This document discusses security token offerings (STOs), which involve tokenizing traditional securities and offering them to the public using blockchain technology. It explains that STOs are subject to securities laws and regulations. Ricardian contracts are recommended for STOs as they are human-readable, programmable, and signed contracts that address limitations of smart contracts. The choice of vehicle, jurisdiction, and legal structure are also important considerations for STOs.

1. The contents have been prepared for informational purposes only and do not constitute or contain any type of advice. All rights reserved.
SECURITISATION TOKEN OFFERING – OLD CONCEPT IN A NEW FORMAT
This article explains what are STOs, contracts used and the vehicle and jurisdiction to look for
SECURITY TOKEN OFFERING
A security token offering (“STO”) is the
tokenisation and offer to the public of certain
rights or obligations over something tangible.
Security tokens have similar characteristics to
traditional securities and are thus considered
financial instruments subject to existing securities
laws and regulations. Differently from traditional
securities, the ownership is however passed
using blockchain. They are programmed to act in
a certain way, without the use of a third party, this
rendering their acquiring, transfer, disposal and
corporate actions easier, quicker, safer and
usually cheaper.
Rights and obligations on securities can be
tokenised, these including rights to participate in
companies’ profits in case of equity or to receive
coupon payments or interest in case of debt.
Voting and co-determination rights can also be
tokenised and this can result in situations in which,
for example, seed investors in an investment
vehicle will have an attached voting right as to
where the initial pool of investment will be
allocated and at which portion.
CONTRACTS
Ethereum Smart Contracts, or more precisely
Chain Codes, are also used to issue securities
and other similar assets over the internet. These
Chain Codes were however not intended to serve
this purpose since they are not human readable,
and their legal binding is questionable. If
anything goes wrong, it is hard to prove a case
against fraud or scam in a court of law.
Ricardian Contracts address the limitations of
these Chain Codes in that they are:
• Available in printable form and are thus
human readable;
• Program writable;
• Signed by the issuer and other parties.
The following are some essential contents of
Ricardian Contracts:
• The Parties;
• Definitions and interpretations;
• Place and date of issue;

2. The contents have been prepared for informational purposes only and do not constitute or contain any type of advice. All rights reserved.
• Clauses and conditions, as in written legal
contracts;
• Governing law & jurisdiction and how to
tackle disputes;
• Signatures.
They are also smart and efficient in that they can:
• Enable control on the transfer of a backing
asset from the Originator to the STO Issuer
to the Investor, such as for example, the
transfer of real estate property backing a
STO;
• Enable control on transfer of investment
consideration (fiat or crypto) from investors to
the wallet address of the STO Issuer;
• Have logic algorithms to monitor:
o if soft caps are reached and if so the
corresponding number of tokens to be
automatically transmitted to the investing
wallet addresses on the specified date; or
if not reached or the hard cap exceeded,
it will also specify the necessary actions;
o “Whitelisting” and “blacklisting” criteria
though which investors or investments are
allowed or disallowed;
o Time, for example, deal needs to be
reached within 3 months, otherwise
contract becomes null and void;
o Exceptions;
• Enable automated corporate actions, such
as payment of dividends or coupons to cum-
div shareholders or bondholders,
respectively.
Issuers which are not using Ricardian Contracts
might not be serious enough to offer their STO
investors a legally binding contract or worse, they
might be a possible fraud or scam.
VEHICLE, FORM & ADVANTAGES
The vehicle from which the STO will be issued
and its form is important since it will have an
impact on the marketability and legality of the
STO as well as its future net asset value. Things
such as, type of target investors, assets being
tokenised, rights to be allowed, timeframes,
jurisdictions of investors, assets and issuer, will
all play their part in the determination of the type
of vehicle and its form.
The following are amongst the advantages of
STOs, the extent of which will also be determine
by the type of vehicle from which they are being
issued:
• Issuers of STOs are in effect issuing
securities from their company and are
therefore legally and regulatorily bound to
security holders. Much like traditional
investment contracts, investors can receive
an asset-backed token in return for their
investment with the attached rights and
obligations as specified in a prospectus;
• STOs require compliance with established
laws and regulations and thus the potential
for scams is drastically reduced, particularly
when using the right vehicle, contracts and
jurisdiction;
• The process of issuing STOs is cheaper and
easier than issuing equivalent IPOs,
although it may arguably be costlier than
ICOs;
• STOs offer the liquidity of a secondary
market;
• Through centralised records, the problems
associated with lost keys, hacking and theft
can be reduced.

3. The contents have been prepared for informational purposes only and do not constitute or contain any type of advice. All rights reserved.
Once the preparation stage is over, one should
be looking at ways to increase the buzz
surrounding the STO. It is easier to market an
STO than an ICO because STOs offer the best of
ICOs and traditional stocks.
The jurisdiction chosen is also an important factor
and master-feeder structures in different
jurisdictions can be an option to attract investors
which would otherwise be difficult to reach.
JURISDICTION
When shopping for a jurisdiction from which to
issue the STO, the following are amongst the
factors to consider:
• Technology-friendly government policy -
governments which harnessed blockchain,
digital assets and tokenised securities will
provide the necessary blockchain legislative
framework to work on. Some will also be
promoting the establishment of blockchain
companies, though public speeches, fiscal
and other incentives;
• Established financial legislation – STOs are
essentially securities governed and regulated
by existing laws and regulations.
Technology-friendliness is not enough and
this needs to be backed by the necessary
legislation and experience in the financial and
capital markets;
• Fiscally friendly environment – taxation is one
of the main costs and can wipe out 20% or
more of issuer’s profits, in some cases
approaching a total 50% in the hands of
investors. It is thus important to manage
taxation, including on the following:
o investors’ subscriptions, liquidations,
income and capital gains;
o service providers, including the issuer,
promoter, asset manager or investment
advisor;
o the vehicle which holding assets backing
the token.
• Approachable and knowledgeable
Regulators – there are jurisdictions with a
reputation for having an accessible Regulator
who welcomes a consultation with them at the
planning stage and remains open for further
discussions during the licensing process.
Blockchain is a new area and approachable
Regulators who can provide guidance when
needed and who are not there just to rubber
stamp issues are the ones to look for;
• Good reputation, consistency and quick to
adapt to changing needs and technology.
ABOUT THE AUTHOR
Mario Buttigieg
Mario occupied several senior managerial
positions, principally in the banking, corporate and
capital markets in Malta and UK, acting also as
executive director for multinationals, such as
HSBC. He is a pioneer in the Maltese funds and
securitisation industry and advised several of
such set-ups.
He is the founder and CEO of Fiduscorp, a
boutique firm licensed and regulated by the Malta
Financial Services Authority.
Mario Buttigieg
Founder & CEO - Fiduscorp
Tel: +356 9982 9824
Email mario@fiduscorp.com
Web: www.fiduscorp.com
MAR ‘19