The Dual Token Offering: A New Standard for ICOs
From our old blog on Wordpress, dated February 28th, 2018
Today we are on our way to the Bahamas to speak at Polycon18, the first ever Security Token conference in the world hosted in the Bahamas. The Security Token is an innovation that allows for the digital embedding of financial instruments into blockchain-based tokens that are tradeable on compliance, SEC regulated exchanges. The crypto market today for security tokens does not exist.
Most recently, Securitize, a blockchain protocol for Security Tokens, announced the first issuance of $500 Million in Security Token Offerings (STOs) including Kairos, Lottery.com, and 22x, which is a fund that represents 500 Startups latest cohort securitized into one financial instrument. The rise of the Security Token represents a major shift in the landscape as well as an opportunity for history-making innovation to emerge.
One such example could be the case of Kairos. Kairos is the original client of our STO advisory firm, Security Token Partners. In December of 2017 we created and launched the first ever Dual Token Offering which gave investors access to equity in the company via a Security Token and a bonus 1-for-1 on the Utility Token which happens to be a form of biometric access via blockchain using their proprietary facial recognition technology and is planned for launch to the public in April.
Let’s dive into what a Dual Token Offering represents by evaluating the STO in detail and if you have a moment to read the Kairos whitepaper, please do so here. This article is for the purpose of research and industry collaboration, not to promote the Kairos offering.
The Client — With Kairos, we have a 6-year old, leading facial recognition company with Fortune 500 clients. They own 4 patents, have a strong developer community, and have healthy revenues backed by an experienced board and strong previous financing history. The company will now be using an STO to raise capital as well as move towards a completely securitized capitalization table. The company was planning to raise $30,000,000 (USD) in order to scale up the business and launch a new product leveraging blockchain.
The Offering — The original intention from the CEO was to do an ICO for the raise and utilize the Utility Token as the method to raise the capital. As their advisors and the CEO being a top-notch operator, we agreed that compliance was necessary and that Utility Token ICOs faced heavy scrutiny and regulatory risk. Since Kairos was originally planning to offer roughly 50% of the existing company in common stock, we recommended Kairos pursue the use of Security Token that leverages today’s securities law to do a traditional offering that leverages blockchain, promising potential liquidity to investors.
Instead of Kairos going back to their original pursuit of a Series B investment from VC and institutional investors, but now with a Security Token, we wanted to instead leverage the global crypto investor capital markets using the Utility Token as the introduction to the company. The Utility Token still needed early contributors and distribution and obviously Kairos wasn’t about to do a second ICO for it, it finally clicked after long nights of discussions that the Utility Token should be paired with the Security Token in what eventually came out to a 1-for-1 offering after determining the final token economics for the Utility Token. And then the Dual Token Offering was born.
The Statistics — What resulted an insatiable amount of demand. The team set out to raise $500,000 (USD) and ended up with almost $12,000,000 in just two weeks. Within a month the offering was oversubscribed and today has garnered more than $1,000,000,000 in reservation interest. The telegram group grew from 0 to 14,000+ in just two months and Kairos was propelled into the public eye. It’s worth noting that the demand was not exclusive to accredited investors even though only they can participate.
The Analysis — There is only so much that can be concluded from this case study as Kairos is both one of the first ever STOs as well as a first-of-its-kind offering. The company has a stellar track record and rockstar team with a very strong use case and value proposition. Pinpointing the success of the raise on the idea that it was a dual token offering alone is obviously not feasible. However, there a few things we can derive:
- Investors may enjoy the potential benefit of liquidity within a Utility Token while they wait for Security Token markets to emerge.
- On the contrary, sophisticated investors may only be interested in the financial benefit of equity ownership and only see the Utility token as a bonus.
- The Dual Token Offering allowed to establishment of demand for the Utility Token without soliciting an ICO for it, allowing for clear separation of the two tokens and their purposes.
- The relationship between the two poise for interesting and possibly complimentary market dynamics that are pending to be seen.
What we can take away is that the Dual Token offering represents an attractive one for both crypto investors and traditional ones. Furthermore, it allows for a fully compliant raise that isolates the two tokens and signals to the SEC that this is a proper raise, using available exemptions, and restricted to accredited investors. This allows the Utility Token to focus on it’s value proposition and not represent any of the raise. Finally, we anticipate for some interesting market dynamics to come to life as both tokens enter the markets.
The “Beautiful Monster” — Going off of this last point, the Dual Token Offering is truly a beautiful monster. Since the company will be holding some of both tokens in treasury and on their balance sheet, the concept that as the Utility Token increases in value, so might the Security Token stands to apply. Inevitably, for better or for worse, the two are going to affect each other once they are both trading.
The revolution has already begun. Numerous companies that are planning STOs are already preparing Dual Token Offerings of their own. We’ve received compliments from fellow advisors for its ingenuity and requests from other amazing entrepreneurs to help with their own. We anticipate this to be just the beginning we will see of this type of offering, as well as many other new innovations to come from the Security Token industry.
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