Why the Regulation A+ for a Securities Token Offering (STO)?
DISCLAIMER:
1. The author is not a lawyer. The author does not pretend to be a lawyer. Nothing in this posting is legal advice.
2. The author is not an accountant and does not pretend to be an accountant. Nothing in this posting is financial advice.
3. Doing a Regulation A+ is an expensive and lengthy process.
4. Lastly, I am not a bot.
Introduction
In a previous discussion [https://medium.com/knowbella-tech/so-you-want-to-launch-a-sto-d047ef6a8f50] it was posited that in the United States (U.S.) a regulated STO is a preferable route for issuing tokens than an un-regulated Initial Token Offering (ICO).[1]
Some smart people have asked us why do a STO via SEC Regulation A filing instead of a Regulation D/S?
First, Knowbella Tech is an open science company. Similarly, we believe generating wealth should be open to all.
Regulation D and S
The Reg D is only open to accredited investors.
If one is a non-accredited cryptocurrency investor, s/he cannot participate in a STO. According the U.S. Securities and Exchange Commission (SEC), an accredited investor is any “person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000.”[2]
When a company filing a Reg D seeks to offer equity to non-U.S. investors, a Reg S is required too. However, under the Reg S, the accredited investor status does not extend to non-U.S. investors.[3]
If one does not qualify as an accredited investor under the $1,000,000.00 rule, there is an alternative. Any “person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year” is considered an accredited investor.[4]
It is suspected that many who wish to invest in an STO do not qualify under the Reg D as high net worth accredited investors. It is assumed these SEC requirements exist to protect non-accredited investors from themselves and fraudulent offerings. It is a classic “the rich get richer” while the rest cannot participate in the opportunity to grow wealth. It is assumed that non-accredited people are not sophisticated enough to make intelligent investing decisions. This may contribute to stratification of socioeconomic classes, but that is not the point of this discussion.
Regulation A
The Reg A allows any investor to participate.
The Reg A offering does not have the same high net worth accredited investor status requirement. In exchange for allowing crowdsourced investors the SEC requires intensive filing and reporting requirements.
Under the Reg A Tier 2 offering, “individual investors are limited in how much they can invest to no more than 10% of the greater of the person’s, alone or together with a spouse, annual income or net worth.”[5]
The Reg A STO is open to all investors, not just the high net worth. It is sometimes referred to a crowdfunding model. This means everyone can participate and realize a return on investment (ROI). This addresses the often asked question: “Why should only the rich have access to the generation of wealth?”
Yes, it is true that the Reg A filing is more expensive and time consuming than a Reg D/S. The reporting requirements to the SEC by a company pursuing the Reg A are extremely high because it is assumed non-accredited investors require more protection than accredited investors. That is paradoxical because non-accredited cryptocurrency investors know far more about the technology and economics of blockchain-based tokens and cryptocurrencies than the very regulators setting and enforcing the rules.
Reg A qualified companies are required to file semiannual and annual reports; more costs for the company. The Reg A might be thought of as a mini-Initial Public Offering (IPO) since it allows non-accredited investors just as IPOs on public exchanges. Further, with just a bit more effort, those companies qualified under Reg A Tier 2 can get their equity to trade on public exchanges. This provides liquidity to the investors holding the equity.[6]
Summary
Crowdfunding under the Reg A is not easy. It is expensive and time consuming. If a company is qualified under the Reg A by the SEC, it has been heavily vetted. By setting a very high threshold for filing and reporting, the SEC seeks to reduce the risk for non-accredited investors. That does not mean fraud cannot happen and investors should always consult their counselors for legal and financial advice (this document does not constitute advice).
LEGAL
Of course, in order to protect investors, please read the following…
This document contains forward-looking statements that are subject to many risks and uncertainties. Forward-looking statements include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned product development; our intellectual property position; our ability to develop and grow the platform; expectations regarding platform launch, user growth and revenue; our results of operations, cash needs, spending, financing condition, liquidity, prospects, growth and strategies; the industry in which we operate; and the trends that may affect the industry or us. Although we believe we have a reasonable basis for each forward-looking statement, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity may differ materially from the forward-looking statements contained in this document. Any forward-looking statements that we make in this document speak only as of the date of such statement, and we undertake no obligations to update such statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
This is not an offer or solicitation to sell securities in any jurisdiction. Any such offer or solicitation will be made only by means that are in compliance with applicable securities and other laws. No money or other consideration is being solicited in connection with this document, and if sent in response, will not be accepted. No offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement on Form 1-A is qualified pursuant to Regulation A of the Securities Act of 1933, as amended, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance is given after the qualification date. Any person’s indication of interest involves no obligation or commitment of any kind. Potential investors may obtain a copy of Knowbella’s most recent Preliminary Offering Circular by emailing Jason E. Barkeloo, Jason@Knowbella.Tech.
[1] https://medium.com/knowbella-tech/so-you-want-to-launch-a-sto-d047ef6a8f50
[3] https://www.sec.gov/rules/final/33-7505.htm
[4] IBID
