Legal assessment of a project is one of the most important factors that dictate the success of an ICO, IEO or STO. In the past few months, we have seen various blockchain project receive penalties and some even being forced to close down due to issues with the law.

BitClave, for example, will have to pay back the $25 million it raised in its ICO back in 2017 after the U.S. Securities and Exchange Commission (SEC) said that the ICO was unregistered. Meta 1 Coin will also have to refund $9 million after a court ruled in favour of the SEC, which argued that the initial coin offering (ICO) was fraudulent. Telegram, on the other hand, had to completely throw in the towel on its TON blockchain project after issues with SEC about its ICO.

To avoid falling into the same trap with your blockchain project, it would be wise to seek a competent legal advisor to handle the legal assessment of your project.

As in the above case scenarios, legal issues could jeopardize the whole project. If a case is filed against the way you raised your capital, you could end up being forced to refund the money. This would throw you back to the drawing board to try and find sources of funds to run the project. However, this time, things could prove to be hard since it would be hard for investors to trust you again and you would be forced to abandon the entire project altogether just like Telegram did.

What to expect from good ICO/IEO/STO legal advisor

  1. Whitepaper assessment

Since the whitepaper acts as the main source of information about your blockchain project. The legal advisor should ensure that it contains all the required legal documentation. Of essence, the whitepaper should contain legal disclaimers and the terms of sale for the tokens.

The legal advisor should help in drafting the legal disclaimer to ensure that all the risks and restrictions (e.g. restriction of investors from certain countries) are included.

Again, the terms of the token sale should be clearly stated to ensure that investors make informed decisions.

Another issue that has been a source of conflict, especially between the SEC and blockchain startups, is the token and funds distribution. This information should be laid out bare for investors to see.

  1. Review of the adopted token model for the IEO/STO/ICO

By reviewing the token model used for the ICO, STO or IEO, the legal advisor shall be able to verify the compliance of the token issuance with the laws and regulations and also give remedies in case of any arising issues.

Security tokens have different regulations compared to the utility tokens and this is the main thing that a legal advisor looks at. If the project uses a utility token or a security token, does it comply with the laws set in place in the regions where it expects its investors to come from?

  1. Aspects of the KYC/AML to be used

Know Your Customer (KYC) and Anti Money Laundering (AML) are some of the basic requirements for blockchain/cryptocurrencies around the world. Therefore, the legal advisor gives guidance on the model that should be adopted and also works closely with any of the involved third parties.

  1. Legal audit of the Project internal processes and documentation

A good legal advisor will also do an audit of the internal processes of the project behind the ICO, IEO or STO to ensure that everything complies with any existing local regulations.

The audit could also include an audit of the smart contracts to ensure that they are executed exactly as the whitepaper and website stipulate.

  1. Evaluation of Tax compliance and the company structure

The legal advisor also helps with accounting, bookkeeping, insurances, tax declarations and domiciliation services among other things through the network of its partners.

Depending on the country, companies dealing with digital tokens are taxed differently depending on the type of tokens they involve themselves with. In Singapore for example, there was a recent update on the Digital Tokens Tax Guidelines.

These ensure that the company remains in good books with the authorities within the country where it is registered.

  1. STO prospectus

Where a legal prospectus is required like in Taiwan, Switzerland and the European Union, the legal advisor helps in preparing it to ensure that it meets all the legal requirements.

  1. Commercial agreements

The legal advisors help in drafting terms and conditions, token sale agreements and any other commercial agreements like the Memorandum of Understanding, the Advisory Agreement, the Financing agreement, etc.

Blockchain has become a booming industry and starting a blockchain startup would certainly be a great idea at the moment. Several blockchain projects ranging from crypto giants like Ethereum, Bitcoin, Stellar, CitiOS, and the like to smaller projects like Cosmos, Storj, Aragon, Augur and the like, have been started in the past years and they have registered tremendous growth. These projects serve as great indicators that blockchain technology adoption is on the rise and you can definitely grab the opportunity by starting your blockchain project/startup.

Nonetheless, for your blockchain project to pick, you will have to convince investors to invest in it. This is the hard part for most blockchain startups!

A good blockchain project is good, but it is not everything. The growth of blockchain projects is determined by how the public adopts it. You need investors to invest their money into the project! So how do you get the investors to recognize your blockchain project and invest in it? What do investors look for in a blockchain project? To attract investors to your blockchain startup, you have to tackle these questions. These questions should be addressed in the whitepaper, Press Releases (PRs) and other marketing strategies like social media platforms.

What investors look for

Below is a guide to some of the things that investors look at:

Clear problem statement and solution

This is the anchor of your blockchain startup and it cannot be over-emphasized enough. You have to clearly state the king of problem you intend to solve and how you intend to solve the problem.

