Demystifying Security Token Offerings: The Real Process Behind the Buzz

Welcome back to Old Man New Money. I'm Douglas Borthwick and today we're pulling back the curtain on how security token offerings actually work. Last episode, we talked about the regulatory framework. Today, we're going to walk through the actual process, who's involved, how long it takes, what it costs, and most importantly, where companies screw it up. Everyone talks about tokenization like it's magic. Just put it on the blockchain, they say, democratize access. In reality, an STO is a complex process involving multiple parties, serious legal work, technical integration, and compliance at every step. I know this because I lived it.

At INX, I was the chief business officer when we did the first SEC registered digital security offering. I've also advised companies like Treasure Experience, Diamond Lake Minerals, Magic Circle Technology, and others through their capital raises. I've seen what works and what doesn't. Here's your 30 second version. A security token offering involves at least six parties. The issuer, securities lawyers, blockchain developers, a transfer agent, a broker dealer or funding portal, and often a custody provider. The process takes three to six months for a straightforward offering.

Costs $150,000 to $500,000 or more, depending on complexity, and requires ongoing compliance after the raise. Most companies underestimate both time and cost. We're at an inflection point. In 2024 and 2025, we've seen more STOs than ever before, but we've also seen more failures. Companies that raise capital, built nothing, or got shot down by regulators. The companies that succeed aren't necessarily the ones with the best technology. They're the ones that execute the process correctly. Let me introduce you to everyone involved in an STO.

At INX, we eventually brought many of these functions in-house, but most companies need to assemble a team. The issuer, that's you. You're the company raising capital. You have the vision, the business, the need for funding. Everything revolves around you, but you can't do this alone. Securities counsel. This is your lawyer who specializes in securities law, not a general corporate lawyer, not a crypto lawyer, a securities lawyer, who's actually done offerings before. They'll draft your private placement memorandum or prospectus, subscription agreements, and handle SEC filings. Budget $50,000 to $200,000 depending on complexity.

When we were doing INX's registration, we worked with top securities firms. The legal bills were staggering, but they were worth it because we did it right. Blockchain developers or platform. These are the technical folks who create the tokens and smart contracts. At INX, we built our own platform. Most companies use existing platforms like Securitize, Polymath, Tokenier, Harbor, costs range from $30,000 to $150,000 for platform fees, plus ongoing costs. Your transfer agents. This entity maintains your cap table and ensures all transfers comply with securities laws. At INX, we acquired one from TokenSoft, so we brought this in house.

For other companies, you need a transfer agent that understands blockchain. Cost is typically $10,000 to $30,000 annually. Broker dealer or funding portal. If you want to publicly solicit investors under 506C or Reg CF, you typically need a registered broker dealer or funding portal. They handle the actual sale of securities to investors. They charge 5% to 10% of capital raise plus fees. At INX, we acquired Open Finance, which gave us both broker dealer and ATS capabilities, specifically so we would facilitate our own offerings and help other companies. Custody provider. Institutional investors need regulated custody.

Options include Anchorage Digital, BitGo, Coinbase Custody. They charge based on assets under custody, typically 0.5% to 2% annually. And I haven't even mentioned accountants, auditors if required, marketing team, investor relations and potential market makers for secondary liquidity. Let me walk you through what really happens. I'm going to use our experience with Treasure Experience as a reference point where I serve as Chief Investment Officer. Month one is planning and team assembly.

You decide to do an STO, you assemble your core team, you engage securities counsel, begin drafting documents, you select your blockchain platform, begin technical planning. This month is mostly meetings and planning costs, $10,000 to $20,000 in deposit fees. Month two is documentation and technical build. Your lawyers draft the private placement memorandum or prospectus. This is heavy lifting. We're talking 100 plus pages of legal documents. Your blockchain team builds and tests smart contracts. You set up your transfer agent relationship. You begin your broker-dealer relationship if needed. Costs this month, $50,000 to $100,000.

Month three is testing and regulatory filings. Final revisions to all documents happen. Smart contract audits and security testing take place. You file Form D of doing Reg D or begin the SEC review process of doing full registration. You set up your investor portal. Cost, $30,000 to $50,000. Month four through six or longer is the actual capital raise. Marketing to potential investors, accepting subscriptions and verifying accredited investor status. Wire transfers and token distribution, ongoing compliance monitoring. This is the active fundraising period.

