Security token offering also referred to as STO, is a security which is represented as a token on the decentralized ledger. STOs were emerged due to the lack of regulations in Initial Coin Offerings as a way to protect investors from scams and frauds. They have gained a lot of popularity, making 2019 a year of security tokens.
Now, the question is what is security token offering, how it exactly works and what are the regulations it should follow to become a compliant security token.
What is a Security Token?
A security token performs the functions similar to that of conventional security except that it acknowledges ownership via transactions saved on the blockchain. Security tokens protect investors from all kind of scams as they are to federal laws that administer securities.
Because security tokens are tokenized on the blockchain, smart contracts can execute, removing the involvement of third parties from the ecosystem. Security tokens are actual financial securities and therefore, are backed by the revenue of issuing company and assets.
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If you want to launch a security token, you will have to register it with the SEC. Complying with regulations imposed by SEC is not an easy process; instead, it is a complex process for the established business.
Following are some of the crucial regulations that you need to understand to launch a security token offering:
- Regulation S
Regulation S is considered as a safe harbor exemption which is only available to companies outside America. Therefore, security token offering reg S is not subjected to the registration requirement under the 1993 Act’s section 5.
However, creators of security tokens have to follow the security regulations of the country where they are supposed to be issued. The Securities and Exchange Commission (SEC) in the United States used Reg S to simplify the application of the Securities Act registration requirements outside the US and its territories.
- Regulation D
Regulation D allows a specific offering to avoid getting registered by the SEC when Creators fill form D after the securities are sold.
- Issuers who are offering RegD offering can request offerings from investors in compliance with Section 506C.
Now, the question is, what do you require to comply with Section 506C? To answer your question, Section 506C needs verification that the investors are accredited and the information provided during the solicitation should be free from misleading or false statements.
Regulation A+ allows the security token creator to provide SEC-approved security to non-accredited investors via a solicitation for a maximum of $50 million in investment. This regulation is ideal for established startups because it can put limitations on offering two years of financial statement.
Besides, Reg A+ does not have restrictions on resale, unlike Reg D, therefore, bringing more liquidity to markets. As the issuance of Regulation A+ takes more time as compared to other regulations, it is quite expensive than all other regulations.
The regulations mentioned above are required to launch a security token in the United States. However, every country has its own set of laws for issuing the security token offering. We shall now discuss the regulations needed to be followed in some other countries as well.
Following are the regulations required to launch a security token offering in the Middle East:
A committee was founded by the Israel Securities Authority (ISA) in August 2017 to determine the applicability of the current Israeli Securities Laws to the tokens sales. ISA has decided to assess the sales of tokens on a case-by-case basis.
ISA defined the security token as a cryptocurrency, authorizing the token holder to rights of ownership or the future cash flow in a particular firm.
United Arab Emirates:
The UAE SCR (Securities and Commodities Regulator) has decided to introduce regulations in the Initial Coin Offerings in the country. They decided to introduce regulations for stating tokens as securities.
The Dubai International Financial Services Authority (DFSA) governs the securities held in the Dubai International Financial Centre; on the other hand, securities in Abu Dhabi are regulated by the Abu Dhabi Global Market’s Financial Services Regulatory Authority.
Following are the regulations required to issue the security tokens in Asia:
The Monetary Authority of Singapore (MAS) has launched a guidance series for sales of tokens. As per the Singapore Government, companies must register and give their prospectus to MAS before issuing STOs and unless passed for any of the exemptions mentioned in “A Guide to Digital Token Offerings,” by MAS.
Unlike the approach followed by its native land, China, Hong Kong announced that they could provide the sale and offer of securities. Parties involved in a regulated activity should be registered or licensed with the Securities and Futures Commission (SFC) whether the parties belong to Hong Kong or not.
We have explained the regulations required to launch the compliant security tokens for a few countries. If you want to understand the concept of security tokens in more detail and the regulations for other countries, consult the team of STO experts who can guide you through the entire process.
Akash Takyar is the author of Blockchain Technology and Business book. He is the co-founder of LeewayHertz and is a consultant to fortune 500 companies including Siemens, 3M, Hershey’s and others. He has a Masters Degree in Computer Science. Akash’s experience of building over 100+ apps allows him to rapidly architect and design solutions. His ability to explain complex technologies in simple and practical ways has resulted in him becoming a popular speaker at colleges, universities, and conferences.