Being successful in token investments and trading requires rules and discipline to follow them. People often get distracted by side or background features and forget that it all boils down to cool-headed analysis of the pros and cons for any investment. There are actually many rules as the devil is in the details, but here we shall focus on the seven which we consider most important.
Rule 1: Regulation
These are securities, which means that they are regulated. Before considering an investment you should ascertain which one is the regulatory authority and the jurisdiction. This is very important in order to determine the applicable law and regulations as well as the compliance requirements. Switzerland has acted fast to develop the legal framework for blockchain-based structs such as tokens, smart contracts and coins. The canton of Ticino has gone as far as to register companies with their securities certificated by reference to tokens. In most jurisdictions in EU the legal validity of the referencing and negotiating securities through transfer of tokens has to be tested.
Rule 2: Eligibility
Given the jurisdiction of the token and both your domicile (residence and tax status) and investor status (accredited professional or regular non-professional) you should check your eligibility for acquiring and holding the token. In all developed economies such as US, EU-member states, Japan and many others legislation often restricts offering of shares including tokens to non-professional investor.
Rule 3: Offering Document / Prospectus
Being a security such a token implies that there should be an offering document – a prospectus which should contain all the essential information for making a judgement on the value, return and risk of the security offered. For smaller issues to accredited investors a full prospectus requirement may not be compulsory, but some type of offering document should always be present. Starting from 2020 the EU and Swiss legislation in this respect is harmonized meaning that Switzerland adheres to the EU framework. The US is a world of its own and one should be very careful even when documents such as prospectuses fall in the hands of US citizen and residents.
Rule 4: Risk-Return Profile
In order to assess the rationale of the investment in a security token you should assess the risk and return profile of the security referenced by the token. If the underlying instrument is an equity it is ultimately the free cash flows, their volatility and uncertainty that determine their risk, return and resulting value. For bonds, it is all about the likelihood of repayment as per schedule and interest compensation for time and risk that matter.
Rule 5: Tax Status
Before investing in a STO you should have a clear idea what the tax effects of income and capital gains from the token will be. Alternative ways of structuring the return should be explored. Tokens that do not offer dividends but capital gains are more democratic as it is your choice when to cash out and realize a capital gain.
Rule 6: Technology
In order to invest in tokens a minimum understanding of technology is required. For example you should use the right wallet for storing the tokens. This wallet must be approved by the platform in compliance with KYC requirements. Liquidity depends on technology also and how secondary markets are organised.
Rule 7: People
Finally as with all stocks and companies it all boils down to people and how they work together to make things happen. This is especially true for SMEs, startups and high-growth projects, which are the usual candidates for STOs. Besides the people standing behind the token, an investor should also consider the people behind the token exchange platform, the market-making, the whole club of investors that has formed. Cultural fit is essential as it impacts all you need from announcements and disclosure of information to the most trivial peer support.