Most importantly, this problem should be something that affects a large group of people to ensure large market growth. A niche problem focused on just a certain minority group of people will certainly attract a few customers, meaning its market growth will be limited.

Your solution to the problem must also be something workable. You should clearly show the investors that it is something that can be done.

Prove that you are better than any other solution in the market

If your projects stand out among your competitors, customers will prefer it to your competitors and that would translate to a higher chance of market growth.

Therefore you have to ensure that your solutions stand out. You also have to explain to the investors how it stands out.

Additionally, you have to take precautionary steps to ensure that your solutions remain ahead and that it is not replicated by other startups. Some of the best ways to do so are by applying for patents, copyrights and trademarks.

A competent team

A qualified team acts as proof to investors that the project will become a success. A project could look great on paper, but without the right team, it could remain just that. You need the right minds for the project to materialize.

That is why it is imperative to higher professionals for all the roles in your blockchain project. To show the investors that you got the best team, you should include the qualifications of each team member in his profile on your website and the whitepaper.

Growth potential

After, showing your potential investors what your startup does, what problem it intends to solve, how your project intends to solve the problem, and how your solution is better than other solutions currently in the market, you have to also show your investors how you shall reach the market and make money for them to also benefit if they invest with you.

Investors look for projects that have a stable marketplace that is full of consumers. Therefore, you will have to show them the group of people you are targeting as customers, how that market base will grow, and what will make them want to use your product. By doing so, you will prove to the investors that there is a potential stream of revenue that will ensure that their investments keep working for them.

Clear business model

Apart from solving a certain problem for the society, your blockchain startup should have a clear replicable business model that will instil confidence into the investors that your project will become a success.

Most importantly, your business model should be scalable and readily adaptive to ensure that it accommodates immerging markets.

Clearly Presented margins

It is always very important to realize that although investors decide to choose your blockchain project because they believe in it, they are also looking to make some extra money. Nobody would invest his/her money into something expecting zero returns.

One of the best way to prove to investors that your project is going to give them good returns is by clearly and professionally presenting the margins of your startup/project. Promising margins will certainly make investors interested in your blockchain project.

Access to capital is essential for Fintech companies looking to embark on rapid growth. However, the available traditional fundraising methods have lots of drawbacks that hinder Fintech companies from realizing their full potential.

Most of the traditional fundraising methods rely on middlemen, who end up making the process too expensive. Also, the process involves a lot of paperwork, which ends up slowing down the whole process.

The rapid evolution being witnessed in the cryptocurrency and blockchain arena has stepped up the efforts of removing intermediaries from most business transactions. The invention of blockchain-based fundraising methods like Security Token Offerings (STOs) has completely revolutionized the way fintech startups and companies engage their customers in raising funds.

Security Token Offerings have stood out among the blockchain-based fundraising methods and offered great competition to methods such as the Initial public offerings which are quite expensive due to reliance on middlemen.

Security Token Offerings within the Fintech industry

Security Token Offerings (STOs) issue security tokens, which are digital financial products that experts and analysts believe could replace the way everything is conducted in the future. Despite being secure and highly liquid (making them easier to buy and sell), they have also provided a better opportunity for transparency and oversight among investors, businesses and regulators.

Security tokens have provided an avenue for digitizing almost anything in the world. A host of industries, among them the real estate industry, and the capital markets, among many others, have seized the opportunity by tokenizing their assets and offering them as security tokens.

Security tokens can easily be offered through smart contracts or STOs.

While STOs allow the Fintech startups and companies to net serious investors, the investors also benefit since the STOs makes it easier for them to monitor the performance of their portfolios. STOs are also easily regulated since the security tokens have an added layer that makes them able to comply with regulations.

Investors who purchase security tokens through STOs are entitled to a given stake, voting entitlements or dividends in the company.

Some of the STOs that have stolen the show recently include that of AssetBlock, a real estate investment firm that has embarked on tokenizing about $60 million worth of exclusive hotels in partnership with a luxury hotel asset manager, for investors to cash in.

There is also another case in Manchester, UK, where a luxury residential development it tokenizing about $25 million worth of assets on Tezos blockchain, with a plan to tokenize over $600 million real estate within the United Kingdom.

Comparing STOs to other blockchain-based fundraising methods

STOs are among several other models for fundraising blockchain projects, among them Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs). Among the three, STOs have stood out after gaining prominence following the regulatory issues facing ICOs.

Initially, ICOs were the go-to fundraising option since they were very simple to orchestrate and required no regulations at all. However, scammers noticed the loophole and started issuing fake ICOs to milk vulnerable investors, thus making investors keep off from them or at least be very careful when participating in one.

The fall away of ICOs saw the invention of the IEOs, which are safer compared to the ICOs. However, most IEOs do not offer security tokens due to the strict restriction that goes with offering security tokens. In the US for example, if an IEO offers security tokens, the IEO should be issued through a registered/regulated securities exchange and the company behind the IEO should disclose adequate information about its business, the token sale as well as the terms of the token sale.

