Security Token’s Greatest Hurdle
The excitement revolving around Initial Coin Offering (ICO) is that the access to fundraising is now democratized, anyone with internet access has the opportunity to finance startups and projects. While ICO is an innovative way to get support from retail investors, this type of fundraising activity very rarely satisfies regulatory concerns. Regulators and lead professionals are nervous as the majority of these retail investors do not fully understand where they are investing their money in to.
In the current regulatory framework of the financial market, securities can only be offered to accredited investors due to the complex nature of hedge funds, private equity deals, venture capital funds, and other private placements. For this reason, more than 97% of Americans cannot invest in the latest startups as the SEC fears that un-accredited investors would sink their life saving into untested startups with no track records.
Currently, the way regulators think about mitigating the risks of affecting the entire population is by limiting the ability of most people to access some of the assets the market can offer. The un-accredited or non-professional investors are not in the financing space and therefore may not fully appreciate the risks associated with investing in securities.
The hurdle security token must overcome whether financial regulators should or should not approach this brand new space of tokenized securities the same way they did for traditional assets. Should the regulators limit the number of investors for the sake of protecting the financial background of un-accredited investors so they would not sink their entire life savings into something they do not fully understand?
Alternatively, will laws and regulations be able to evolve to better suit the growing demand for securities tokens?Jumpstart Our Business Act or JOBS Act is a law adopted by the SEC, which liberalized the private placement exemption.Securities offerings not exceeding US$1.07 million over a 12-month period are exempted from SEC registration, allowing early-stage businesses to offer and sell securities to the investing public using crowdfunding. The JOBS Act enables un-accredited investors to participate in crowdfunding investments in startups legally. However, because of the high risk involved in crowdfunding investments, un-accredited investors are limited to only invest up to 10 percent of their annual income or net worth. The JOBS Act encourage funding of startups, but it also protects the investing public by limiting how much they can invest in financial assets that are high-risk, high return.
The crypto market in the past year has proven that retail investors/un-accredited investors are very interested in extremely speculative asset classes that have high returns, which are previously unavailable to them. We believe that the regulatory development of securities token will accelerate. Moving forward, we hope to see the regulatory bodies in different jurisdictions can work closely with crypto related businesses to establish a new framework that is better suited for securities and asset-backed tokens.
