Equity Token Offering: A CEO's Guide to Raising Capital for the Future

How to get funds for your business?

As a CEO, you understand the importance of raising capital to grow your business. Traditional fundraising methods, such as venture capital and initial public offerings, can be expensive, time-consuming, and often require giving up control of your company.

However, there is a newer and more flexible option for raising capital that may be the perfect fit for your company: Equity Token Offerings (ETOs). ETOs leverage the power of blockchain technology to enable your company to raise capital from a global pool of investors, while still retaining control and ownership of your company. In this blog post, we will explore the benefits of ETOs, how they work, and what you need to know to launch a successful ETO for your company.

What is Equity Token Offering?

An Equity Token Offering is a fundraising mechanism that allows companies to raise capital by selling equity tokens to investors in exchange for cryptocurrency or fiat currency. The tokens are created on a blockchain, providing transparency and immutability to the investment process. Investors can purchase these equity tokens and become shareholders in the company. The tokens represent a certain percentage of ownership in the company, and the value of the tokens can increase or decrease depending on the performance of the company. ETOs provide a flexible and cost-effective way for companies to raise capital from a global pool of investors, without giving up control or ownership of their company.

How to prepare for ETO?

There is a couple of parameters you have to figure out. Here is an example:

All these parameters are written into a blockchain Smart Contract.

*Here is the current Ether price: https://www.coindesk.com/price/ethereum/

What is Smart Contract?

A smart contract is a self-executing computer program that is stored on a blockchain. You can think about Smart Contract as a digital version of standard contract.

In the context of an Equity Token Offering (ETO), a smart contract is used to manage the sale and distribution of equity tokens to investors. The smart contract acts as an automated middleman between the company issuing the equity tokens and the investors purchasing them.

When an investor sends cryptocurrency to the smart contract address, the smart contract automatically generates the corresponding amount of equity tokens and sends them to the investor's cryptocurrency wallet. The smart contract also keeps track of the total number of equity tokens issued, the price of each token, and the total funds raised during the ETO.

The operations inside the smart contract include a number of functions that govern the sale and distribution of equity tokens. For example, the smart contract can limit the number of equity tokens that each investor can purchase, ensure that investors are only allowed to purchase tokens during a specific time period, and enforce compliance with applicable securities laws and regulations.

The smart contract also ensures that all investors are treated fairly and equally. For example, if the ETO has a cap on the total number of tokens that can be sold, the smart contract will automatically reject any transactions that would exceed the cap. This ensures that all investors have an equal opportunity to purchase equity tokens and that the distribution is not skewed towards any particular investor or group.

Overall, a smart contract for an ETO streamlines the process of raising capital and reduces the need for intermediaries, such as investment banks or brokers. This can result in cost savings for the company and can provide investors with greater transparency and accountability in the investment process.

What is the best blockchain for your company equity tokenization?

There are a number of blockchain platforms that can be used for Equity Token Offerings (ETOs), but the choice of the best blockchain platform depends on a number of factors such as scalability, security, community adoption, and technical features. Here are three of the most popular blockchain platforms for ETOs:

1. Ethereum: Ethereum is the most widely used blockchain platform for ETOs due to its smart contract capabilities, established developer community, and broad ecosystem. The platform has a high level of adoption and supports various tokens, including ERC-20 and ERC-1400 standards.
2. Polkadot: Polkadot is a newer blockchain platform that has gained popularity due to its ability to facilitate cross-chain interoperability. Polkadot is designed to connect different blockchain networks, enabling the exchange of information and assets across different chains. This interoperability feature is particularly useful for ETOs, which may require access to different blockchain platforms.
3. Stellar: Stellar is a blockchain platform designed for fast and low-cost transactions, making it ideal for ETOs that require quick and cost-effective transactions. Stellar also has built-in support for token creation and management, which can simplify the ETO process.

Do you have to pay company profit share to investors?

The specific terms of the smart contract should outline the percentage of profits that will be distributed to equity token holders, the frequency of such distributions, and any other relevant details like f.e. for how long investor needs to keep (stake) shares before is eligible to participate in annual profits.

For example, if the company generates 1 million USD in profit and the profit-sharing percentage is set to 10%, then 100,000 USD will be available to distribute to shareholders.

