STO Launch Strategies
Guide to Security Token Offering (STO) Exemptions: Reg A+, D, S & CF
Disclaimer: The information below is for educational purposes only and should not be construed as legal advice. Please contact a Security Tokens Attorney for a full legal opinion. The information is based exclusively on USA regulations.
STOs Conducted Under Exemptions
With careful review, Security Token Offerings (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, the STO must still be performed in full compliance with US securities laws to qualify for this exemption.
What are these exemptions exactly?
Regulation A+
Through Reg A+, a U.S. or Canadian company is afforded the opportunity to:
- Raise up to $75 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.
Regulation D
Rule 504 of Regulation D exempts from registration the offer and sale of up to $10 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.
Regulation S
This regulation generally implies that STOs must “lock” tokens for a set period before trading can commence in the US.
The SEC has stated that “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 depending on the issuer’s status (reporting vs. non-reporting), and you should consult a legal professional.
Regulation CF
This is the exemption that many STOs utilize if they decide to raise funds via a crowdfunding platform such as StartEngine.
(STGC )
In order to rely on the Regulation Crowdfunding exemption, certain requirements must be met. This includes a maximum offering amount of $5,000,000.
A company issuing securities in reliance on Regulation Crowdfunding (an “issuer”) is permitted to raise a maximum aggregate amount of $5 million 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:
Accredited investors have no investment limits in Regulation Crowdfunding offerings. Non-accredited 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 $124,000, then the investor’s investment limit is the greater of:
- $2,500; or
- 5 percent of the greater of the investor’s annual income or net worth.
- If both annual income and net worth are equal to or more than $124,000, then the investor’s limit is 10 percent of the greater 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 $124,000, 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 for non-accredited investors under the adjusted rules:
| Investor Annual Income | Investor Net Worth | Calculation | Investment Limit |
|---|---|---|---|
| $30,000 | $105,000 | Greater of $2,500 or 5% of Greater($30k, $105k) | $5,250 |
| $150,000 | $80,000 | Greater of $2,500 or 5% of Greater($150k, $80k) | $7,500 |
| $150,000 | $124,000 | 10% of Greater($150k, $124k) | $15,000 |
| $200,000 | $900,000 | 10% of $900,000 | $90,000 |
| $1,200,000 | $2,000,000 | 10% of $2,000,000 (Subject to Cap) | $124,000 |
Summary
While this breakdown may offer some clarity on the subject, SEC regulations are complicated and subject to change. It is important to hire a legal professional.
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.
