

Security Token Exchange Securities Lawyers

• tZero • Davis Polk & Wardwell LLP
• Malta Stock Exchange • Cravath, Swaine & Moore LLP
• Neon Exchange

Alternative Trading Systems Token Advisory Agencies

• EquityUp • Tokenomix
• Templum • Supercharge Blockchain

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