Regulation D: A Love-Hate Story for Security Token Offerings
While Reg. D is praised as the mechanism that makes Bitcoin transactions cheaper than bank withdrawals, the same regulation is also the underlying reason that security tokens are largely unavailable to 93.5% of USA-based investors. At this early conjecture between utility, scalability, and acccess, Reg. D’s impact on cryptocurrency is still a story largely untold.
What is Regulation D?
Regulation D provides exemptions through which small, private companies are able to raise money without having to register as a security with the Securities Exchange Commission (SEC) in the United States of America.
The regulation has three specific exemptions for how a company can be resolved of registering a security with the SEC: Rule 504, Rule 505, and Rule 506.
Then, Rule 506 is split into two parts: 506B and 506C. The latter two parts of Rule 506 are most important to online crowdfunding.
More information about Rules 506B and 506C can be found here.
How does Regulation D Effect Cryptocurrency?
Regulation D effects cryptocurrency right now because of the compliance component of a major trend in the market… security tokens.
Many Security Token Offerings (STOs) are applying for Regulation D exemption. More specifically, STOs are applying for an exemption of the rule that makes securities offered to Accredited Investors only (we’ll briefly explain more about the qualifications of Accredited Investors in just a minute).
One emerging media narrative from the last 6 months is that security tokens are the way of the future. I’m not too unwise in so far as to understand the benefit of security tokens. In general, security tokens provide enhanced liquidity, a cheaper path to compliance, a faster path to compliance, and more company disclosure.
If more companies continue to register securities using the Regulation D exemption, then more securities may only become exclusively available to Accredited Investors. Again, that leaves out close to 93.5% of Americans, and lets face it, the rich are getting richer and the poor, pooorer. That number might only go north closer to 100.
Why Are the Benefits of Regulation D?
The exemption allows a company to raise funds without going through a public offering. Public offerings can take years to plan, be very expensive, and they allow unwanted outside influence to enter into the company. On the other hand, Reg D. offerings are quicker, less expensive, and offer a more direct approach to investor selection.
Regulation D offerings target accredited investors. This audience is seen as a particularly stable market with a higher-than-average income or even above average income compared to the general population. Accredited Investors can contribute more per person than something like a Regulation A+ offering that is made to the general public.
Underwriters can charge fees as high as 13% for public offerings, so Reg D. circumvents that middle person and allows what is considered Direct Public Offerings. Taking out the intermediary saves money and time, while containing the amount of outside influence that is let in.
Why do some people think Regulation D is bad?
While Regulation D. is hailed as a cheaper, more time-efficient option from a compliance perspective, however, it is also viewed in some cases as discriminatory against investors without above average income. That is because Regulation D offerings within the USA are only available to Accredited Investors. In order to be an Accredited Investor, you need to earn over $200K per year or have $1M in savings. AKA not many people.
In other words, Main Street loses so that the market can be contained within a group of the ultra-rich.
How Will Regulation D effect the Future of cryptocurrency?
The Regulation D exemption will allow smaller, private companies to create technology such as Alternative Trading Systems at a faster and cheaper rate compared to the benefits offered through other exemptions. Reg. D. will also lead to a rise in Dark Pools like the one created on tZero’s platform. In turn, more assets will be tokenized and traded on these platforms, especially within super affluent communities.
These platforms are a bridge for Wall Street, the modern banking structure, broker dealers, and institutional investors to enter into the digitalized economy. The benefits provided to, for example, the issuance process is just one of the many examples of why a tokenized world is coming, and why these aforementioned ultra-rich groups have no choice but to join it. Alternative Trading Systems are a bridge between these worlds, an entry point, and eventually the lifeboat.
Regulation D will expedite the arrival process for technology compliance, but it will come at the expense of Main Street gaining access to the same investments that Wall Street does. What else is new, America?
Reg D discriminates and only sits at the cool kids table during lunch time, where all of the Accredited Investors are. Unless near-century old securities laws are changed, this will continue to be the case.