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The Future of Fundraising: IL MAKIAGE and SpoiledChild Launch Security Token Offering

May 1, 2022
May 1, 2022
Spoiled Child

On the heels of their more traditional $130 million dollar fundraise at a $1.5 billion valuation back in January, ODDITY, the parent company of beauty and wellness brands IL MAKIAGE and SpoiledChild, launched a digital security token built on the Ethereum blockchain. With a reputation for building brands with an “unconventional” and “boldly unconstrained” ethos, ODDITY is using the offering to provide a new way for investors to participate in the growth of the company by “democratizing” investor opportunity and broadening individual access securities in the company.

Oran Holtzman, co-founder and CEO of ODDITY, said, “Crypto and blockchain technology unlock massive opportunity for consumers and capital markets. With this offering, we are building a new bridge to link traditional markets with the vibrant world of digital assets, where the innovation potential is huge.” Lindsay Drucker Mann, Global CFO of ODDITY, went on to say, “We believe in a future where securities are not just records of ownership, but also functional lines of code. The potential use cases of this technology are enormous, and as a digital and technology powered company, we believe we are especially well positioned to help drive it forward.”

In the last couple of years, beauty brands, large and small, have heavily leaned in to the power of blockchain and crypto, but many of those efforts have been centered around the selling of non-fungible tokens (NFTs), where a brand fanatic could own a piece of a virtual or physical object, creation, or idea. The ODDITY token is different in that it’s a security token offering (an STO) that automatically converts into ODDITY Class A ordinary shares at the time of an IPO. Given ODDITY’s recent valuation and backing from traditional VC and institutional investors like L Catterton and, in their latest round, Thomas Tull, Franklin Templeton, Fidelity Management & Research Company LLC, and First Light Capital Group, who will all need to realize a liquidity event at some point in the future, an IPO could definitely be on the horizon for the company. But, until the capital markets present an opportunity for the company to go public, token purchasers are making a bet that, at some point soon, their token will convert into actual shares. Since the company is selling its STO in compliance with Regulation D of the Securities Act of 1933, purchasers won’t be able to sell or resell their token in advance of an IPO without permission from the company and, further, when the company does go public, token holders will be subject to the typical 180-day lockup provision that all Class A shareholders are subject to—meaning, they can’t sell their shares for six months after the IPO.

To Token or Not to Token

Despite investor restrictions, STOs present an incredible opportunity to level the playing field and give access to qualified individual investors beyond the traditional institutions who regularly have access to such deals. Beyond simply broadening a company’s investor base, tokens also give a brand access to new, oftentimes younger, digitally savvy audiences. STOs move beyond being simply a tool to raise funds; they’re a way to build community and align incentives among a brand’s most loyal advocates.

Tokens also have capabilities to raise capital in ways traditional securities do not. For example, companies can raise funds for a specific project or division, unlike other forms of equity ownership in which investors typically are required to invest in the entire company. Companies have the flexibility to define a token’s rights and terms of ownership. STOs also have low barriers to investing since STOs can be built to permit fractional ownership. Most importantly, STOs are a tool that can be utilized by brands large and small, whereas many traditional forms of capital raising, especially IPOs, are reserved for large, more established companies.

STOs do come with their own set of unique challenges. For one, since STOs offered in the US are subject to securities regulations, there are important rules and regulations around the way a brand markets its tokens. Since STOs are often registered under Regulation D (as the ODDITY tokens were) or Regulation A+, companies may find it challenging to balance the marketing of their tokens with staying compliant under the law. Also, unless a token converts into a more traditional security like the ODDITY tokens, which convert into Class A shares of the company upon an IPO, STOs are relatively illiquid in that they can’t be sold or resold without permission from the issuer. Since STOs are a relatively new technology that has grown extremely quickly, they’ve attracted the attention of hackers looking to exploit coding and other blockchain design errors; it’s important for a company to diligence the cybersecurity of its blockchain to ensure the proper policies and safeguards are in place. Finally, since accounting rules haven’t moved nearly as fast as blockchain technology, STOs can present some unique challenges for your accounting team. 

While STOs aren’t the right fit for every beauty company, the technology presents a new, innovative way to raise capital, democratize access, align incentives, and expand reach to the digitally savvy corners of a brand’s community.

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