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1 WhitePaper on Initial Securities Offering (ISO)

WhitePaper on Initial Securities Offerings (ISO)

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2 WhitePaper on Initial Securities Offering (ISO)

Foreword

For most startups it is a big issue to come up with more capital. IPOs are extremely restrictive and costly and getting a bank loan based on an innovative idea is akin climbing the Everest.

ICOs have come under heavy scrutiny and the constantly popping news of ICO frauds have brought a cloud of doubt over the long term viability of the ICO process.

Governments across the world are formulating regulations for Blockchain tokens but the very nature of ICO, as it currently stands is erroneous. It encourages anonymity and opacity. IPO has certain features like independent audit, financial reporting and due diligence that are absent in an ICO. This is why we have proposed the new standard for going public via a blockchain token offering – Initial Securities Offering.

The first premise of ISO is that it considers all tokens to be securities tokens. At this time the ISO standard does not support utilities token in any shape or form. The second premise of ISO is Transparency. Just like in the IPO process, ISO insists on standard disclosure.

Our focus is both on the promoter and the investor. We would like the promoter to rest easy knowing that there is life beyond regulations. Likely, when the regulations do set in, the regulators would like to review all the procedures that were followed while taking the company public via a blockchain token sale. If a company take the ISO route instead of ICO, and follows all the set norms, the chances of them passing all the checkpoints put up by regulations will be very high.

For instance, if a promoter maintains the record of all the investors (something we do with KYC on our platform for the promoters), they can give a detailed shareholder list to the regulators. Our disclosure policy also means that quarterly, half-yearly and annual ‘filings’ have been maintained. This might significantly reduce the fine that might be levied on promoters under upcoming regulations.

For investors, the biggest challenge is to ascertain if the ICO is legit. In the case of an IPO there are multiple checks that the promoters have to go through before their securities get listed. ICOs, however, are a different story altogether. Most ICOs are built around a few keywords and a whitepaper. There is no actual analysis done by an independent party about the project viability and there is little by the way of actual KYC being done on the team that is promoting the Public issue.

ISO addresses this weakness of ICOs. In order to get listed on OiX Platform, the promoters have to submit a business plan to the Exchange for viability study. They also have to go

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3 WhitePaper on Initial Securities Offering (ISO)

through an extensive KYC so that the investors know exactly who is it that they are backing. We hope this new standard for Blockchain token keeps growing in its adoption and adaptation.

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4 WhitePaper on Initial Securities Offering (ISO)

Contents

WhitePaper on Initial Securities Offerings (ISO) ................................................................... 1

Foreword ........................................................................................................................................................ 2

What is changing in Blockchain Tokens Offerings? .................................................................................... 5

Do you need to go the ISO way? ................................................................................................................. 7

The Process of Listing on the Exchange ...................................................................................................... 9

The Pre-Approval Period ....................................................................................................................... 10

The Approval Period .............................................................................................................................. 10

The ISO Period ....................................................................................................................................... 10

Post-ISO Scenarios ................................................................................................................................ 10

Disclosures ................................................................................................................................................ 11

Periodic and Current Reporting ............................................................................................................ 11

Annual Report Declaration on Form O16-A. ......................................................................................... 11

Disclosure Controls and Procedures ..................................................................................................... 12

ISO Best Practices ...................................................................................................................................... 13

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What is changing in Blockchain Tokens Offerings?

As the Blockchain token market looks promising, companies need to be fully prepared to take the upcoming regulatory phase head on. This cannot be done by procrastinating or by persisting with unregulated ICOs. While an ICO may be your favoured approach to raising capital at this given time, it is important to evaluate all possible implications that could act as roadblocks in continuing business once the regulations set in.

A multi-track approach will allow you to keep your options open during the preparation process. Do you see yourself as a utility token? Can you pass the ‘Howie test’? If yes, then you can easily go the ICO way and get away with it. However, if you cannot pass a Howie test then it is time to drop the idea of going via an ICO and walk the path to an ISO.

