A Security Token Offering (STO) is conducted under 506(b) or 506(c) of the US, SEC guidelines provided for by the Jobs Act of 2013. This article will focus on 506(c) of Regulation D and Regulation S. The U.S SEC chairman, Jay Clayton believes all utility tokens are likely securities. Given that belief, the SEC has taken a number of enforcement actions as early as 2013 with the volume picking up in 2017-18. Further clarifying the SEC’s position, which is thought to be shared by the EU, Director Hinman made it more clear that the SEC believes most utility tokens to be securities.
These statements and actions, along with other countries’ similar concerns with the SEC are all with the primary intent to protect investors. A Security Token Offering will hopefully satisfy both pending regulations and more importantly offer peace of mind as an investor.
So what does mean from an investors standpoint?
US Investor
- Must be an accredited investor
- Must fill out all KYC/AML paperwork for broker-dealer
- Complete a Reg D SAFT agreement (an agreement clarifying how much one intends to invest)
- Securities (Tokens) will be “restricted” for 1 year, meaning they cannot be sold
- As a point of reference, US investor is based on citizenship, not where you live
None US Investor
- Must fill our KYC paperwork for broker-dealer
- Complete a Reg S SAFT agreement (agreement clarifying how much one intends to invest)
- Securities (Tokens) will be ‘restricted’ for 40 days, meaning they cannot be sold
All potential investors will be provided with a Private Placement Memorandum or Offering Memorandum prior to investment which will outline the investment and when tokens will be issued and all the specific details of the offer.
These steps are designed to clarify the risks associated with the investment. The company will be required to file a Form D with the SEC that includes the names and addresses of the company’s promoters, executive officers and directors, and some details about the offering. This gives the SEC the information they need to pursue enforcement if they should find something inappropriate in the offer.
The use of a Security Token Offering is designed for compliance requiring the company to provide the proper framework and disclosure documentation to help investors have some peace of mind. Compliance, while not as expensive as an Initial Public Offering (IPO) is significantly more expensive than an Initial Coin Offering (ICO) which requires no compliance or regulations. The lack of regulation has allowed for fraudulent activity in the ICO space which as an ecosystem, must avoid for progress and growth. Companies using an STO are attempting to act in good faith to help investors feel confident the offering is not fraudulent. It does not guarantee the offering will be successful or produce gains from the invested amount. STO is inherently speculative and it is possible to lose your total investment.
