Regulatory Overview of Security Tokens in Major Economies

Initial Coin Offerings (ICO) as we know, are well-known for being legally freestyle and easy-going towards laws and regulations imposed by authorities. Ever since the DAO attack and more than 80% of ICOs being declared as a scam, the regulators are keeping a strong vigil on the ICOs. The scenario is the same throughout the globe, investors are escaping the ICOs and most regulators have a strong opinion on regulating the tokens. This gave birth to Security Tokens which are backed by real assets such as gold, silver, equity, funds etc., we have covered a few blogs on it on our website.

The question here is that which country will facilitate these security tokens and analyses the great potential it holds. Since the security token ecosystem has no barriers for entrepreneurs seeking to achieve their crowdsale goals, many countries have welcomed it. However, imposing strict regulations on issuing securities which we have discussed in this blog. Different countries have different legal regulations which are equally important to consider while deciding how to launch a Security Token Offering (STO). It’s our attempt to vaguely outline these regulations in major economies that have shown interest in security token offerings.

Let’s explore.

UNITED STATES

In order to launch a Security Token in the US, your security token must be registered with the Security and Exchange Commission (SEC). The token must be qualified for one of the exemption regulations below:

Regulation A+ for Limited Public Offerings

Regulation A+ is often referred to as mini IPO as it is specifically designed for equity and debt offerings. You can offer tokens up to $20m in a period of one calendar year for Tier 1, whereas for Tier 2 this can be exceeded to $50m. Within this time frame, the tokens can be traded on SEC-registered exchange platforms whereas after that they can only be traded as unaffiliated securities. However, the issuance of regulation A compliant tokens is time-consuming than other regulations and only the issuers offering debt securities are allowed to use this regulation.

Regulation D for Private Offerings

This regulation will allow your security token offerings to sideline the SEC requirements, however, it does involve the electronic filing of Form D once your securities have been sold. If all the investors are verified according to Rule 506C then your company can advertise your offerings in the USA.

Regulation S for Foreign Offerings

This regulation is taken into consideration when your securities are deemed to be marketed outside the US, however it exempts US investors from participating in the crowdsale. You as an issuer must abide by the regulations imposed by the country where you are planning your Security Token Launch.

EUROPEAN UNION (EU)

The EU has imposed strict regulations which comes with country-specific rules which are exercised internally by state regulators, however, the concept is similar for pan-EU as the idea is to standardize the legal framework for EU members. Here, you (the issuer) must draft a prospectus and get it approved by the regulators of the targeted geography. Being exempted is the prospectus requirement, by this means you will be able to sell the security in that particular country in a pre-defined limited way unlike public offerings (retail).

For those who are not willing to raise more than 5 million Euros with their STO Launch, you don’t really need to draft a prospectus as your offering would fall under limited offer exemption. Selling your security tokens. In another instance where you don’t need to draft a prospectus is when you are selling your security tokens up to 150 individuals per member state.

SINGAPORE

Digital tokens that MAS determines shall have characteristics of capital market products and must adhere to the guidelines imposed by Singapore’s Securities and Futures Act (SFA). Recent news surrounding crypto trading in Singapore suggest that the Singapore government is welcoming STOs with open arm, however, they are keeping an eagle eye on the regulations being imposed.

In order to launch an STO in Singapore, companies must submit and register prospectus to the Monetary Authority of Singapore (MAS). To kick-start with, you will need a capital markets services license. Likewise, firms offering financial advice on cryptocurrencies, ICOs, STOs require a financial adviser’s license. Without a license, you will be exempted and your proposal will not be considered as a security offering.

In case the digital tokens fall within the jurisdiction of the SFA then they must meet a certain level of requirements, for instance:

• the Offer being made is a very small, usually for an entity or units in a CIS, that is equivalent to a foreign currency or does not exceed S$5m within a 12-month period, subject to certain conditions;
• the Offer is a private placement which is often proposed to 50 or fewer persons within a period of one year; subject to certain conditions;
• the Offer being made is for the institutional investors only
• the Offer being made is to accredited investors, subject to certain conditions;

-advertising restrictions may also apply when it is all about promoting digital tokens

A “race to the bottom” occurs when fierce competition arises from nations (or states) who adopt vastly different regulations for a particular industry.

The ICOs were traveling the road where nations were competing for projects and huge investments by imposing insignificant taxes and regulations. As a result, STOs have gained an upper hand against its nemesis and is whitewashing the stains left behind by the ICOs. For consultation on Security Platform Development, please visit Techracers website.

Disclaimer:

Please do not consider this post as a legal advice as it is published as a general overview. It is advised to seek legal advice before launching your Security Tokens in these economies.