Regulated ICO options? Reg A+, Reg S, Reg CF; Sounds like alphabet soup, but what does this all mean?
The cryptocurrency market has erased $700 billion in the last few months; yes billion with a B. Many are looking for answers for this and what is going to happen to the tokens purchased in Initial Coin Offerings (ICOs) aka Token Sales? The good news is that the space is evolving and there are some options for those looking to launch a token in this volatile climate. Let’s take a few minutes and go through some regulated raise options and what this all means.
Regulation D, Regulation S, Regulation A+, Regulation CF?
You start with a rule and that rule states if someone offers securities then they must publicly register. It must be reviewed and ongoing requirements met as your raise capital. The aforementioned are all what are considered “private” securities. People are now raising more money privately than through public offerings. What this means is that rather than launching a public offering on the NASDAQ, funds are raised between individuals and businesses. This means that you have to file what is called a S-1 with the Securities and Exchange Commission (SEC).
Let’s look at these offerings in more detail below:
This is one of the most popular exemption offerings that we see in the cryptocurrency space. It allows for exemption from filing registration with the SEC. To over simplify, businesses are only dealing with “accredited investors.” We saw this with the Simple Agreement for Future Tokens (SAFT); largely in 2017. Accredited investors are people that make over $200,000 yearly or for couples $300,000 yearly or assets over $1,000,000 excluding main residence. It becomes very restricted in terms of eligibility and we hear the negatives because it discriminates opportunity for many smaller investors. Asset owners must wait one (1) year for non-accredited investor sales.
These are securities offered to overseas investors. The United States SEC says they will not apply most of their rules as they would for filing stateside. As long as the offer takes reasonable steps to ensure they stay primarily overseas.
This is called Regulation CrowdFund. The differences here are the offering allows $1,070,000 in the first round from non-accredited investors more widely and accessibly. This is simply an easier way to raise money from a wider range of income demographics and investors.
Regulation A+ or dubbed “IPO-light” requires a filing with the SEC and you can take in non-accredited investors. There are some restrictions around income levels of the investors and their citizenship. Usually a minimum of a $2,000,000 raise requirement and primary place of business must be United States or Canada.
Security vs Utility Token
Now let’s look at token options and classifying here once the offering is set. Simply put, the utility token is designed as a network fee or Gas to run the system is made to be used on. These are for services like processing transactions, digital services like verification of identity and gaming credits. The SEC had criticism of these things because platforms weren’t developed and they were marketing with returns guaranteed/promised.
A security token is something that is designed around a for-profit intent with buying the token. A good example is exchange tokens like Binance; they offer bits and pieces of other tokens in return for holding that native token. Basically, the buyer is paid a dividend for holding onto a token.
How is this all enforced?
Well, as we all observe; the SEC and regulating bodies are making statements to steer businesses around the space; their thoughts on regulation. But, they are having a hard time monitoring transaction for so many alt-coins. Platforms like Harbor and tZero aim to be compliant ready and provide basic checks/audit trails for these security tokens. One of the main concerns is using Regulation D for accredited investors.
Let’s think of this example: John buys a security token and wants to trade it externally. He was able to purchase it because he met income requirements, but he doesn’t know that he cannot sell it to someone before 1 year. This now becomes the responsibility of the exchange/issuer to enforce compliance which is hard to do in this massive, digital world for anonymous tokens.
These regulated exchanges are mandating Know-Your-Customer (KYC) procedures; we see this happening even in non-securities trading platforms like ShapeShift and Changelly.
Auditing and compliance is a complex problem that is not sexy to most, but is an expensive problem with little resolve currently.
Current systems take a public address that a user provides and then the KYC takes place. The business/exchange has to record the identity of the owners pubic address. As this space become more mainstream, this will be inherently slow and even more costly with human intervention. Automating that identity to a pubic wallet/address is going to be the preferred accessibility for both the user and business.
This is a problem that is going to have to be addressed.
We believe buying a tokenized asset will be as straightforward as buying shares of stock online through brokerage firms.
Until then, we have to make a better mousetrap to handle the way identity is tied to digital assets.
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