Be under no doubt; when you go for an ICO or an ISO, you are essentially going public. This journey of transformation into a public company does not start or end with your ICO or ISO. Your success increasingly depends on your approach to regulation, your team and its skill and pedigree and a great deal on a coordinated team effort. Foreseeing regulatory uncertainty, it is more important than ever to over self-regulate rather than to be ambiguous on this issue. Begin to assemble your advisory team well in advance of your public launch.

Although the future is uncertain, the actions of various governments (barring a few) seem to be taken out of fear and loath rather than a deep understanding of the Blockchain. This means that as usual, the government will being in regulations rather swiftly and fine the unprepared to death. At this point it is wise to remember the words of Ronald Reagan

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ISO is not dependent on the kind of blockchain that you are using. While the first exchange to propose it is on ERC-223 standard it also has variant that is deployed by another exchange that is on EOS standard. With the advent of more standards and with the elimination of some inherent drawbacks of the distributed ledger technology, there is a great chance that we will find a much wider application of blockchain technology in days to come.

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

8 | Getting ready for IPO in India

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Do you need to go the ISO way?

Key questions to consider while evaluating starting the process of going public via an ISO:

• How is the business idea developing? Is it ready for the ISO? • Do you have the corporate structure ready to fully utilize the ISO Funds? • Have you structured your core ISO team? • Do you have a clear timeline in place? • Is there an internal and external communication plan?

Evaluate Plan

• Develop a robust business plan including the objectives

of going public, as well as a Plan B

• Establish an internal team that will manage the IPO

process

• Appoint external advisors including financial, accounting

and legal advisory teams

• Adopt leading-practice corporate governance and

reporting processes

• Complete strategic initiatives and pre-IPO transactions

(e.g., acquisitions)

• Begin preparation of historical financial

information

• Establish financial reporting procedures

• Review management information systems and operational

and compliance controls

• Consider ownership, tax issues and nationality of

holding company

• Finalize preparation of historical financial

information

• Commence initial due diligence

• Make necessary changes to the executive board and

begin recruiting additional board members

• Start building financial model and business

plan

• Meet with stock exchange representatives

• Consider investor relations strategy and equity

story

• Implement financial reporting procedures

• Discuss transaction with the relevant stock

exchange

• Agree draft timetable

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Execute Deliver

• Finalize timetable

• Begin financial and legal due diligence

• Consider adequacy of working capital

• Produce draft prospectus and other documents

• Do initial review of pricing issues and public

relations presentations

• Begin initial marketing

• Commission expert reports if required

• Appoint non-executive directors

• Eliminate deal breakers and resolve any potential litigation

or due diligence issues

• Comply with all reporting requirements

• Prepare road show presentations to targeted

potential investors

• Begin formal marketing

• Price and allocate the offering

• Register prospectus

• Have underwriter perform marketing of securities (“book

building”)

• Admission to stock exchange is granted and trading

commences

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The Process of Listing on the Exchange

The ISO process starts with the registration of the company’s intent with OiX. The registration process involves three stages: (1) the “pre-approval period”—the period where all the documents and information regarding the ISO has to be submitted to the exchange; (2) the “approval period”—the period where the exchange does its due diligence and asks for more information, clarity and takes a decision on whether the company can go public via an ISO; and (3) the “ISO period”—the period in which the token can actually be sold to the public.

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The Pre-Approval Period

The pre-approval period is the most critical time in the ISO Process. This is the time when the promoters undertake the following activities

1. Putting together a team of advisors and core team members to take the ISO process to its logical end. 2. Get all the paper ready for initial public disclosure. This would include but not be limited to a red herring prospectus, a team profile and organizational structure statement. Generally the exchange would provide you with a standard due diligence request list. 3. Create a formal, comprehensive business plan and a detailed timeline regarding the operational, financial and strategic initiatives necessary for the company to go public.

The Approval Period

The approval period is the one where we have the exchange evaluating and confirming the information provided by the promoters.

