Challenges & Chances of Security Tokens
We are pleased to welcome Jonathan C. Dunsmoor, Esq. for our weekly Interview on Security Tokens. Jonathan is a US corporate attorney who focuses his practice on securities law and regulatory matters including blockchain related offerings, asset management, and corporate governance. He represents private companies, including those exploring blockchain/cryptocurrency opportunities, as well as angel investors and investment funds.
Enjoy the Interview.
What are the biggest current challenges launching a Security Token?
The current challenges vary from jurisdiction to jurisdiction and how well those interact. For example, the Canadians, Malta, and others are further ahead from a legal and regulatory perspective than the US, but since the US is the largest market in the world, and therefore most reasonable companies want to have access to it, they have to play by US laws, too. If Malta issues a security token that is not compatible with US regulations, then the company and its investors could face dire consequences, including recission orders and/or civil penalties. This hurts the entire ecosystem and doesn’t bode well for headlines about blockchain and STOs.
As for the US, the biggest challenge right now is having a Regulations A+ offering registered with the SEC. If an A+ is successfully registered, it would be a true STO for the masses, meaning investors would not have to be accredited in order to participate in the offering. It would be available to the public at large through a launching platform or licensed broker-dealer like Tokenomix. Companies using this offering would be able to raise up to $50M USD, which would be a strong start for a startup or early stage company.
How expensive and time consuming is it to do an STO?
The STO costs can be very expensive, but costs are coming down as the community understands more of what works and what does not work. Companies that don’t want to spend money on marketing will not succeed. Companies that refuse to use acceptable Know Your Customer and Anti-Money Laundering service providers will not have a high number of investors or will not be permitted to trade on regulated exchanges. Companies that refuse to pay for true blockchain development talent will suffer hacks and additional issues with private keys and security concerns, as well as regulatory issues. These types of costs are nominal up front, but incredibly costly when it something goes wrong. We provide the anecdote to clients and potential clients it costs less to fix now than tomorrow when it’s broken.
As for legal costs, these expenses are also coming down and we hope to offer Regulation D/S, CF and eventually A+ offerings at an affordable price to all issuers. The important thing right now is that issuers must be serious about these prospects. If they take this matter seriously and understand the days of the ICO “when moon” “when lambo” craze is over, then most service providers can work with them on the initial, upfront fees.
Where do you see the biggest advantages and risks of Security Tokens?
The biggest advantage eventually will be the speed and accuracy in which an STO can be conducted and launched on a regulated exchange. It will permit companies to “go public” with an incredibly limited amount of effort compared to the nearly $2M it costs to do an Initial Public Offering, as well as the timeframe of a traditional IPO of 2–5 years. Once we have a Regulation A+, we should be able to conduct an offering in about 12–18 months with the possibility of STOs being launched in under 6 months for offerings that are publicly attractive. Imagine if SpaceX did an STO how soon it would be oversubscribed, or if a viral company who is selling the idea of a prototype that they have developed with a major university, like the State University of New York at Buffalo. Companies that take the time to do initial business development and bootstrapping before launching an STO will be the true winners of the next evolution of this space. There will be very few “we have a cool white paper” and “a team that looks nice on paper” STO winners. That era is dead.
What would you recommend to projects considering doing an STO?
We recommend all projects, companies and ventures to look at what an STO can offer and compare and contrast this type of offering with more traditional equity or debt raising options. Right now there are many options available for entrepreneurs and they should pick the best one that works for their company and its investors. If this is an STO, it may provide more benefits than traditional methods and may save time and money in the long run. The idea behind the ICO craze was that we can invest in early stage companies and receive incredible returns; because they are so new, the exponential growth would be something that traditional institutions and accredited investors have witnessed for years. So, if that method was available to the public, they or their financial advisors would be able to take part in the exponential growth opportunities that accredited investors have enjoyed for years. Alternatively, since the law provides a monetary limit on what a non-accredited investor can spend, they only lose that amount and not their entire net worth. Eventually, especially under Regulation A+, there will be capitalization limits placed on investments by non-accredited investors by using just their brokerage wallets. That means these investors will still be able to take part in the STO raising and the companies who do these types of raises will be able to make a difference, not only in their company, but potentially in the entire world economy.
How far are we when it comes to trading Security Tokens? What are the biggest problems and how/when will they be solved?
SPiCE VC already trades on OpenFinance but it is in beta and there are limits but we are closer to trading security tokens than some might think on a truly readily accessible launch pad and exchange. It is something we see happening in the very near future, though exact dates cannot be confirmed at this time. The biggest problem right now is using old law for new technical solutions that do not have a lot of wiggle room. In the old days, innovation was not as quick moving as it is today, so we have to modify and adapt this technology to fit with the parameters of the current law until we are able to modify, or completely change, some of these older laws and regulations. Another big problem is solving issues with private keys and how to store them from a basic regulatory perspective. Governments do not want millions or potentially trillions of dollars going missing because someone misplaced their private key.
Can you explain to us how the transfer of Security Tokens works, both technically and legally? Are my ownership rights “just” stored on the blockchain or is there an “offline copy”?
These are great questions. Ideally, everything about the transactions will be stored on the blockchain from the initial generation of the tokenized assets to the the trading of them. The timestamping function will be much more efficient than traditional methods of stock transfers, and thus allow for more regulatory oversight and permit easier enforcement actions by government bodies, specifically the SEC when insider trading is found. Legally, it’s still a bit complicated because we are using very old law to fit into new and improving technical models, but the folks at Codable Capital are working with us to make sure we have a security token protocol that allows for legal compliance along all areas of the law in the US.
What happens if I lose the private key to my Security Token?
There are some incredibly smart people working on those solutions and, while I cannot disclose them here, this will not be an issue. It cannot be an issue in order for mass adoption and institutional investors to come into this market.
How will it work from a regulatory point of view to transfer Security Tokens across citizens of different legal jurisdictions?
These are smart contracts, so the underlying protocol will see not only who you are, but if you’re allowed to trade these assets. In order for this ecosystem to survive and thrive we cannot have unregistered and restricted tokenized shares flying around all willy-nilly. We need to have order, we need to know that this person is able to accept these shares under their applicable jurisdiction. This will take time, but, when done properly, it will be part of the economic freedom model that Bitcoin was founded on. Though it will not be as anonymous as some in this community may want, it will allow for this community to grow to incredible new heights and mass adoption.
What was the biggest learning you made during the last year?
The biggest lesson I’ve learned is that we are still incredibly early in this space. The blockchain and STO communities appear large, but when you speak to the average person about blockchain technology they have no idea what you’re talking about. It is the equivalent of telling someone in the 1990s about the Internet or smartphones. They will nod their head and look at you like you’re crazy until you say something that makes sense for them. Once that happens, people are excited and they are ready to learn more. That is the biggest lesson I have personally learned. We as a world people are still in the very early stages of this exciting adventure and have a lot to learn.
Where do you see the Security Token Ecosystem in 5 years?
We are very bullish on this space. We believe that this market will allow democratization of the capital markets, which have been gated off since their inception. In the next 5 years we firmly believe that STOs will become a regular occurrence around the world using blockchain because the costs, security and management of information is truly remarkable.
Note: This article is provided as a general informational service to clients and friends of Jonathan C. Dunsmoor, Esq. and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes. For inquiries regarding this matter or others please contact us at Info@DunsmoorLaw.com or 716–371–1936.
Thank you for the Interview!
If you like what you read, please clap (max. is 50x)
To see all new Security Token Offerings (STOs) on STOcheck, click here
To follow us on Twitter & Telegram, just follow us ;)
To get our Monthly Report on the Security Token Market click here
