Raising Capital: Sale of Securities Represented by Shares on the Blockchain (Tokens)
There are many paths a company can take when seeking capital for their business, with one of the most common being a sale of securities. These securities held by investors are often represented by a share certificate or through some form of accounting on the private books of the company issuing the securities. The share certificate or the company share ledger acts as a receipt for the purchase and ownership of shares in the company. In the case of share certificates, they can be represented as physically (paper) or, in some jurisdictions, digitally (paperless).
While public companies have been transacting paperless shares for many years (through a settlement and clearing process of shares held at a central depository), many private companies continue to issue physical shares. But there is a growing trend to move to paperless share certificates due to the added level of efficiency that they can offer.
Historically, there have been three main ways to issue paperless shares:
- Digitally signed “certificated” shares (ie. PDFs)
- “Uncertificated” shares using a spreadsheet tool
- “Uncertificated” shares using a web-based ledger
For reference, shares issued with certificates are called certificated shares. Shares issued without certificates are called uncertificated, or book-entry, shares.
With recent advancements in technology, we can introduce a fourth option:
4. “Uncertificated” shares on the blockchain (“Tokens”)
If you decide to issue Tokens, Polymath offers a web-based software solution (“Polymath Token Studio”) that enables you to issue tokens, track ownership, and enforce permissions related to transfers between parties. Dependent on your selected roadmap, you can engage the appropriate Polymath ecosystem partners to assist.
There are multiple paths that an issuer can take to raise capital, and each will be different based on the capital needs and stage of the business. The below provides an overview of some of the various ways issuers using Polymath and our ecosystem have planned or conducted a sale of securities. The path an issuer takes will determine the respective partners they choose to engage.
A sample guideline is detailed below:
Fundraise with broker-dealer network
1) Engage Polymath ecosystem partners
i. Fundraising advisor / consultant (optional)
- Assist throughout the fundraising process, timelines and workflow
- Help structure the offering, potential valuation, etc.
- May assist in revising potential marketing documents for investors such as an investor presentation, financial reports and the forecast and budget plan highlighting the uses of capital
ii. Corporate & Securities lawyers (strongly recommended)
- Structures a compliant capital raise
- Drafts the respective legal documents and assists in determining permissions related to potential transfers / sale of securities between parties (holding periods, max. number of investors, etc.)
iii. Fund collection — banking / escrow partner (strongly recommended / required)
- If you plan on raising in both crypto currency and fiat, you will require a partner which can set up an account to support this flexibility
- If you are raising solely in crypto, you may use the issuer’s wallet address to accept funds or use a third party to provide an escrow solution
- If you are raising solely in fiat, you may use your banking partner to accept funds
- If you intend to have an escrow as part of your offering, your banking partner or your securities lawyer may be able to provide or refer an escrow solution
iv. Custody (optional)
- Your investors may prefer a third-party custodian to hold their security tokens in a safe and secure manner; for certain transactions, a “qualified custodian” may be needed
v. Broker-dealer (required)
- Broker-dealer will market the offering and onboard potential investors to subscribe
- Refine & finalize structure of the offering, potential valuation, etc.
2) Set up investor portal (determine approach w/ selected broker-dealer)
i. Investor onboarding process provides your investors a data room to complete their due diligence on the investment opportunity, includes KYC/AML and accredited investor verification checks where required, enables them to electronically sign-off on a purchase agreement and provides instructions related to contribution of funds
- The broker-dealer may have a preferred way of onboarding investors which may or may not include an investor portal
3) Conduct & complete fundraise
i. Broker-dealer to market the offering and raise respective capital
- Note: in some cases, issuer may assist with marketing the offering and direct investors to the investor portal (if publicly available)
ii. Issuer distributes Tokens to investor’s wallets (personal wallets or custodied wallets) through Polymath Token Studio
- Issuer sets permissions related to advice from counsel on how they conducted the offering and where the investors reside
Fundraise without broker dealer
1) Engage ecosystem partners
i. Fundraising advisor / consultant (optional)
- Assists you throughout the fundraising process, timelines and workflow
- May assist in planning structure of the offering, potential valuation etc.
- May assist in revising potential marketing documents for investors such as an investor presentation, financial reports, and forecast and budget highlighting the uses of capital
ii. Corporate & Securities lawyers (strongly recommended)
- Structures a compliant capital raise
- Drafts the respective legal documents and assists in determining permissions related to potential transfers / sale of securities between parties (holding periods, max. number of investors, etc.)
iii. Fund collection — banking / escrow partner (strongly recommended / required)
- If you plan on raising in both crypto currency and fiat, you will require a partner which can set up an account to support this flexibility
- If you are raising solely in crypto, you may use the issuer’s wallet address to accept funds or use a third party to provide an escrow solution
- If you are raising solely in fiat, you may use your banking partner to accept funds
- If you intend to have an escrow as part of your offering, your banking partner or your securities lawyer may be able to provide or refer an escrow solution
iv. Custody (optional)
- Your investors may prefer a third-party custodian to hold their security tokens in a safe and secure manner; for certain transactions, a “qualified custodian” may be needed
2) Set up investor portal (strongly recommended)
i. Investor onboarding process provides your investors a data room to complete their due diligence on the investment opportunity, includes KYC/AML and accredited investor verification checks where required, enables them to electronically sign-off on a purchase agreement and provides instructions related to contribution of funds
3) Conduct & complete fundraise
i. Issuer markets the offering and raises the respective capital
ii. Issuer distributes Tokens to investor’s wallets (personal wallets or custodied wallets) through Polymath Token Studio
- Issuer sets permissions related to the securities based advice from counsel on how they conducted the offering and where the investors reside
Joining Polymath
Are you interested in joining the security token revolution? We are always looking for high quality talent. Check out our careers page at https://polymath.bamboohr.com/jobs/ to apply!
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