Therefore, though IEOs solved the issue of safety with ICOs, it hasn’t been able to attend to the need of the evolving trend among most Fintech companies to use security tokens instead of using utility tokens. Security tokens are best issued through STOs.

As a result, Fintech companies and startups are opting to run STOs even though they are more involving compared to the ICOs and IEOs. And since the STO landscape is persistently evolving, companies are forced to constantly conduct in-depth market research to thoroughly understand the anticipations of their target audience.

 

Fractional ownership through blockchain technology is the new haven for companies and startups looking to raise capital from investors in exchange for a stake in the companies/projects. Traditionally, companies and startups could only do so through the traditional shares market.

In the traditional shares market, shareholders have to undergo rigorous selling and buying procedures, which also involved lots of paperwork. Investors also have to invest the full minimum required amount to own at least one share of a company or startup.

But thanks to blockchain technology. Companies and startups can now digitize or tokenize assets and offer them as digitized securities also referred to as tokens, rather than as traditional shares. By doing so, people looking to own a stake in the companies/projects can now do so by purchasing the digitized securities, which are normally transferred through blockchain networks rather than through the traditional stock market platforms.

Fractional ownership

Fractional ownership refers to the ability of an investor to own a fraction of a company or startup asset. For this to happen, the asset must first be converted into a form that can be divided into fractions, which is normally possible through asset tokenization.

Traditional shares are normally offered as whole numbers without the possibility of breaking them into fractions. Therefore, investors can only purchase whole shares. For instance, an investor can purchase 1, 2, 3, 4, 5, etc. shares from a certain company, but cannot purchase 0.5, 0.3, 1.3, 1.5, etc. shares.

On the other hand, digitized assets are easily offered as fractions/decimals thus enabling fractional ownership.Investors can purchase 0.1, 0.5, 1.4, etc. digitized assets.

Contrary to the traditional shares market where investors are required to invest a minimum amount to purchase shares, security tokens can be offered as fractions or decimals, therefore, allowing fractional ownership.

Asset tokenization changes how asset ownership is managed and also automates the activities that come after investment.

Blockchain technology makes it possible to have instant, traceable and cryptographically secure distribution and transfer of the digitized assets (tokens) without the need for intermediary parties.

Besides, contrary to the traditional securities, tokens of the digitized assets are issued and settled on a blockchain network. Therefore, the transactions are instant and without the need of signing stock certificates. And this process is not time-bound; it can take place 24/7.

Advantages of using digitized assets (digital securities)

The digital assets can be offered through smart contracts or security token offerings (STOs), where the holders acquire fractional ownership of the company/project behind the tokens.

These digital securities can also be exchanged in secondary markets just like other cryptocurrencies. When an asset is digitized, shareholders can use smart contracts to promptly sell their securities on registered exchanges where there is high liquidity compared to the traditional shares market. This in return help in avoiding the long lockup period of capital that is witnessed in the traditional shares markets

The beauty of it is that companies and projects can basically tokenize any assets whenever the need arises.

Comparing traditional securities to digital securities

Traditional securities (shares) normally call for larger investments while digital securities (digitized assets) allow fractional ownership, which reduces the amount of the required investment.

Additionally, since traditional securities require large investments, access to significant funding can only be done by institutional investors while in digital securities, since there is fractional ownership, there is a large pool of investors which makes it easy to quickly access significant funding.

Secondly, in traditional securities, the capital is usually tied up, especially with private placements like the venture capitals. However, with the digital securities investors can sell the tokens at secondary markets where there is high liquidity.

Traditional securities are also too costly due to the high fee structures. But the digital securities have a low fee structure due to automation using blockchain technology.

 

Though ICOs and STOs are great fundraising methods that startups can use in raising funds for their projects, it is paramount to asses the risks involved.

Launching ICOs/STO requires quite an amount of investment and therefore requires due diligence to ensure that that money is used for the right cause.

Besides, the sole purpose of the ICO or STO is to raise funds for your project. So, one should assess whether the ICO/STO shall be able to meet its target.

What to consider when doing ICO/STO risk assessment

In assessing your ICO/STO, you should consider the following:

  1. Market assessment

It is good to keep in mind that the market shall play a very great role in the success of your ICO/STO and your project.

Before launching your ICO/STO, it is good to assess the market to find out if your project shall be accepted and even adopted by a significant number of people. If a lot of people like your project, they shall be ready to invest in it. However, if people don’t find the project to be worth it, they will not be interested in investing in it and your ICO/STO could end up being a total failure.

To ensure that your project fits in the market, you should ensure that it tackles a solution to something crucial in society. Your solution must also be viable and unique. Remember, you also have other competitors and you have to prove to the people that your project is better than the rest.

