The information below is an opinion piece and should not be construed as legal advice. Please contact an Security Tokens Attorney for a full legal opinion. The information is based exclusively on USA regulations.
STOs Conducted Under Exemptions:
With careful review STOs can be structured under one of the following exemptions from registration offered by the US Securities Act.
- Regulation A+
- Regulation D
- Regulation S
- Regulation CF
It should be noted that even if the issuance of the token is exempted from needing to be registered with the SEC, in order to qualify for this exemption the STO needs to be performed with full compliance of US securities laws.
What are these exemptions exactly?
- Raise up to $50 million in a 12-month period using a “public solicitation” of its shares and have the offering be exempt from SEC and state securities law registration.
- Confidentially submit its offering memorandum to the SEC and enjoy the opportunity to “test the waters” before pursuing a mini-IPO/STO.
- Enjoy a streamlined, expedited review process where the company is required to make its offering memorandum public just 21 days before SEC qualification and the beginning of its roadshow.
- Combine public funding (through Reg A+) with private funds from venture capitalists to create a larger round of fundraising.
Rule 504 of Regulation D exempts from registration the offer and sale of up to $5 million of securities in a 12-month period. A company is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering. In addition, a company must comply with state securities laws and regulations in the states in which securities are offered or sold.
The following companies are not eligible to use Rule 504: Exchange Act reporting companies; investment companies; companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies; and companies that are disqualified under Rule 504’s “bad actor” disqualification provisions.
This regulation implies that STOs must “lock” tokens for a year before trading can commence.
The SEC has written”“Equity securities placed offshore by domestic issuers under Regulation S will be classified as “restricted securities” within the meaning of Rule 144, so that resales without registration or an exemption from registration will be restricted for a one-year period.”
Attorneys are interpreting this statement differently, and you should consult a legal professional.
This is the exemption that many STOs are falling under if they decide to raise funds via a crowdfunding platform such as Start Engine.
This is adequate for smaller raises, but may not be adequate for larger raises.
In order to rely on the Regulation Crowdfunding exemption, certain requirements must be met. This includes a maximum offering amount of $1,070,000.
A company issuing securities in reliance on Regulation Crowdfunding (an “issuer”) is permitted to raise a maximum aggregate amount of $1,070,000 in a 12-month period. In determining the amount that may be sold in a particular offering, an issuer should count:
- the amount it has already sold (including amounts sold by entities controlled by, or under common control with, the issuer, as well as any amounts sold by any predecessor of the issuer) in reliance on Regulation Crowdfunding during the 12-month period preceding the expected date of sale, plus
- the amount the issuer intends to raise in reliance on Regulation Crowdfunding in this offering.
An issuer does not aggregate amounts sold in other exempt (non-crowdfunding) offerings during the preceding 12-month period for purposes of determining the amount that may be sold in a particular Regulation Crowdfunding offering.
Investors are subject to the following limits:
Individual investors are limited in the amounts they are allowed to invest in all Regulation Crowdfunding offerings over the course of a 12-month period:
- If either of an investor’s annual income or net worth is less than $107,000, then the investor’s investment limit is the greater of:
- $2,200 or
- 5 percent of the lesser of the investor’s annual income or net worth.
- If both annual income and net worth are equal to or more than $107,000, then the investor’s limit is 10 percent of the lesser of their annual income or net worth.
- During the 12-month period, the aggregate amount of securities sold to an investor through all Regulation Crowdfunding offerings may not exceed $107,000, regardless of the investor’s annual income or net worth.
Spouses are allowed to calculate their net worth and annual income jointly. This chart illustrates a few examples of the investment limits:
Greater of $2,200 or 5% of $30,000 ($1,500)
Greater of $2,200 or 5% of $80,000 ($4,000)
10% of $107,000 ($10,700)
10% of $200,000 ($20,000)
10% of $1,200,000 ($120,000), subject to $107,000 cap
While this breakdown may offer some clarity on the subject, as can be seen SEC regulations are complicated and it is important to hire a legal professional. The information on this page is for entertainment purposes only and is not meant to be construed as legal advice.
Should you choose to launch an STO you may choose to fall under one of the above exemptions, or structure your STO in a different legally compliant way.
Below is a list of companies that are currently assisting with this process:
|BX3 Capital||www.bx3.io||261 Madison Avenue New York, NY 10016|
The Best Countries to Launch Your Security Token
Security token offerings (STOs) are now commonplace in the cryptomarket. This unique fundraising strategy gives companies the ability to easily monitor, distribute, and regulate their campaign utilizing blockchain technology. STOs combine the best features of ICOs with the stringent regulations found in particular markets.
