
Franchising and Security Token Offering: Who, How, and Why
Following the release of my interview in the February issue of Millionaire (pages 70-71) regarding the deep dive into Security Token Offerings (STOs), I have been contacted by many readers seeking more information on this financial phenomenon in relation to the franchising world.
To all those who wondered if STOs were aimed only at larger franchising networks, I can answer that the scope of applicability is very broad, and therefore even relatively small entities could benefit from this financial instrument. However, within the constraints of these available lines, some necessary preliminary clarifications are needed to shed light on this new financial-technical phenomenon related to blockchain.
1. Which franchisors can benefit from STOs?
As previously defined in the interview in the last issue, an STO is a process based on blockchain technology that allows for the sale of financial instruments (such as new shares issued with capital increase and/or sale of shares, etc.) in the form of Tokens. And, consequently, to acquire liquid capital for the franchisor.
In fact, the Token is capable of generating liquid financial values, such as receiving dividends from a company (if any), but always through specific digital channels. The goal of STO is to simplify and at the same time enhance the traditional system of private equity, IPO. However, for an franchising company to potentially execute an effective STO, it should:
- Have good profitability.
- Have a solid financial position.
- Show growth trends over the last two years.
- Have a turnover of no less than one and a half million euros.
- Have a credible and ambitious development plan.
Be open to new investor partners and possibly willing to change the balance of the company’s management.
P.S.: Only some direct points could be “tokenized”; the STO procedure does not necessarily have to involve the entire franchising network. The amount of liquid capital that can be raised must be commensurate with the aforementioned characteristics.
2. What are the project steps to follow?
First of all, before embarking on this new and innovative capital raising and/or monetization procedure, it is necessary to rely on specialized professionals because the technical level required is very high.
Subsequently, the following multidisciplinary project steps must be kept in mind:
- CORPORATE FINANCE. Before being able to assign a value to STOs, it is necessary to have your company evaluated. The financial technical evaluation is carried out by specialized consultants who allow you to present yourself on the “market” with a real and potential value. Indeed, along with financial evaluation, it is extremely important to be able to present a credible and profitable industrial development plan for investors (study of technical and financial feasibility, plan for opening direct or franchised PVs, media and advertising plans, internationalization, etc.).
- IT. This step is divided into three moments: a. The company, to conduct an STO, must have, with the help of specialized companies, a kind of digital platform that would allow dialogue with the blockchain system and subsequently tokenize the company’s assets. b. always through the platform, what is called the primary offering is conveyed, (in which tokens are proposed and acquired by institutional investors at the first issuance). c. Always through the platform (marketplace), the secondary offering is verified, the resale and/or exchange of tokens to other investors.
- LEGAL AND COPLIANCE. (AML-KYC). At the base of the process, there must be legal technical assistance that provides guarantees on the formal correctness of the operations. It is a matter of evaluating the compatibility of the company’s bylaws with the regulations relating to STOs, blockchain, and anti-money laundering in the reference market (The regulations to follow in Italy are European – European Regulation 2017/1129). Other legal aspects concern the drafting of necessary corporate minutes, contractual prospectuses with investors, etc.
- COMMUNICATION. Once all the above steps have been perfected. The investment token offer must be “advertised” on specific channels such as industry magazines, blogs, and dedicated websites, banks, and investment companies, but not before the DEPOSIT OF THE PROSPECTUS, which takes place with the supervisory authority (e.g., Italian market CONSOB, in the United States, SEC). It is a real presentation that highlights the characteristics and potentials of the project and aims to attract and convince potential investors. In conclusion, we can say that a company that intends to develop its network through STOs can increase its liquid capital to invest in a serious and credible development plan.