Terms & Definitions
For an Investor to be deemed ‘accredited’, the individual must meet certain parameters set forth by regulatory bodies, such as the SEC. These parameters are built around ensuring the financial stability of the investor, through a look at, either, net worth or annual incomes.
An ATS is an SEC approved platform – typically hosted by companies which hold a broker/dealers license – offering an alternative to regulated exchanges. These platforms function to facilitate buy and sell orders among a client base.
Anti-Money-Laundering is a term which refers to regulations imposed upon an industry in an effort to prevent, and deter, nefarious activity. Primarily, money-laundering indicates hiding the origin of funds. Different jurisdictions use different AML laws to ensure that ‘dirty’ money isn’t passed off as ‘clean’.
Asset backed tokens are digital representations of ownership of a real world item. These tokens derive their worth, based on the value of the asset which they are associated with, while providing their holders with the inherent benefits of a blockchain technology.
Simply put, blockchain refers to a ‘digital ledger’. This ledger is comprised of blocks of data, which are linked together in sequential order, creating a chain. This chain provides the ability to transfer value between participants, while tracking transactional details.
This is a designation doled out by the SEC to applicants, allowing for them to buy/sell securities on behalf of, both, themselves and others. Responsibilities of a broker/dealer also extend to include providing financial advice, raising capital, and more.
This refers to a non-traditional means for raising capital. Rather than relying upon a single venture capitalist, companies can generate small amounts of funds from a ‘crowd’ of investors. This is done in hopes that the larger pool of investors will allow for more capital to be raised.
A Custodian refers to a company responsible for the safekeeping of securities. The purpose of such companies revolves around their ability to provide state-of-the-art measures to prevent the loss, theft, and manipulation of assets. Due to the scale of the endeavor, it is typically only big banks that have the capabilities to provide this service.
These represent assets such as bonds, loans, mortgages, etc., which have undergone tokenization. The result is a security token that will typically see its holder rewarded with dividends / interest, based upon the asset / debt instrument which it represents.
A Digital Security Offering (DSO) refers to a capital generation event in which an issuer will create and distribute securities in the form of a digital token. These tokens provide their holders (investors), with the benefits of blockchain technologies, while retaining the rights of a traditional security.
Custom built by security token specialists, Polymath, ERC-1400 is an evolution of the ERC-20 standard. This evolution means that ERC-1400 is tailored specifically towards security tokens. This is shown through the integration of capabilities allowing for differentiated ownership, and various forms of restrictions based on, both, identity and asset types.
Based on Ethereum, the ERC20 standard was developed as a means to allow the creation and execution of tailorable smart contracts. It remains one of the industry’s most popular token standards.
For companies hosting a capital generation event, there are often ‘caps’ put in place, which indicate a limit to the amount of funds they are looking to raise. A ‘hard-cap’ is the upper limit, at which the company will cease raising funds, and close out their event.
Established in 1946, the Howey Test, refers to a set of parameters and questions utilized by the Securities and Exchange Commission, in an effort to determine if an asset falls under the definition of a security.
KYC refers to ‘know-your-client’ or ‘know-your-customer’. KYC simply refers to a required database on investors by potential securities issuers. This data includes everything from identification, to financial awareness, and more. As the various forms of security tokens are simply digital representations of traditional securities, they are also subject to the same regulations, such as KYC.
Liquidity refers to the difficulty with which an asset can be bought/sold. A highly liquid asset will be easy to quickly convert to another asset. An illiquid asset will be difficult to sell, typically due to a lack of buyers.
A marketplace provider specializes in providing a trading platform for blockchain based digital securities. These platforms act as a secondary marketplace where investors can buy/sell digital securities. In doing so, these assets gain higher levels of liquidity, which would not be attainable otherwise.
A security token is a blockchain based, digital representation of a security. As such, they are subject to the same regulations and compliance measures that their traditional counterparts are. A security token differs from a tokenized security in that they are an entirely new construct, rather than simply wrapping up an old one within a new delivery construct.
A smart contract is a blockchain based contract, which is self-executing. When creating a smart contract, specific action and reactions can be encoded into them. This allows for transactions to take place between anonymous parties, without the need for an intermediary.
When undergoing a capital generation event, a company will typically set both a soft, and hard, cap. A soft-cap refers to the minimum amount of funds that the company is looking to raise. Often the soft-cap is used as a minimum threshold needed to attain a greenlight for token issuance. If not met, funds are typically returned to investors.
A Stablecoin refers to a cryptocurrency which is pegged / tethered to a traditionally stable asset such as the USD or even precious metals. The goal of such assets is to allow for their holders to more easily enter/exit positions when investing, while escaping the volatility typically associated with cryptocurrencies
A Tokenized Asset refers to anything from a car, fine art, real estate, and more, which has seen its ownership sold off in the form of a digital token.
A tokenized security refers to a security which has been ‘wrapped’ in blockchain technology, and delivered as a token. These tokens are imbued with the same rights and characteristics as their paper counterparts.
The role of a transfer agent revolves around financial bookkeeping. This involves recording transactional data, including asset ownership, and more. Transfer Agents are typically utilized by companies which have issued some form of security.
Often issued through an ICO, as a means to raise funds, utility tokens are blockchain based holdings which are not representative of an investment, but rather rights to the services or product of a company. They are not securities, and must be careful in their structuring in order to avoid being construed as such.