• During this period the exchange issues what can be generally be termed a due diligence request list. These may have questions based on information provided or request for new information and disclosures. • During the approval period, the company and the promoters also kick off their marketing efforts, both online and offline, for the offering.

The ISO Period

During the ISO period, there can be three distinct phases – Private Sales, Pre-ISO and ISO Sales. These can run from any duration but not exceed 364 days for the whole process.

Post-ISO Scenarios

1. In case the minimum required capital or softcap is not met, the money will be returned to the investors 2. In case the minimum required capital or softcap is met, the money is released to the promoters and the process is completed. 3. In case the collection exceeds maximum approved capital or hardcap, the company will have the option of keeping 10% in excess of the hardcap

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Disclosures

ISO at its basic is built on the foundation of full and fair disclosure of all material information. The big idea behind ISO is to enabling an investor to make an informed decision whether to invest in a company, or not.

Periodic and Current Reporting

Just as a public company files annual, quarterly and current reports with the regulators, any company going ISO has the obligation to maintain and display their financial reports and regular news updates and supplement information on their website. Additionally they have to submit an undertaking to the exchange every three months that they are maintaining their books and doing due diligence and maintaining KYC in case their token have been listed on other exchanges too.

Annual Report Declaration on Form O16-A.

A company listed on an ISO compliant exchange must submit a declaration that they have made their annual financial report public. In the case they also submit the financial report along with the declaration they will be given an A rating and they will be eligible for all the features of an ISO Exchange (for example OiX Gold on Oix.global and also 2nd Round of Funding). In case of such a deceleration the company will be given a B rating and while they can trade on the ISO exchange, they will not be able to avail advanced features. In the case the company fails to submit even a declaration, the trading will be halted and the trading will only resume when declaration has been submitted along with a monitory fine.

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The rating system is described below.

Rating Requirement Eligibility

A Submission of financial report along with declaration

OiX Gold as well as Second round of Funding

B Submission of just declaration Not eligible for OiX Gold or Second round of Funding

C No Submission Not eligible for trading

Disclosure Controls and Procedures

ISO standard will be keeping the guideline as outlined in Rule 13a-15 of The Securities Exchange Act of 1934. Although lacking the legal mandate to enforce the guidelines ISO was built to pass the muster of regulators. The one thing that the regulators will look for when they come knocking will be the financial documents and other procedural documents. By following the mandate as given in the Rule 13a-15 of the Exchange Act, the chances that the company is fast tracked into legality with minimum fines. ISO standard strongly recommends that a lawyer be hired by the company to lead their disclosure practices.

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ISO Best Practices

1. It is advised that one should not wait until the last minute to establish a practice of regularly releasing information. Maintaining a blog for the company that is contemplating an ISO gives a company more organic exposure. Your blog must establish a regular pattern and manner of releasing important business information – including but not limited to corporate developments or product updates. If you start this exercise too close to the ISO, it will be difficult to establish that you have regularly released the information and consequently will cast doubt on whether dissemination of the information is during the IPO process. 2. You must have duties well defined during the whole ISO Process. There should be a team ready with all the answers for the investors, exchange and regulators (when they arrive on the scene). Preparation and coaching both for non-deal and deal roadshows, mock presentations and investor meetings require communication specialists and public relations resources. 3. Have One-Pages, Prospectus and Presentations on various aspects of your business uploaded on your ISO Website. It is advised to memorialize the website and leave it as it is and not take it down after the ISO process is over. Many investors get jittery if ISO websites go down. The following principles help inform and protect buyers, and increase the chances of a successful token sale, especially for a sale which occurs before there is a live network using the token. They are guidelines and are not designed for any specific situation. Please consult your legal and other advisors. Most of these best practices do not directly affect whether a token is a security under the Howey Test

Principle 1: Publish a detailed white paper

How?

Describe the protocol and the network

Identify a clear and compelling reason for the token to exist

Provide a detailed technical description of the proposed implementation

Set clear expectations for total token supply and distribution

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Have an independent expert review the white paper

Why?

