Polymath is creating a platform that aims to provide a marketplace for the creation of blockchain-based financial products. Compared to the traditional initial public offering (IPO) process used in equity markets the team hopes to use tokens to decrease the costs for organizations to issue securities while allowing more investors to participate in offerings.
While recent token sales, or initial coin offerings (ICOs), have focused on payment tokens used to transfer value or utility tokens used to access goods or services on a platform, all tokens issued through Polymath will be securities (security tokens). Security tokens are specifically intended to represent a stake in an organization or a claim to the wealth generated by its activities. They are therefore subject to security regulations in the case of both issuers and investors.
Polymath plans to offer a blockchain-based issuance system that allows organizations to create tokens and engage service providers, like law firms and developers, to complete a token sale. Investors will be able to participate in securities token offerings (STOs) and trade their tokens on a secondary market. Polymath plans to integrate third-party know your customer (KYC) providers to verify details about issuers, investors, and service providers, including location and accredited investor status. The integration of KYC and legal service providers aims to allow issuers and investors to comply with various regulations across jurisdictions.
Tokens created on the network will be based on Polymath’s ST20 standard which incorporates KYC compliance into the token. This should create a system where only investors, as identified by Ethereum addresses, that match the regulatory profile (location, accredited investor status, etc.) outlined by the organization are able to purchase tokens. ST20 tokens will be modular and can be changed over time to reflect new governance or change features such as dividend payments.
To launch a new token, an issuer creates a smart contract with the parameters of their offering including total supply, equity or other rights attached, price, and governance details. Issuers can choose to develop their own contracts or engage a developer through a planned marketplace system. Developers can bid to provide new implementation or review services directly through the platform and will be paid in POLY. The team plans to ensure quality development by locking these tokens for a minimum of three months after the launch of an STO.
Once a contract has been deployed, law firms, called legal delegates, will be able to bid for the new offering. Issuers will be unable to complete their token sale until they complete a legal review process. Legal delegates can submit proposals during this time and if selected will be responsible for working with the issuer to properly construct a compliant token sale. Like developers, legal delegates will be compensated for their work in POLY. Delegates may choose to stake an amount of POLY or set various lock-up periods before they can receive compensation as a way to guarantee the quality of their work.
After an issuer approves the final offering, they set the sale date and investors are allowed to purchase the security. To participate in a sale, investors are required to go through a KYC process to verify their location (jurisdiction) and accredited investor status. Issuers and their legal delegates set parameters directly through the smart contract that can do things like include only accredited investors or exclude certain jurisdictions. These parameters will be encoded directly to the token so that even in the secondary market any investor must meet the original requirements. Investors will be identified by their Ethereum addresses which helps to build a transaction history and audit trail for assets on the network.
KYC services will be provided by third-parties that verify investor credentials in return for POLY. These providers will be required to pay a fee to join the network to attempt to prevent illegitimate providers from participating. To facilitate the trusted sharing of documents things like legal paperwork and investor credentials can be uploaded to the Polymath platform and accompanied by a cryptographic hash on the blockchain creating a verifiable archive of documents.