Why You Should Spend More Time Thinking About investing in Security Token Offerings

edeXa — a real Security Token from Liechtenstein

If you wonder what Token would be a good investment for you, the answer is simple: Security Token. The reason is just as simple: This is the only real investment opportunity. Utility Token was not made to be an investment, but rather to use them, to “utilize” them. edeXa offers one of the first Security Token in the world, that is linked to real underlying shares like in the stock market.

Which is the right (Security) Token for me?

In fact, most startups really wanted to offer a Security Token but could not cope with the regulation and technical issues and ended up with something in between and called it a Utility Token. Their initial thought was thinking was, a Utility Token is not a Security (in the sense of the law) and will not be regulated (read: will be a safe haven from the point of view of the entrepreneurs). It turns out, it is not that easy. Few startups reside in countries like Liechtenstein or Singapore whose government is actually open-minded for new technologies and will even provide a dedicated law towards enabling distributed-ledger technologies. This is not only important for the current state. edeXa is certain, that in the future Liechtenstein will continue to support technological changes and their companies. At the same time in many countries, the situation is very different.

Why the international Regulation of Security Token might be important to you

The crypto-world is divided between Utility Token and Security Token. And yet it could all be so easy. If you leave out all the prejudices and look at the facts, everyone can decide for themselves whether a Security Token or a Utility Token is the right Investment. Because there are very good cases for both Tokens. It just depends on what you’re looking for. Let’s take a look at that.

Regulation of Security Token across the world

Cryptocurrencies, Blockchain and ICOs are barely regulated in most countries. Currently, this is not dangerous, because startups often do not violate any law and remain in a (dark) grey area. But there are exceptions, mainly China and the USA. While China’s stance against ICOs remains a local issue, the USA’s decision has much broader consequences for ICOs all over the world.

The American Securities and Exchange Commission (SEC) doesn’t care what companies say about their Token, but how it is designed. Relevant is how it appears to the eye of an investor. Should it really only be used as a utility medium (say Airline Miles) or is it meant to be an Investment?

Because if it actually is an investment, then these companies have to comply with financial market regulations and in the past, many have not.

The possible consequences for the future? The company has to pay hefty fines, the executives face harsh penalties (maybe even prison) and Investors may lose their complete investment due to legal issues or uncertainty.

The SEC uses four categories to decide whether a financial instrument should be deemed a security and thus fall under the purview of the SEC. The criteria are:

  • It must be an investment of money
  • With an expectation of profit
  • In a common enterprise
  • With the profit to be generated by a third party.

Why is it relevant what the SEC does and say

Now, why is it important to startups around the world what the SEC says but not really what other countries do. This is mainly connected to the banking industry. All banks around the world need access to the American market, the New York Stock Exchange and the Dollar. To get this access, they have to play by the rules of the American authorities or else they will lose access to these privileges which can be both, dangerous and very costly to their business. Furthermore, if American Investors take part in an ICO, the SEC might view it as an American investment and this could have direct consequences for the company, even if it sits in Germany, Malta or France.

Therefore, we at edeXa are happy that the Liechtenstein Financial authority (FMA) has checked out our Security Token Sale and that we can honestly offer one of the first Security Token Sales in the world. Here are just one of many examples of how the SEC subpoenas about 80 ICO related companies with potentially harsh consequences.

What makes a Security Token so different?

In short: the underlying shares or rights. Currently, Tokens itself have no right and therefore Investors in Utility Token have nothing but the trust in the company or the word of the founders. How often this has backfired show the multiple exit-scams and disputes between the owners and legal issues. With edeXa’s Security Token all Investors are written down in the share register and have the same rights arising from the underlying share.

Do “Security Tokens” automatically require regulation?

First of all, no. Whether a Token is called a Security Token or Utility Token is not a sufficient condition to say anything about regulation. In fact, the regulation looks much closer what the company (the token issuer) really does with the token and what the intended usage is. The regulation depends not on what a company wants but what it really does.

Some companies tried to deliver some kind of Security Token but called it a utility token to escape regulation. These startups now face scrutiny from various financial market authorities like the SEC in the United States of America. Security and Utility Tokens are thus not a protected name but just a description that anyone can use. Therein lies the difficulty in deciding when a Security Token has real value.

What is the Howey Test and why is it important?

You sure have heard the name Howey a lot in regards to tokens and regulation. It was the name of an agricultural company in South Florida in the first half of the 20th century. The main line of business was citrus fruits like oranges. But the company didn’t stop there, got creative and started to offer people the opportunity to come to buy a piece of their land as well. For that time, the business idea must have been similar creative as the blockchain is today. These people didn’t run the area but instead, Howey did. The company did what it did best and took care of the plants, harvested the fruits and made them ready for shipment.

Investors will receive the proceeds from this process, and Howey receives more money to fund its activities. How did the SEC start to care for it? The company eventually did go into financial troubles and Howey did not pay anything back. Sounds familiar? Investors have faced the same troubles, some early contributors of ICOs face now. Investors were left with nothing but promises. The investors later claimed that they were promised an investment opportunity arising from the citrus growing and expected a financial reward.

Explanation on What the Howey Test is about

In this particular case, the citrus grove was bought with money and an expectation of profit for a group of investors. These profits largely depended on factors like the weather and Howey’s ability to operate economically. The profit from Howey later goes largely to the pool of Investors and they again depend on Howey, as they do not interfere with the day-to-day business. This is a classical security and is very similar to securities in the stock market. Yes, a little bit smaller in company size but nevertheless securities.

What happened to the investors sounds all conspicuously close to what happened in a recent month to contributors from Initial Coin offering. edeXa will avoid this and has cleared all legal hurdles beforehand with lawyers and the financial market authority. This protects the company edeXa and you as an investor.

Are Security Tokens safe? They certainly can be …

As with all young business, cryptocurrencies and Tokens are still in its infancies and need time to develop. However, it is possible to design investor-friendly and secure Tokens, given the company resides in the right jurisdiction. One example, Tokens should be linked to traditional rights (for example ordinary shares). To be clear, even if all hurdles are cleared there remains the ordinary business risk, that every business in this world is subject to. Business risk is a basic component of why Investors will get a reward for their money. So while business risk is unavoidable, legal uncertainty is easily avoided with the right Security Token.

Photo by Guillaume Bolduc on Unsplash

edeXa wanted to give our investors legal certainty and make them real investors. We have discussed our Security Token with the local financial market authority and cleared all questions. Investors can relax and follow the interesting development of edeXa. We will deliver a safe Security Token and you don’t need to be worried about regulatory uncertainty and hackers. You can invest in edeXa with an eased mind.

About edeXa

To find out more about our ongoing STO (Security Token Offering), please feel free to visit edexa.io and join our Telegram Group (https://t.me/edeXa), follow us on Twitter (@edexablockchain), or simply send us an e-mail: info@edexa.io