As part of our ongoing research at STOblock, we have undertaken a study which samples data from 56 Security Token Offerings (STOs). The purpose is to understand what type of regulations issuers are following in order to complete a compliant STO.
The methodology for our study includes those offerings that have a regulatory filing/exemption, either planned or approved. Out of the 56 offerings, 12 issuers have been identified with multiple exemptions, therefore values are based on a total of 73 proposed filings/exemptions.
The study yields a number of observations, which we cover on popular jurisdictions, the US and the EU:
United States exemptions account for ~75%
United States exemptions account for ~75%
The SEC has strict rules on security issuances and has a number of exemptions for issuers to rely on. These include and apply as follows:
SEC Rule 506(c) of Regulation D, 45%
Represents most exemptions. The issuer must ensure that investors in the offering are all accredited investors. The issuer can broadly solicit and generally advertise the offering.
Examples:
- BCAP – Funded $10m USD
- Aspen Digital – Funded $18m USD
SEC Rule 506(b) of Regulation D, 7%
The issuer can sell securities to an unlimited number of accredited investors but not to more than 35 non-accredited investors. No general solicitation or advertising can occur.
Examples:
SEC Regulation S, 12%
Allows for offshore participation from non-US persons. The issuer may sell its securities to an unlimited number of accredited investors and up to 35 other purchasers. In all cases, US issuers have combined with either Rule 506(c) or 506(b) of Regulation D.
Examples:
- tZERO – Funded ~$134m USD combined with Rule 506(c)
- Resolute Fund – Deal size $5m USD, combined with Rule 506(c)
SEC Regulation Crowdfunding, 10%
Issuers may sell publicly, however, rules do apply such as a maximum raise of $1,070,000 in a 12-month period and transaction must take place on a SEC-registered intermediary, either a broker-dealer or a funding portal.
Examples:
SEC Regulation A, 1%
Both accredited and non-accredited investors may participate in the offering. An issuer can elect to raise up to $50 million, however, stringent requirements and limitations apply. Prior to the sale, the offering must be reviewed by the SEC.
Examples:
- Blockstack, filed with SEC on the 11 Apr 2019 for up to $50m (approval pending)
12% are exempt under the EU Prospectus Regulation
The EU requires a prospectus in order to comply with security requirements, however, an issuer can avoid the requirement of a prospectus if certain thresholds are met. These thresholds vary for each member state but may include minimum ticket sizes and maximum raise amounts.
Only one issuer, Bitbond, has an approved prospectus by BaFin, which accounts for 1.4% of the sample data.
From 21 July 2019 new rules will be implemented for the EU Prospectus Regulation (EU) 2017/1129, which will make it simpler and cheaper for small and medium-sized businesses to issue securities.
Examples:
Conclusion
To date the US has seen most of the deal flow and investment, however we are seeing other jurisdictions provide guidance on STOs and lower the barriers of entry for issuers and investors. Notably, the EU introduces new rules in July and countries such as Liechtenstein whom have recently passed their Blockchain Act, which provides a legal basis for security tokens. In Asia, Hong Kong SFC recently issued their official guidance on STOs claiming security tokens are likely to be “securities”.
The security token ecosystem is still in its infancy but there are many registration exemptions for issuers to follow to ensure they comply with financial securities laws. Whilst it may be beneficial to access investors in the US or complete an issuance in Europe, an issuer must still follow the specific rules for each country where an investor is acquired. This can start becoming complex, with the flow-on effects determining how issuers structure an offering, in which jurisdictions and what type of investors can participate.
References
Rule 506b & 506c, Reg A, Reg Crowdfundinghttps://www.sec.gov/smallbusiness/exemptofferings
Regulation Shttps://www.sec.gov/rules/final/33-7505.htm
EU Prospectus Thresholdshttps://www.esma.europa.eu/sites/default/files/library/esma31-62-1193_prospectus_thresholds.pdf
Liechtenstein Blockchain Act - Press Releasehttps://www.regierung.li/en/press-releases/222668
Hong Kong SFC - Statementhttps://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/statement-on-security-token-offerings.html
Disclaimer
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