If a shareholder owns 50 equity tokens out of a total of 1000 tokens, they would receive 5% of the total profit-sharing amount, or $5,000 in this case.

In this case we can create smart contract that allows token holders (investors) to stake their tokens, and once a year, the contract distributes 10% of the company's profits to staked tokens in proportion to their share of the total staked tokens.

Can investor sell tokens?

Yes, investor who equity tokens can sell them if the tokens are transferable. The transferability of the tokens is dependent on the specific terms and conditions of the ETO offering. Some ETOs may have a lock-up period, during which the tokens cannot be transferred or sold. After the lock-up period ends, the tokens may become tradable on a cryptocurrency exchange or another secondary market, where users can buy and sell them.

What countries are best to conduct ETO?

Some countries have shown greater interest and support for blockchain-based businesses and digital asset offerings, such as ETOs, through more favorable regulatory frameworks, innovative approaches to digital asset regulation, and friendly business environments. Examples of such countries include:

1. Switzerland: Switzerland has been a popular destination for blockchain businesses and ICOs (Initial Coin Offerings) due to its progressive regulatory approach, established financial ecosystem, and favorable tax laws.
2. Malta: Malta has implemented a regulatory framework specifically designed to attract blockchain businesses and digital asset offerings, including ETOs. The framework aims to provide legal clarity, investor protection, and business opportunities for the industry.
3. Singapore: Singapore has a pro-business and innovation-friendly environment, as well as a regulatory framework that seeks to balance investor protection with business growth. Singapore is also home to a vibrant blockchain and digital asset ecosystem.
4. Estonia: Estonia has been a pioneer in implementing digital governance and has created a regulatory framework for blockchain businesses and digital assets, including ETOs. Estonia's business-friendly environment, advanced technological infrastructure, and supportive ecosystem have also attracted blockchain-based startups.

It is important to note that the regulatory environment for ETOs can change quickly, and the convenience of conducting a blockchain ETO can vary depending on the specific circumstances and requirements of the offering. It is crucial to consult with legal and financial professionals to ensure compliance with applicable laws and regulations.

How to make ETO in United States?

Equity Token Offerings in the United States are typically subject to regulation by the Securities and Exchange Commission (SEC) under the federal securities laws. The SEC requires the issuer of the ETO to register the securities offering with the SEC or qualify for an exemption from registration. The regulatory framework for ETOs in the United States can be complex and subject to various federal and state securities laws and regulations.

The SEC has issued guidance on how existing securities laws and regulations apply to various aspects of ETOs, such as the offer and sale of securities, investor protection, and the trading and secondary market activities of the tokens. The SEC considers whether a digital asset, including an ETO token, qualifies as a security under the federal securities laws by examining factors such as how the token is marketed, how it is used, and how it is structured.

Therefore, if you are considering conducting an ETO in the United States, it is recommended that you seek the advice of experienced legal and financial professionals (we can recommend lawyer agencies specialised in blockchain) who are familiar with the applicable securities laws and regulations, and who can provide guidance on compliance requirements, potential risks, and regulatory considerations.

Want to prepare your own ETO? Check our ready to use to-do list.

Here is a detailed work breakdown structure that covers the main tasks and deliverables of an ETO project:

I. Planning and Strategy

• Develop project plan, including timelines, milestones, and resource allocation
• Conduct a feasibility study to assess the viability of an ETO
• Develop a strategic roadmap and implementation plan
• Define the ETO structure, including the type of security token to be issued
• Determine the target market and investor profile
• Define the legal and regulatory framework for the ETO
• Conduct market research and competitive analysis
• Determine the marketing and communication strategy for the ETO

II. Technical Development

• Design and develop the ETO platform, including the front-end and back-end systems
• Develop smart contracts to handle the token issuance, distribution, and trading
• Integrate the platform with blockchain networks, such as Ethereum
• Develop a user-friendly interface for investors to participate in the ETO
• Develop a dashboard to track and monitor the ETO performance
• Implement security and privacy measures to protect the ETO platform from hacks and breaches

III. Legal and Compliance

• Ensure the ETO is compliant with all applicable securities laws and regulations
• Develop legal documentation, such as the offering memorandum, subscription agreements, and other disclosures
• File the necessary paperwork with regulatory bodies, such as the Securities and Exchange Commission (SEC)
• Ensure compliance with anti-money laundering (AML) and know your customer (KYC) regulations
• Hire legal counsel to provide ongoing advice and support throughout the ETO process

