Most likely, if you are reading this article, you already know something about Security Tokens and STO, and you also have an idea of how they differ from ICO and IPO (if not, then we have the article on this topic). Therefore, we will not discuss whether regulation is needed in the area of STO, but will immediately turn to the guidebook for those who have already decided that they want to conduct their Security Token Offering in full compliance with the law. And now it remains only to decide the question – in accordance with the rules of which country to register the offer, and also what rules will affect your sale.
In the jurisdiction of which country to conduct your STO?
Regulation of financial markets is carried out mainly by government bodies. They can be called differently – agency, authority etc. But the general meaning of them does not change. Why is it the prerogative of state bodies – only the state can provide not only monitoring, but also control over the activity. A private company could also analyze the information, but it would not have the authority to take any real action.
These regulators can have their own various legal acts that define the rules according to which financial instruments can be created, sold, and so on. These rules may be called differently by different organizations, but their essence does not change.
For many, financial regulation is associated with the U.S. Securities and Exchange Commission. But the proposal in this area is not limited to only the SEC. In the world there are already represented various agencies, in particular European and Asian. And we can expect that in the near future countries from all over the world will join in the competition, because this will make it possible to attract considerable funds to the economies of these countries. Below we look at the list of regulators that already allow STO.
U.S. Securities and Exchange Commission (SEC) (United States)
As we have said, the US Securities and Exchange Commission is a major player in the regulation of STO and Security Tokens. This is not surprising. Before, they were the ones who were most active in combating the illegal raising of money through the ICO, when securities were sold under the guise of Utility tokens. And secondly, we all understand that at the moment the American securities market is the most developed and largest in the world in all respects – from turnover to the cost of placed securities. And the companies traded under the rules of the SEC are traditionally the highest quality and most reliable, which is largely due to the most stringent rules for passing all legal procedures. But it is precisely these procedures and rigor that make it impossible to call the SEC the uniquely the best choice for STO. Adherents of the blockchain and cryptocurrencies are generally not very fond of various regulations, and advocate for the free market. In addition, the cost of passing all legal procedures is quite high. However, if you are a serious company that has a sufficient budget and wants to attract large sums of money from international investors, regulation by the SEC rules is probably the best choice at the moment. Investor confidence in companies that have passed the control of the American commission is traditionally very high.
The Commission is a body established to regulate securities in 1934. At the same time, the Securities Trading Act was issued. A year earlier (in 1933) a law on securities was issued. There are a few more laws in the field of US finance, but these two are basic and sufficient for a common understanding.
The SEC has foreseen and created a number of legal acts that regulate various types of securities and their sales. They are called Regulations or Rules. They allow you to organize offers of securities on various conditions, which currently cover a wide range of possible needs and differ in conditions. Here are some of them: Reg A (Reg A +), Reg CF, Reg D (506b, 506c), Reg S. These are the rules that are most suitable for STO and are most likely to be used for this purpose.
As the name implies, it is intended for holding crowdfunding campaigns. It is distinguished by the need to conduct an offer through a special crowdfunding platform (verified by SEC and FINRA). The maximum amount of investment is limited to $ 1,070,000. And the amount that an individual can invest is also limited. Only companies registered in the USA can apply for conducting STO through Reg CF. Investors must also be US citizens.
Recently, significant changes were made to Reg A and some began to call it Reg A +, which caused some confusion, although its official name remained Reg A. Suitable only for US and Canadian companies that were not previously registered with the SEC. The maximum funding amount is $ 50 million (or $ 20 million when choosing Tier 1). It is convenient because there are no restrictions for potential investors (except for US citizenship). The registration process itself, although not very complicated, but more complex than other options, requires SEC approval before the start of fees.
At the moment it is one of the most popular rules that are used to conduct STO. And now we will explain why. This rule allows issuing securities to both American and foreign companies. There are no restrictions on maximum fundraising. As well as restrictions on the size of the investment from one investor. Suitable for all types of securities. Among the shortcomings, only accredited US investors can participate (for 506 (b), up to 35 non-accredited participants are allowed to participate).
The only one of all options that allows investments from non-US investors. This resolution is aimed at offering securities outside the United States and is suitable for both US and foreign companies that want to issue their tokens. That is, even if you do not have a company registered in the United States, you can register in accordance with this decree and sell your to non-US investors tokens but in accordance with US laws.
However, it should be understood that if you are an American company, then most likely your proposal (within the framework of Reg S) will have significant limitations. That is why the simultaneous combination of two rules is recommended. Regulation S is convenient to use as an addition to Reg D (their simultaneous use is allowed), which is very similar, with the only difference that Reg S allows you to raise money from foreign investors without the requirement for investor accreditation. That is, you can raise money under STO from US investors in accordance with Reg D, and within the same offering raise money from investors outside the United States according to the rules of Reg S.
Financial Industry Regulatory Authority (FINRA) (United States)
This organization is not directly involved in regulating the issue of securities. However, it exercises separate oversight over the various organizations involved in the process of issuing and selling securities. In particular, it controls the activity of brokerage firms and exchange markets. Thus, FINRA does not directly regulate Security Tokens issuance, but it is nevertheless desirable to consider its directives if you plan to issue tokens according to SEC rules.
European Parliament and the Council of the European Union (European Union)
Regulation (EU) 2017/1129 (also known as “New EU Prospectus Regulation”, “Small offering exemption” of the European prospectus directive”)
Like the USA, the European Union also took measures to simplify the access of small and medium-sized businesses to attracting capital. For this, some updates were made to the already existing rules. The main problem of the previous rules was that the cost of preparing a securities issue could reach about 700,000 EUR, which is an incredible amount, and in the case of small issues they ate a large part of the money and deprived it of any meaning. With the new rules, the public offerings up to 8,000,000 EUR (the exact amount depends on the particular European country) can register their offering under the simplified scheme. But European rules have a number of limitations. In particular, the threshold for exemption to 8M EUR is applicable only to offers within the same country, for the cross-border offerings the old limit is applied – 5M EUR.
Thus, in general, most European countries obey precisely the legislation of the European Union, and in particular this rule. It follows that their rules, although they may differ slightly, are generally within this framework. There are a number of countries and regulatory bodies in the European Union under which regulations some STOs have been conducted or planned. Among them are:
The U.K.’s Financial Conduct Authority (FCA) (United Kingdom)
We should also mention the UK regulator, since this country, although currently a member of the European Union, at the same time largely leads an independent policy, particularly in the field of finance. For example, in 2019, FCA issued crypto asset guidance, which clearly indicated that security tokens should follow FCA’s regulations. But in general, at the moment, the conditions for the release of tokens for most cases will coincide with the EU Regulation.
There are also regulators in the Asian region. Already in the context of security tokens, such countries as Singapore, South Korea, etc. were mentioned. They should be used primarily by those who are interested in the Asian market.
In general, summing up it is worth saying that regardless of the jurisdiction of which country you choose to hold your STO, you will need a good lawyer to understand all the details and subtleties. Otherwise, there is a great chance to make a mistake and lose money or even investor confidence.