Key Considerations for Issuers and Financial Service Providers
For companies or financial service providers contemplating a primary issue of smart securities.
What do you want to accomplish?
Smart securities are flexible – they can be used to tokenize traditional asset classes such as equity or debt (bonds) or they can be built up of different features that combine into a novel instrument. So, the first step is to clearly conceive of what your business needs.
Is it a more efficient way to manage your company’s equity and shareholder obligations? Is it to finance and manage assets that your company needs in order to develop? If so, are those assets appreciating or depreciating?
Don’t hesitate to look to the legacy financial industry for inspiration on how to structure aspects of a smart security issue.
For example, if your company is seeking to finance depreciating assets (that it will use to create new business), look at how the equipment leasing or project finance industries structure themselves and price their services.
If your potential issue would finance property investments or development, what are the benchmarks used by real estate investment trusts to layer debt and equity into a low risk investment with upside potential?
Who are your target investors?
Would your investment opportunity be attractive to: Institutions? Specialized funds? Individuals (retail)?
The nature of your investment opportunity illuminates many aspects about its optimal structure (and its most natural investor fit). Some factors to consider:
- How big is the amount to be raised?
- Is your project highly technical or specialized?
- How big are the risks and what are the factors?
- Where (geographically) would the funds be deployed?
- Does your project capture aspects of popular sentiment or have a strong CSR component?
- Does it involve a consumer product or service?
- Could your existing suppliers, customers or partners be considered potential investors?
- How much regulatory review and preparation are you prepared for? (i.e. a full prospectus?)
A clear understanding of which investors are well matched to your project’s needs allows for informed decisions about your smart security’s features, risk profile and returns. Institutional investors may care little about token-holder VIP status at a tourism property. but it may be a compelling feature for individuals interested in visiting their investment.
Once target investors are identified, it also enables a meaningful review of regulatory approach. Does your offering make most sense for large institutions? If so, issuing securities under a registration exemption cuts cost and time. However, if you’re seeking to raise substantial capital for a product or service that has consumer appeal, it may make most sense to register a prospectus and market your security to the general market (*subject to the applicable regulations related to the home jurisdiction of your securities issue).
With the established basis of your smart security’s features and regulatory channel, decisions can be made concerning how to inform target investors of the opportunity. Broker-dealer syndicates with focus on your target market can be activated and an appropriate (and regulatory compliant) public relations / marketing campaign can be structured.
What conditions are you willing to place on yourself?
The last major theme to address before starting a process to issue smart securities is to consider what terms, conditions and obligations you’re willing to place on your company or on the project being financed.
Hunit’s patent pending Sentinel System™ goes a significant step beyond the types of smart contracts currently represented in the market – it provides a platform for you to make a set of commitments to your investors that include both what you’re going to do and, importantly, what happens if those commitments aren’t met. Our platform puts the blockchain in control of your off-chain obligations, giving investors confidence that their holdings will comply with perimeters you’ve set (in either the upside or downside scenario).
It’s therefore critical for the market’s evaluation of your smart security offering for you to have determined what you’re willing to commit to in terms of:
- What will you report on and how often?
- What governance rights do investors have?
- What are the financial features of your smart security?
- Are there any key performance indicators that you’re willing to guarantee?
As Hunit’s platform autonomously enforces investor rights in parallel to the conventional judicial system, it’s important to consider what penalties you’re willing to live with if you don’t meet your obligations. For example:
How and when can the smart security program access company assets to fulfill payment obligations that were missed?
What repercussions are there if you fail to report accurate information?
What do missed key performance indicators mean for the current management’s control over the project being financed?
When issuing a Hunit-powered smart security, you’re essentially negotiating with yourself* when it comes to what you’re promising to investors and what you’re willing to give up if those promises aren’t met (*within certain limits as may be required by the relevant securities codes under which an offering is conducted).
It’s tempting to give your company ample room to operate and light penalties for non-compliance. But the question then becomes how attractive that would be for a potential investor? How would that impact your ability to successfully close your security issue and/or your aftermarket resale price?