Aside from the benefits achieved by companies that use an STO strategy, there are also many reasons why an investor would seek out this type of investment. For one, STOs are far more transparent than an ICO. Companies involved in STOs must reveal sensitive company information including their address, upper management, and financials.
This information further protects investors from the ramped scamming that occurs in the ICO markets. One report published by the Statis Group showed that as much as 80-percent of the ICOs conducted in 2017 turned out to be scams. It’s exactly this fraudulent activity that led to the development of security tokens.
Now that security tokens are more popular, many countries want to host STO related businesses. In order to entice these businesses onto their shores, government officials are ready to make some serious concessions. Below are the best countries to launch your security token.
The island country of Malta is one of the premier locations to launch your security token. The country embraced blockchain technology from the start. The Maltese Prime Minister, Joseph Muscat, issued a public statement this year in which he acknowledged both the fears of regulators “and the fact” that this technology is quickly changing industries across the globe.
Maltese officials are serious about their desire to be the leading blockchain country in the world. In the same statement, the Prime Minister stressed the importance of heading the digitization of the economy. He went as far as to state – “we must be the one that others copy.”
Malta is home to some of the largest security token projects currently in the works. In September the Malta Stock Exchange (MSX) announced a partnership with Binance, the world largest exchange by volume. Binance seeks to create a new security token platform in the country in the coming months.
Lithuania made some significant headway last year towards their goal of becoming EU’s security token capital. The country introduced security token friendly regulations. The country’s Minister of Finance issued broad security token regulations that covered the taxation, accounting, issuance, and compliance.
Blockchain companies send their project to a supervisor of financial markets and their office well send back a reply regarding the status of your token. Basically, Lithuanian officials do their version of the Howie Test to your project and give you a solid answer prior to your firm moving forward on their project.
Since Lithuania is a member of the EU, they gained a huge advantage by legalizing and regulating STOs in their country. Government officials hope to entice all of the EU to host their STOs in the country.
Switzerland has a long history as a financial safe haven. The country features low taxes and a crypto friendly environment. Switzerland was one of the first countries to adopt cryptocurrency regulations.
Switzerland has had a pro-crypto stance since 2014 when regulators released a report detailing the significance of cryptocurrencies. Interestingly, the report acknowledged cryptocurrencies handle the same tasks as money but stopped sort of labeling it legal tender due to the lack of an issuing country.
STOs submit their project to the Swiss Financial Market Supervisory Authority (FINMA). This regulatory body reviews each STO to confirm what designation the project falls under. Token labels include payment, utility, asset, and hybrid tokens.
Israel is home to numerous blockchain-based startups. The country leads the world in research & development according to a recent Bloomberg report. The report placed Israel in the number two spot, only behind South Korea in terms of innovators. Israel welcomed blockchain companies by cutting crypto taxes in half in October of this year.
According to a Cryptoslate report, Israel started 2018 with 88 blockchain startup in operation. In March 2018, Israel released an interim report which detailed the regulations for ICOs. The report was intended to strike a “balance between technological innovation and the protection of investors.”
The Israel Security Authority’s ex-head, Prof. Shmuel Hauser went as far as to recommend the country foster the creation of an international blockchain center on his retirement. This move ensures Israel remains a dominant force in the cryptomarket.
Canada continues to lead the North American crypto revolution. The Canadian Securities Exchange (CSE) announced in February plans to launch a new securities token platform. The platform is based on the Ethereum Blockchain.
Toronto, Canada is the birthplace of Ethereum and the city continues to be a strong hub for crypto activity. Additionally, the platform allows users to launch their own security token easily. This decision is consistent with Toronto’s desire to be an industry leader.
According to the press release, the new security token platform is designed to give companies an alternative to the ICO space. Kabuni Technologies is the first security token scheduled for launch on the platform. The company also filed a prospectus with the British Columbia Securities Commission (BSCE).
Dubai remains a powerful influence in the cryptomarket. The country was one of the first to issue a state-backed cryptocurrency back in October 2017. In February of this year, The Dubai Multi Commodities Centre (DMCC) began to facilitate a market in cryptocurrencies.
The DMCC is a member of the Global Blockchain Council. The project initially began as part of the Dubai Smart City initiative. Speaking on cryptocurrencies, the project’s director, Franco Bosoni, discussed how he could see a commodities-like future for these digital assets. Dubai is now in the middle of developing a robust framework for the security token commodity to operate within.
Security Tokens – A Smart Move
The countries exemplify the innovative spirit and their decision to position their markets in line with the digitization of the economy is sure to pay off. The security token market continues to expand and these countries are now seeing the benefits of their pro crypto stance. You should expect more countries months.
