Not All Security Tokens Are The Same

Alan Lee
Alan Lee
Sep 2, 2018 · 4 min read

As the awareness around security tokens increases with many regulators providing clearer guidelines and rules of play, more startups & aspiring enterprises will be considering the route of issuing security tokens. Their main motive is to tap into the capital market of cryptocurrencies for an alternate source of funding — just like what ICO is doing for blockchain startups.

Offering Security Tokens In The USA
In some jurisdictions such as the United States of America and where USA’s investors will be solicited for funding (regardless in fiat currency or cryptocurrency), there is no choice between STO or ICO if the startups’ token or its business model have not passed the infamous Howey Test. It is generally true that majority of the startups who just burst into the scene will likely fail the Howey Test and are better off conducting an STO. I say better off because there are more merits.

For such startups who decided to conduct an STO, generally they will apply for exemptions under Regulation D and their tokens will be considered security tokens. While their tokens are considered security tokens in the USA, their tokens may resemble more like utility tokens, with no promise of profits, ownership rights to the startup or rights to anything. Further, the issuer — the startup itself doesn’t need to have proven “track records” in managing and handling investors’ money.

Offering Security Tokens In Singapore
Turning our eyes to Asia, and particularly Singapore. The Monetary Authority of Singapore (the MAS) has issued guideline and clarifies that any tokens that resemble securities or capital market products under the definitions of the Securities and Futures Acts (the SFA) of Singapore, has to be in compliance with the SFA. Essentially, it means that the issuer has to register the security token with the MAS (unless exempted), conducts the offering of the security token in compliance with SFA. It also states that the issuer has to be a licensee with the MAS holding a Capital Market Service license (unless exempted). Upon successfully comply with its requirement, the issuer can offer its security tokens to its investors.

The Differences
While the USA and Singapore both allow the issuer to offer security tokens, the security tokens from these countries are not the same. For the man in the street, the following are the differences:

1. Singapore requires the issuer to be a licensee with the MAS holding a capital market service license. The USA doesn’t have this requirement on the issuer under the exemptions of Regulation D.

2. Security tokens issued under the regulations of Singapore will resemble the definition of securities under the SFA. To the layman, it means that the security token may be a share to the company, promise of investment returns, a debenture or a unit of a collective investment scheme. In the case of the USA, the security token conducted under the exemptions of Regulation D, may not have such properties.

3. Singapore requires the issuer to conduct stricter investors onboarding checks. The issue has to conduct Know Your Customer (KYC), Anti-Money Laundering (AML), Counter-Terrorism Financing (CTF), Proof of Residency and Proof of Asset checks on the investors. The USA may not have such requirements under the exemptions of Regulation D.

4. A lodging of a prospectus with the MAS is mandatory in the case of Singapore. In the case of the USA, the Private Placement Memorandum is optional under the exemptions of Regulation D.

5. The issuer from Singapore is required to manage the capital raised from its investors in compliance with the SFA. The issuer is subjected to established functions in audit, accounting, legal, compliance and custodian.

While there are differences between the USA and the Singapore’s approach to offering security tokens, there is no comparison on which country has the best regulation. The importance is that the investors are empowered with the full knowledge and disclosure of investment products that they are putting their money into. And that the issuer is conducting its offer in compliance with the chosen regulation.

References:
Securities and Futures Act of Singapore: https://sso.agc.gov.sg/Act/SFA2001

A Guide To Digital Token Offerings (by the MAS):
http://www.mas.gov.sg/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Securities-Futures-and-Funds-Management/Guidelines/2017/A-Guide-to-Digital-Token-Offerings.aspx

Honour Network

Decentralised governance & incentive tokenising assets with blockchain protocol & decentralised platform adhering to regulatory standards

Alan Lee

Written by

Alan Lee

CEO/CTO Co-Founder Honour Network |Technologist & Advisor To Businesses on Blockchain, Crypto, Tokenize Economy, Smart Technology, Fintech & Proptech

Honour Network

Decentralised governance & incentive tokenising assets with blockchain protocol & decentralised platform adhering to regulatory standards

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