How long it takes depends on your network, your broker-dealer's reach, and market conditions. Costs during this phase includes broker-dealer fees of 5% to 10% of raise, marketing costs, and ongoing legal review. For INX, our full registration took two years from filing to effectiveness, but we were doing something unprecedented. For a standard Reg D offering, three to six months is realistic. Total costs for a straightforward $5 million raise, $150,000, or even maybe up to $500,000. That's 10% to 15% of the raise planned for it. And let's talk about the actual paperwork because this is real.

The private placement memorandum or PPM is your offering document. At INX, our F1 prospectus was hundreds of pages. For a private placement, your PPM will be 100 to 200 pages. It includes the executive summary, use of proceeds, risk factors, usually 20 to 30 pages of things that could go wrong. Description of the securities, management team bios, financial statements, legal disclosures. Your PPM needs to be accurate because investors rely on it. You can be liable for material misstatements or omissions. We spent months getting INX disclosure documents right. The subscription agreement is the contract between you and each investor.

It includes purchase terms, representations and warranties from the investor, acknowledgement that they've read the PPM, accredited investor attestation, purchase price and payment terms. Each investor signs one. The operating agreement if you're an LLC, or shareholders agreement if you're a corporation, governs how the company is run and what rights token holders have. This is critical for digital securities because you need to specify how tokens can be transferred, what happens if someone loses their private keys and needs tokens reissued, how voting works if applicable, and governance procedures.

ORM D is filed with the SEC within 15 days of the first sale of securities. It's relatively simple, but it's public. Everyone can see it. State filings depend on your exemption and where your investors are located. This can be dozens of separate filings. Now let's talk about what you're actually building on the blockchain side. The security token is a smart contract that represents your securities. At INX we use Ethereum for our tokens initially, then expand it to other chains. The token includes total supply, transfer restrictions, holder registry, compliance functions.

Most platforms use standards like ERC 1400 or ERC 3643, which are designed specifically for securities. The compliance layer is middleware that checks whether a transfer is allowed before it happens. It verifies whether the recipient is accredited, whether the holding period has expired, whether there are regulatory restrictions, and whether the transfer is within permitted amounts. This is the secret sauce. This is what makes digital securities different from regular tokens. The investor portal is where investors go to review documents, complete KYC and AML verification, submit subscription agreements, make payments, receive their tokens.

This needs to be secure, compliance, and user-friendly. Cap table management integrates with your transfer agent to provide real time visibility into who owns how many tokens, token transfer history, vesting schedules if applicable, waterfall calculations for distributions. At INX we built all of this ourselves because we needed it for our platform business. Most companies should use existing platforms that have already solved these problems. And this is where a lot of companies struggle. Under 506c you must verify that investors are accredited. Here's how that actually works.

For income verification, investors provide the IRS Form W-2 for the past two years, IRS Form 1099 tax returns. You or your broker dealer reviews these to confirm they meet the $200,000 or $300,000 thresholds. For net worth verification, investors provide bank statements, brokerage statements, real estate appraisals, debt statements. You calculate net worth, excluding primary residents and verify it exceeds $1 million. There are also third-party services like Verify Investor or North Capital who will verify accredited status for you. Cost is $100 to $500 per investor.

If the investor holds a Series 7, 65 or 82 license, they're automatically accredited. You verify the license through FINRA's BrokerCheck. This verification must be done within 90 days of the investment and you must keep records. At INX we have systems for this for other companies your broker dealer typically handles it. Once everything's ready you need to actually find investors. And this is the hard part. Direct outreach to your existing network is still the most effective. Email, LinkedIn, phone calls. We're raising capital, here's the opportunity. At Treasure Experience we leverage the networks of our team and advisors.

Digital marketing if you're doing 506C, social media posts, blog articles, webinars, though platforms like Google and Facebook restrict securities advertising so you need to be creative. Broker dealer networks are valuable. If you've engaged a broker dealer they'll market to their investor network. This is their value proposition. Access to accredited investors who are actively looking for opportunities. At INX we built a network of over 7,000 investors. That network came from years of marketing, speaking at conferences, building relationships, demonstrating credibility. The most successful raises use multiple channels simultaneously.

You can't rely on just one source of investors. Once an investor subscribes and their payment clears you distribute tokens. And here's that process and practice. The investor wires money to an escrow account usually held by a transfer agent or attorney. The broker dealer or attorney verifies the subscription agreement is complete. The payment matches the subscription amount. The investor is verified as accredited. There's no red flags. The transfer agent records the investor in the cap table. A smart contract mints the tokens and sends them to the investor's wallet address.

