Global Security Token Regulations: What You Need To Know

The initial coin offerings (ICO) market has birthed a new cryptocurrency-based fundraising model that allows any project in the world to raise funds by selling a digital token in exchange for digital currency to early backers. This new method of funding created the ICO boom of 2017, which enabled blockchain startups to raise over $5.6 billion in total with an average amount raised of $12.7 million.

In 2018, the ICO market climate changed significantly as regulators started to clamp down on this booming but unregulated market to protect investors from losing funds by investing in low-quality or fraudulent projects.

As a result, so-called “security tokens” gained popularity as they provide companies with the ability to raise funds through token sales but, at the same time, enable investors to buy “real” financial securities that come with a degree of regulatory protection.

What are Security Tokens?

Security tokens, which are issued through security token offerings (STOs), merge the concept of digital tokens and traditional financial securities by enabling investors to hold regulated financial securities in tokenized form.

In its most standardized format, security tokens provide holders with equity in the issuing company. Known as equity tokens, this type of security token acts in the same way as a traditional share in a company by giving the holders a claim on the company’s assets. An example of an equity token would be the tokens of Overstock Inc. subsidiary, tZero.

Security tokens can also take on other forms, such as tokenized debt offerings, where a company issues a “blockchain bond” to investors instead of equity.

Aside from being a regulated investment vehicle, security tokens offer several benefits including:

• 24/7 trading
• Increased liquidity
• Fast settlement
• Fractional ownership
• Wide investor base
• Reduction in issuance costs

Due to the long list of benefits of security token offerings over traditional initial public offerings, some blockchain community members believe that they have the potential to replace traditional securities in the future.

Morgan Creek Digital’s Anthony Pompliano, for example, said on Twitter: “The security token market is going to be larger than the US public equities market.”

Security Token Regulations

As security tokens are investment contracts that are being sold with the anticipation of future returns for its holds they are covered by securities laws. Securities laws vary from country to country and there is still some potential for regulatory arbitrage, but companies that are serious about issuing a security token will ensure that they meet all regulatory requirements before solicitings funds from investors.

United States

In the US, a security token offering falls under Federal Securities Law and would likely make use of one of the following regulations: Regulation D, Regulation A+, or Regulation S,

Regulation D is an exemption that allows offerings to avoid SEC registration provided they only sell securities to accredited investors and ensure that all information provided during the securities offering solicitation is “free from false or misleading statements.”

Regulation A+ enables companies to issue a security qualified with the SEC to non-accredited investors for a total amount of up to $50 million.

Finally, Regulation S applies to companies based outside of the US who are, therefore, not subject to the registration requirement under the Securities Act of 1933. These companies, however, will still need to abide by securities laws in their own jurisdiction as well as each country in which they are offering their security.

European Union

Similarly to the US, Europe has taken the approach that if a newly issued digital token has the features of a securities offering, then the token sale will fall under the EU’s pan-European securities laws as laid out in the prospectus directive and the prospectus regulation.

Security token issuers need to draft a prospectus and receive approval for their prospectus by the country’s financial regulator in which they are operating.

Switzerland

According to the Swiss financial regulator, FINMA, digital tokens that promise a claim on a company’s assets, future income or future cash flows will be classified as securities under Swiss law. This includes tokens that represent a share in a company, a bond or another type of non-derivative financial security.

Asia

While token sales are currently banned in China and South Korea (with the latter expected to reverse this decision soon), most financial regulators in Asia have taken a similar stance towards security token issuance as their counterparts in the US and Europe.

In Singapore, security token offerings fall under local securities laws as set out by the Securities and Futures Act (SFA) and would be subject to applicable rules and regulations. Under the SFA, securities include shares, debentures, contracts for differences, and similar investment products.

Interestingly, no digital token offering has reportedly yet been approved by the country’s financial regulator, the Monetary Authority of Singapore (MAS).

The same goes for Hong Kong. According to the Securities and Futures Commission (SFC), digital tokens that function like shares, debentures or pay interest are regarded as securities and thus fall under “regulated activity.” “Parties engaging in a “regulated activity” are required to be licensed by or registered with the SFC irrespective of whether the parties involved are located in Hong Kong, so long as such business activities target the Hong Kong public,” the SFC announced in a statement.

While the legal situation for security tokens is reasonably clear in the main jurisdiction where token sales are being launched, the wider token sale market — which includes the sale of utility tokens, currency tokens, rewards token, etc. — is still challenged by the lack of a detailed regulatory framework.

CentrumCoin’s Solution to the Token Sale Market’s Biggest Challenge

The biggest challenge for the ICO market for both startups and investors is its unregulated nature. The lack of industry-wide regulations could lead to legal issues for issuing companies and fails to protect investors from falling victim to scams.

Switzerland-based CentrumCoin has recognized these challenges that issuers and investors are facing in the tokenized fundraising market and aims to solve them by offering a service that provides companies with globally compliant STO and ICO execution as well as giving investors the opportunity to invest in pre-screened blockchain startups’ token sales at private sale stage.

Moreover, CentrumCoin also finances the token sale process of the partnering blockchain projects, effectively underwriting the token sales that it launches. CentrumCoin is, therefore, not just an STO and ICO fundraising platform but also a fund that focuses on innovative cryptocurrency and blockchain projects.

To learn more about CentrumCoin, visit our website at http://centrumcoin.com/.