How did you initially get involved with the Security Token Academy?
I have a background in entrepreneurship, law, and a fairly strong interest in disruptive technology. A few years ago I became interested in the intersection of blockchain, digitization, open networks, and securities law — and started researching and writing about these topics. At the time, I was running my previous company and teaching entrepreneurship at the University of Oregon.
Stephen McKeon (Partner, Collaborative Fund) is a good friend of mine, as well as a former advisor on one of my previous startups. Stephen had put together some amazing written work and thinking around security tokens and was operating as the Chief Strategy Advisor of Security Token Academy (STA). After spending time with the STA team and learning more about its educational work, I joined STA as Director of Strategy in January of 2019.
Could you share with us the overarching goal of the Security Token Academy?
Security Token Academy aims to be the leading educational platform for the security token industry, and the team is dedicated to covering and facilitating the evolution of digitized securities as the industry progresses over the coming years. Powered by a strong interest in the future of finance, STA hosts educational events, video and podcast interviews, an industry-leading weekly newsletter, and insightful case studies and narratives with the teams and service providers building out the security token industry.
What are some of the projects in the digital securities sector which you find most exciting?
The area I find most interesting is definitely the infrastructure layer — the projects building out the tooling and foundation for the industry across both retail and institutional markets. I’ve written about this before, but unlike other areas of the blockchain industry, a fully optimized (and compliant) end-to-end ecosystem will be required for us to see mainstream security token adoption. This includes areas like legal, broker-dealing, issuance, trading, custody, and lifecycle compliance.
With security tokens, we’re creating radically new financial architecture — one where every asset imaginable can be digitally wrapped, tracked, and traded in concert with trustless ledgers. A number of projects have invested significant resources to build and optimize different parts of this infrastructure layer, and from my perspective, watching these puzzle pieces start to fit together has been fascinating to follow.
Regulated security tokens are using SEC crowdfunding rules to raise capital. Could you give us a breakdown of each regulation? For example, Regulation A+, Regulation D, Regulation CF?
Anyone reading this should hire an attorney for more specificity and nuance, but I can run through a few of the highlights. As security tokens are simply digital representations of securities, they are also subject to the same rules as non-tokenized securities offerings. As a result, securities offerings made to U.S. residents must either be registered with the SEC, or exempt under the Securities Act of 1933.
There’s a number of benefits to conducting a registered offering — issuers can generally solicit, sell to diverse investor pools across accredited and unaccredited investors, the securities are freely transferable for trading immediately upon sale, and issuing companies are not subject to regulatory limits on the amount raised. With that said, registered offerings and ongoing reporting requirements can be quite costly and time intensive.
Alternatively, an issuer of securities may seek an exemption from registration. In 2012, the JOBS Act was signed into law, creating an updated regulatory framework for retail participation in exempt securities offerings under Reg CF, Reg D, and Reg A+. While there are a number of unique rules that exist, here are some general features of each category:
Regulation Crowdfunding (Reg CF) enables certain companies to offer and sell securities (up to $1.07M annually) on an internet based platform through an intermediary that is a registered broker-dealer or registered funding portal, and allows both accredited and non-accredited investors to participate.
Reg D Rule 506(b) does not permit the use of general solicitation, but allows issuers to sell securities with no annual fundraising limit, to an unlimited number of accredited investors, as well as to a small number of sophisticated non-accredited investors.
Reg D Rule 506(c) permits the use of general solicitation to sell securities with no annual fundraising limit, where all purchasers are accredited investors, and the issuer takes reasonable steps to verify that each purchaser is an accredited investor.
Regulation A+ permits general solicitation to sell securities up to $20M (Tier 1) or $50M (Tier 2) and allows both accredited and non-accredited investors to participate.
Which of these regulations do you personally believe caters best to STOs?
This is certainly a case by case decision — for issuers, it’s important to understand the long-term goals of the fundraise, then work backwards from there to find a framework that is narrowly tailored to those goals. In addition, there are also a number of legal questions and considerations that issuers face when attempting to choose the best legal framework for their securities offering. I always recommend sitting down and reviewing the available options with legal counsel who have experience in both securities laws and blockchain-based fundraising.
Do you have any examples of projects using the above exemptions?
A number of the earliest security token projects in the U.S. have leveraged the Reg D Rule 506(c) structure. With that said, there have been a number of offerings who have used different frameworks that were better tailored to their offering. Over time, I expect to see more Reg CF, Reg A+, and eventually, registered offerings.
As it relates to “network” tokens — one major trend I’m continuing to see is more and more pre-launched networks looking to U.S. securities laws to compliantly kickstart their new networks. Blockstack sold $23M worth of “investment contract” tokens under Reg A+ and Reg S. Althea is bootstrapping its decentralized internet network by combining the concept of Reg CF with the concept of “token airdrops” on the Republic equity crowdfunding platform. CoinList is helping projects like Kadena and NuCypher launch regulated Reg D offerings on top of the CoinList platform. I expect for more pre-launched networks to follow this theme. Over time, the aim for many of these networks will be to reach a state where the network tokens originally sold as investment contracts can transition from security to non-security as the investment contract factors erode, and the underlying network becomes more decentralized.
Where do you see the marketplace in 5 years?
Digitation and trustless ledgers offer an overwhelming number of benefits compared with our legacy systems — I feel strongly that as the tools and regulations mature, the industry will thrive.
In the meantime, we need to build the industry’s foundation for a variety of use cases and end users — in other words, the right tools for the right segments. We need attorneys committed to understanding asset digitization, and to view tokenization as a strong path for clients. We need legislators and regulators providing guidance narrowly tailored to this disruptive technology. If legislators and regulators can work together across jurisdictions, even better. Finally, we need to continue improving the education in this space — that’s something we’re focused on at Security Token Academy.
Eventually, issuers will prefer tokenization and investors will demand it.
To learn more visit Security Token Academy or read the article Derek wrote titled Decentralization and Security Tokens.