Or if tokens are pre-minted they're transferred from the issuer's address to investor's address. The investor receives confirmation email and can see tokens in their wallet. This entire process should take one to five business days assuming everything's in order. At INX we automated much of this and the speed was one of our competitive advantages. Now let me talk about the mistakes I see because I want you to avoid them. Underestimating time and cost is the most common. Companies think they can do an STO in 30 days for $50,000. The reality is three to six months and $150,000 to $500,000 budget accordingly. Using the wrong lawyers is deadly.

Hiring a crypto lawyer or general corporate counsel who's never done securities offering. You need an experienced securities counsel. Period. Pure token economics, not thinking through the actual utility and rights of the tokens. What do token holders get? When? How? We spent months at INX designing our token structure. Ignoring secondary trading. You raise capital then investors have no way to sell their tokens. At INX we built the trading platform specifically to solve this. Other companies need partnerships with ATSs. Inadequate investor relations. After the offering closes you disappear.

Investors need regular updates, financial reports, communication. At Treasure Experience we provide regular updates on expedition progress. Smart contract bugs can be catastrophic. Not properly auditing smart contracts before deployment. One bug can lock tokens forever or enable unauthorized transfers. Always get your contracts audited by reputable firms. Regulatory non-compliance kills companies. Missing filing deadlines. Not maintaining proper records. Violating transfer restrictions. The SEC will shut you down. Let me share what we did at INX that worked. We spent two years getting our registration right. We didn't cut corners.

We hired the best securities lawyers. We went through every SEC comment letter methodically. We built technology that automated compliance. We raised from 74 countries. We had multilingual support. We understood that the global market was bigger than just the US. We acquired a broker dealer and transfer agent. We brought the entire stack in-house. This gave us control and reduced friction. We built a trading platform. Investors could see secondary market prices from day one. They knew there would be liquidity. We over communicated with investors. Regular updates, transparent financials, accessible management.

We treated investors as partners, not ATMs. The result, 85 million dollars raised from over 7,000 investors. The first and still one of the only fully SEC registered digital securities in the world. Let's look at numbers from 2024 and 2025. The average raise size for digital security offerings is 4.2 million dollars. Medium time from start to first funding is 4.7 months. The average cost as a percentage of raises 12 to 15 percent. The success rate, meaning that reaching the target raise, is 38 percent overall. But here's the interesting part. Offerings with broker dealer involvement have a 67 percent success rate.

Offerings without broker dealer involvement have only a 19 percent success rate. Professional execution matters. What should you do right now if you're considering an STU? Well, create a detailed budget. Account for legal, technical broker dealer and ongoing costs. Add a 20 percent buffer because something always costs more than expected. Interview securities lawyers. Ask how many digital securities offerings have you done. What exemptions? What went wrong and how did you fix it? Check their references. Research blockchain platforms. Compare securitize INX, T0, polymath, tokeny. What do they offer? What do they charge?

Talk to their existing clients. Build your investor list now. Who are 100 people who might invest? Start engaging them early. Don't wait until you're ready to launch. Consider your liquidity strategy from day one. How will investors exit? Partnership with an ATS. Built-in buyback provision. Be clear up front. If you're an investor evaluating an STO, ask them about the team. Who's their securities lawyer? Which blockchain platform? Do they have a broker dealer? These answers tell you whether they're serious. Review the documents. Read the PPM, all of it. Especially the risk factors. At INX, we disclosed every risk we could think of.

Good companies do the same. Understand the liquidity plan. When and how can you sell these tokens? At INX, we built the trading platform. What's this company's plan? Check the smart contracts. Have they been audited? By whom are the audits public? This is your money. Do your diligence. Research the issuer. Look them up on Edgar. Check their form D. See if they have other regulatory filings. Public information tells you a lot. Security token offerings are not easy. They're not quick. They're not cheap.

But for the right companies with the right business model and the right approach, they're an incredibly powerful way to raise capital and create more liquid, transparent and accessible securities. At INX, we proved it could be done. We raised $85 million in the first SEC registered digital securities offering. We acquired open finance for broker dealer and ATS capabilities. We acquired Tokensoft's transfer agent for transfer agent services. We built infrastructure that other companies now use. We showed the path. The companies that succeed are the ones that treat this seriously. Hire the right professionals.

Follow the process and don't cut corners. Next episode, we're diving into the infrastructure layer. Alternative trading systems, transfer agents, custody providers, the picks and shovels of the digital securities market. The stuff that actually makes this whole ecosystem work. I'm Douglas Borthwick. This is Old Man New Money. If you found this valuable, share it with a founder who's thinking about raising capital. Thank you.