Recruiting STO Advisors
Launching an ICO is a complicated process, but launching an STO is even more perplexing. The reason is due to the additional legal compliance that is required, and the necessity to complete proper ongoing KYC and AML on investors.
Businesses, and start-ups should be focusing on what’s important, and that is the success of their business. Learning all of the ins and outs of launching an STO should not be the role that you play. It’s too complicated of a marketplace for beginners, and any accidental error or omission could end up costing the company far more in the future then had things just been done properly.
Below are some of the problems that you will encounter if your STO is not performed according to code.
- Exchanges will not list any STO which has potential legal issues. Even the loss of one exchange can dilute the future liquidity and value of your brand.
- The SEC or other government bodies can either slap you with a penalty or in a worst case scenario shut down your operations.
- Failure to KYC or AML properly could jeopardize future banking relationships, and could result in the confiscation of funds.
- You could appear to be unprofessional to those in the space.
- De-optimization of the potential raise amount.
These are a sample of the legal and financial reasons why you should outsource as much as possible. This is not factoring in the lost opportunity cost, of having your staff focusing on the technology of an STO versus running a business. Specialize in what you are good in, which is running your business, and outsource the rest.
It can be difficult to know where to start. The natural inclination is to seek out an advisor. The wrong approach to finding an advisor is by searching for “STO Advisor” on Google and using the first service that you find. This does not make someone an STO Advisor, it simply makes them someone who is good at search engine optimization.
You should become familiar with the tokenized securities industry. Learn who you can trust in the industry, and who is simply out to benefit themselves. Attend a few Security Token Conferences if you can. Mingle, network, but most importantly learn.
The crypto industry is full of conmen, but what’s more shocking is the high number of people who simply lack any type of business sense. Make sure that whoever you hire as an advisor has experience and is a credible name.
A valuable STO advisor will only sign on with your company if they believe in the project. You do not want an advisor who blindly advises anyone who contacts them. The reason for this is that the most valuable role of the advisor is as someone who introduces you to the right contacts. If an STO advisor attempts to connect junk projects with his existing network, that network will quickly learn to ignore the advisor. This is why the best advisors are very selective on who they work with.
The second most important role of an advisor is as a sounding board. Are you unsure on how the market will react to your business idea? If so, the advisor can be someone that you consult with. A good advisor will be honest with you if they feel that something will backfire and damage your reputation.
An advisor can also perform the following:
- Introduction to proper legal council
- Introduction to token issuers
- Introduction to potential investors
- Recommendations on jurisdictions to incorporate
- Optimization of whitepaper/business plan.
- Connecting at events to discuss project.
- Recommending changes to planned corporate structure.
How do you compensate an advisor? This can take the form of equity or tokens. It is important that the advisor is actually involved, and is simply not compensated for having his profile on the STOs website. Compensation can be as high as 3%, but this is a little high and it depends on the value of the project, it’s potential to scale, etc. If someone believes in your project they should be willing to be an advisor for 1 to 1.5% in equity or tokens.
What’s important is that you use someone who becomes a business partner. They have your success in mind, and due to this they will do their best in order to ensure your success. We also have a list of Security Token Advisors.
Additional Commentary: As a Co-Founder of Securities.io and BlockVentures I am occasionally approached regarding STO advising/consulting. I will only consider this after meeting with the founders, and being comfortable in the project.
Marketing Security Tokens
You found a token issuer, you decided to launch an STO, now comes the difficult part, recruiting investors.
The good news is the marketplace for security tokens is in its infancy and less clustered than regular utility tokens.
When it comes to marketing there are several channels which you should consider:
Google Adwords – Pay only per click. Advertise under keywords that are specific to the industry.
Reddit – This resource is quite popular in the cryptocurrency space. You can sponsor a sub-reddit which caters to cryptocurrency or even security tokens.
STO Listing Platforms – List yourself on all channels which provide information to investors. You can begin with being listed on our token page.
Conferences – The more specific to tokenized securities the better, as most conferences still cater nearly exclusively to utility tokens. When it comes to marketing at conferences not all ad spends are the same. Your best option is to be invited on a discussion panel, or fireside chat. The second-best option is to pitch, just make sure you are not pitching on the second half of the last day, as you may be pitching to an empty room. Many expensive options such as sponsoring a party, lunch, etc. may not be worthwhile based on your budget.
Enlist companies that specialize in marketing security tokens. Below are some options:
|BX3 Capital||www.bx3.io||261 Madison Avenue New York, NY 10016|
|Priority token LLP||www.ptoken.io||Suite 6, 5 Percy Street, London, Fitzrovia, W1T 1DG, United Kingdom|
Lastly, you can also choose to recruit STO Advisors.