IV. Marketing and Communication

• Develop a marketing strategy to promote the ETO to potential investors
• Develop marketing materials, such as a website, social media content, and press releases
• Conduct investor outreach and engage with potential investors through online channels and events
• Develop a community engagement plan to build a strong investor base
• Work with a PR agency to handle media relations and coverage

V. ETO Launch and Post-Launch Activities

• Launch the ETO and begin accepting investments from investors
• Monitor the ETO performance and adjust the strategy as needed
• Provide ongoing investor support and communication
• Handle the distribution of tokens to investors and ensure compliance with regulatory requirements
• Manage token trading and liquidity on secondary markets
• Provide ongoing technical support and maintenance for the ETO platform

How to do technical development when you don’t have blockchain developers in house?

There are a few options to consider for technical development of an ETO:

1. You can hire a blockchain development agency that specializes in ETOs to handle the technical development of your project. They will have the necessary expertise and resources to build the ETO platform, develop smart contracts, and integrate with blockchain networks.
2. Another option is to outsource the development work to a team of freelancers who have experience in blockchain and ETO development. You can hire developers from platforms like Upwork or Freelancer, or from blockchain-specific job platforms like Blocktribe or CryptoJobs.
3. You can also collaborate with blockchain startups that have built ETO platforms or have the necessary technical expertise. This can provide access to specialized skills and resources while potentially offering a lower cost than hiring a development agency.
4. If you have the time and resources, you can learn blockchain development yourself and build the ETO platform. There are many online courses and tutorials available that can teach you blockchain development, but keep in mind that this option requires a significant amount of time and effort.

How to evaluate blockchain agency you want to work with?

Here are some questions to ask a blockchain agency before starting work on an ETO project:

1. What experience do you have in developing blockchain-based projects and ETOs specifically?
2. What blockchain platform do you recommend for this ETO project, and why?
3. What is your approach to developing smart contracts, and how do you ensure that they are secure and bug-free?
4. How do you ensure compliance with regulatory requirements in different jurisdictions?
5. Can you provide references from previous ETO clients or projects?
6. What is your project management methodology, and how do you ensure that the project stays on track and meets deadlines?
7. What is the estimated timeline for developing the ETO platform and launching the token sale?
8. What are your hourly rates, and what is your estimated total cost for the project?
9. What will be the scope of work for the ETO project, and what deliverables can we expect?
10. How will you handle any issues or bugs that may arise after the ETO platform is launched?

Still have questions? Schedule a meeting with blockchain expert.

Here's an example smart contract for an ETO on the Ethereum blockchain. This contract allows investors to purchase ETO tokens in exchange for Ether (ETH), and then receive a share of profits from the ETO at a specified rate.

Hope you enjoy this article.

pragma solidity ^0.8.0;

contract ETO {
    // Contract owner address
    address payable public owner;
    
    // ETO token symbol
    string public symbol = "ETO";
    
    // Token exchange rate (1 ETH = 100 ETO)
    uint256 public rate = 100;
    
    // Total supply of ETO tokens
    uint256 public totalSupply = 1000000;
    
    // Mapping of investor balances
    mapping(address => uint256) public balances;
    
    // Event to notify when an investment is made
    event InvestmentMade(address investor, uint256 amount);
    
    // Constructor function to set contract owner
    constructor() {
        owner = payable(msg.sender);
    }
    
    // Function to purchase ETO tokens
    function buyTokens() public payable {
        uint256 amount = msg.value * rate;
        require(amount <= totalSupply, "Insufficient supply");
        balances[msg.sender] += amount;
        totalSupply -= amount;
        owner.transfer(msg.value);
        emit InvestmentMade(msg.sender, amount);
    }
    
    // Function to distribute profits to investors
    function distributeProfits(uint256 amount) public {
        require(msg.sender == owner, "Not authorized");
        require(amount <= address(this).balance, "Insufficient balance");
        for (uint i = 0; i < investors.length; i++) {
            address investor = investors[i];
            uint256 balance = balances[investor];
            uint256 profit = balance * amount / totalSupply;
            investor.transfer(profit);
            balances[investor] += profit;
        }
    }
}