A white paper defines the network and its use cases. It is critical for buyers to be able to understand the characteristics and functionality of the token they are buying, the challenges and risks of development, and the benefits of using the network.

Principle 2: For a presale, commit to a development roadmap

How?

Provide a detailed development roadmap

Include estimates of time and costs for each stage of the project

Include a breakdown of estimated expenses by category

Allocate funding for each stage of development and consider restricting access to funding until milestones are achieved

List the names of key members of the development team and advisors

Be transparent about remuneration paid to key members of the development team and advisors

Quantify early contributions of members of the development team and advisors

Between sale and launch of the network, report back to token holders periodically on progress against the development roadmap

Set aside funds for independent security audits and a bug bounty program

Why?

A clear development roadmap gives buyers confidence that the proceeds of the sale will be properly used for the project and that the network will be launched, meaning that they will be able to use the tokens as intended.

Setting aside funding for each stage of the project helps establish structure and allows buyers to assess the likelihood of success. Using blockchain features to restrict the development team’s access to funding can deliver more transparency.

Members of the development team and advisors should be paid full and fair value for their services, through a combination of money and tokens. Quantifying the value of contributions, especially early contributions (pre-crowdsale) provides transparency.

Identifying the development team and advisors helps potential buyers assess the credibility of the project and its potential for success. It reduces the likelihood of fraud. Note: Many aspects of Principle 2 only apply to token sales which occur before there is a live network using the token

Principle 3: Use an open, public blockchain and publish all code

How?

Use an open and transparent blockchain

Use open source software

Where possible, commit to using standard or well-known token contracts (e.g. ERC20)

Do not use a private or unintelligible blockchain, or one for which the developer is the sole or primary transaction validator

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Commit to undertake an independent security audit before launch

Why?

Building with open source software and using an open, public blockchain provides transparency, enables real participation from token holders and independent developers, allows for auditing, and helps prevents fraud.

Enabling real and meaningful participation in the network from a diverse set of independent parties may also strengthen the arguments against the second and third criteria of the Howey test, because participants are less reliant on the initial developers.

Principle 4: Use clear, logical and fair pricing in the token sale

How?

Set a maximum number of tokens to be sold in the crowdsale

Use a pricing mechanism which does not increase over time. Consider a Dutch Auction or similar mechanism to price tokens fairly

Set a cap for the amount to be raised

Set a minimum amount and refund buyers if the minimum amount is not met

Denominate the price in one currency (e.g. ETH or BTC)

Why?

The total proceeds from a crowdsale should not exceed the estimated costs of development. A crowdsale should be capped at the number and price of tokens required to raise this amount.

Pricing mechanisms which increase over time can encourage irrational behavior (e.g. FOMO) and do not treat buyers equally. Setting the price in a single currency reduces the potential for confusion and arbitrage.

Principle 5: Determine the percentage of tokens set aside for the development team

How?

Decide on the percentage of the total token supply that represents a fair reward for the work of the development team and advisors. Release those tokens to the development team incrementally over time (contingent on their continued work on the project).

Why?

Concentrating too many tokens in the hands of the development team and other contributors increases the risk of centralization of control of the network. On the other hand, setting aside too few tokens does not align the interests of the development team with the interests of other token holders.

Releasing tokens to the development team over time aligns their interests with other users over a longer period.

Releasing tokens to the development team over time also reduces the risk of affecting the market - it prevents large numbers of tokens from flooding the market at one

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time.

Principle 6: Avoid marketing the token as an investment

How?

Do not promote the token as an investment that will increase in value

Promote the token based on its functionality and the use case for the network

Avoid analogies with existing investment language and processes - e.g. ‘ICO’

Provide appropriate disclaimers about the token as a product, not as an investment.

Why? Marketing a token as a speculative investment, or drawing comparisons to existing investment processes, may mislead or confuse potential buyers. It may also increase the likelihood that the token is a security.

Using a short, relevant disclaimer which accurately describes the risks of the tokens, protocols and network is useful. Long, legalistic disclaimers about the risks of investment are not helpful to buyers and may provide the impression that the token is an investment