3 Ways Digital Securities Are Changing Compliance for Issuers

Juan M. Hernandez
Jun 14 · 3 min read

How well do you know your investors? For private and non-listed securities issuers, listing and administering assets means managing a litany of regulations around investor qualifications, shareholder limits and other compliance considerations.

Depending on the type of private placement, the Securities and Exchange Commission (SEC) has strict laws around asset ownership and transfer, with severe penalties for issuers who fail to meet requirements. In the traditional markets, the time and resources required to vet investors and ensure transactions meet compliance standards has often limited the pool of prospective investors for issuers.

By offering these assets digitally, issuers can streamline many aspects of the compliance process. As a digital representation of a security like real estate, venture capital or private equity, digital securities are programmable to ensure full compliance with SEC regulations. Digitizing these assets eliminates many of the manual processes involved in compliance, with smart contracts enforcing regulations automatically with each trade. Here are three ways digital securities can help issuers manage compliance requirements and ultimately reach a broader pool of investors more easily.

  1. The future of AML/KYC standards

Ensuring that investors meet identity verification standards, such as and know-your-customer rules, has historically been a time-intensive process for private securities issuers. Depending on the security, each investor must meet a unique set of requirements around geographic location, accreditation status and other factors that determine their eligibility to invest.

Digital securities are helping to streamline the investor qualification process by baking identity verification into the infrastructure itself. While issuers still need to submit AML/KYC documentation as part of their overall compliance review, secondary trading platforms then verify AML/KYC criteria automatically to ensure only whitelisted investors participate in trades. In the future, that process could become even more seamless for issuers as verification moves to a distributed ledger. have announced regtech initiatives to create a decentralized, shared AML/KYC database, which would verify each investor account automatically and eliminate the need for redundant, manual checks.

2. Opening up compliant trading for non-accredited investors

While many believe only accredited investors can own private securities, certain securities can trade freely between both non-accredited and accredited investors once their lockup periods expire. Since brokers typically only connect issuers to a small pool of qualified buyers, however, it’s rare for non-accredited investors to gain access to these deals.

The digital securities market offers access to a much larger universe of fully vetted investors, with facilitating trades between accredited, non-accredited and global investors who meet appropriate requirements. Since trading platforms are built to enforce investor qualifications automatically, issuers can spend less time administering one-off transactions and and minimize the risks of selling to the wrong person.

3. Keeping track of shareholder limits

Under private placement regulations, issuers may need to limit the number of accredited or non-accredited shareholders who can own the security at any given time. For example, certain securities can’t have more than 2,000 U.S. shareholders at a time. With clearing and settlement processes often taking weeks for traditional alternative assets, maintaining a record of who owns what — and how much — can be a challenging task for issuers.

Digital securities offerings can help make tracking shareholder limits simpler by offering a real-time, immutable record of ownership. Using a combination of distributed ledger technology and compliance protocols, digital securities provide a constantly refreshed snapshot that both regulators and issuers can rely on to satisfy shareholder limit requirements.

For issuers evaluating offering a digital security, consider whether your chosen service providers, such as obtaining broker-dealer registration. As digital securities reshape the overall compliance process, working with partners committed to compliance can help issuers minimize risk while opening up new opportunities.

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Juan M. Hernandez is the CEO of Openfinance, the first U.S. regulated platform for the secondary market trading of digital alternative assets. Juan is a serial entrepreneur, technologist and polymath experienced in financial markets, exchanges and blockchain technology. He holds a CS degree from Northwestern University and an MBA from the Kellogg Graduate School of Management.

Openfinance

The next evolution of alternative assets. Openfinance is the first U.S.-regulated platform for the secondary market trading of digital alternative assets.

Juan M. Hernandez

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Juan M. Hernandez is the Founder and CEO of OpenFinance Network, the trading platform for security tokens and other alternative assets.

Openfinance

The next evolution of alternative assets. Openfinance is the first U.S.-regulated platform for the secondary market trading of digital alternative assets.