Besides, you must be able to identify your target group. You must clearly distinguish the people that you want your project to help. This ensures that your marketing strategies are trained towards this group. And the wider the target group, the higher the likelihood of finding more investors. To identify a target group, you should ask yourself what services your project intends to offer; and who is best suited for those services.

  1. Regulatory risk assessment

This is very critical in launching an ICO/STO.

You have to understand what is required of you depending on the regulations that are set within the region or country where you want to run your fundraising. Failure to adhere to those regulations could cost you a lot and could even result in your ICO/STO or project being put on hold by the regulatory authorities.

Since at times those laws and regulations are quite intricate, like when launching an STO, it is good to involve an ICO or STO advisory firm to help you maneuver those regulatory issues.

Legal liabilities can be very costly to your company or startup especially if you are involved in court cases. Also, once it goes public that your project is on trial at the courts, people/investors will tend to become extra cautious and it may hamper the rate at which people find it worthy to invest in the project even if you manage to handle the cases.

Why do an ICO/STO risk assessment?

  • Preparing yourself for eventualities in future

Countries and regions are still struggling with regulation cryptocurrencies and blockchain technology. As a result, most of the countries are still formulating laws and regulations to govern anything related to blockchain technology.

Therefore, your antennas should be up all the time to ensure that your blockchain project adheres to all the laws; even those that were just released. The best way to do this is by looking for a competent advisory firm like Gravitas International that will be concerned with the regulatory issues.

A good advisory firm will help you maneuver the current legal matters and also prepare you for legal issues that may come up in the future.

  • Ensuring that you ICO/STO does not violate any laws/regulation

There is nothing that can be bad like finding yourself on the wrong side of the law.

Risk assessment ensures that you are on the right side of the law.

  • Estimating the success of your ICO/STO

Carrying out a risk assessment, enables you to find out your weak points and helps you to come up with ways of improving to ensure maximum success of your ICO/STO.

It also enables your team to identify risks and develop plans and contingencies to mitigate risks for your investors. This instills confidence in the investors.

Commercial real estate business in Japan is undergoing a radical revolutionization as tech companies come up with new innovative ways to make the industry more efficient and tech survey. These tech companies in collaboration with the real estate developers have devised ways of tokenizing real estates using security tokens.

Several companies in Japan among them Securitize, LIFULL, and Lead Real Estate, have announced the creation of real estate investment platforms that will allow the use of digital securities better known as security tokens.

In partnership with LIFULL, Securitize, which is a tokenization firm aims to promote real estate crowdfunding through blockchain technology and it is being sponsored by Nomura, MUFG and Sony Financial Ventures.

LIFULL, which is listed on the Tokyo Stock Exchange, provides real estate information services in Japan and it has 14 subsidiaries. LIFULL is the one that started the development of the real estate crowdfunding platform in partnership with BUIDL, which was later acquired by Securitize. In their trial version, they were able to reduce the costs of operation, improve the efficiency of divided payments and automate the distribution of the security tokens.

To their advantage, Securitize developed a tokenized securities compliance platform that makes it possible for the security tokens to be traded on secondary marketplaces.

Lead Real Estate, on the other hand, is already using blockchain with the help of Securitize to fund the construction of hotels and condominiums ahead of the Olympics 2020, which will be held in 2020.

What is Real estate tokenization?

Commercial real estate business is recognized to be among the most profitable businesses in the world. However, the traditional business model employed in real estate limits many investors from investing in the business since it requires a substantial amount of capital even though it is a viable investment option.

Thanks to blockchain technology through asset tokenization, the commercial real estate industry can now be tokenized.

Real estate tokenization refers to the practice of using tokens to represent real estate assets. The tokens can then be sold out or offered at a price to investors. By owning the real estate tokens, the investors respectively own a share of the real estate project and they are entitled to a share of the rental yield accordingly or profits originating from the sale of the assets.

Advantages of real estate tokenization

Blockchain is known to be an incontrovertible distributed ledger, whereby the data/information stored/recorded cannot be altered unless the whole network is brought down. As a result, it brings transparency, enhanced security, reduced costs of processes, traceability, and storage of immutable documents.

Of utmost importance to the real estate market is the ability of blockchain to allow the execution of transactions without the need for an intermediary. The transactions are only between the involved parties and they are stored in a ledger that holds the history of the transaction, the property involved or the asset involved and the title. Therefore, real estate tokenization eliminates the need for lawyers, brokers, and agents.

Tokenization also offers investors the ability to transact using digital currencies like Bitcoin and the like. This, in addition, is cheaper since the buyers bypass the fees that banks could have included.

Furthermore, the use of Escrow and smart contracts makes it easier and efficient to transfer title deeds upon payments.

Most importantly, real estate tokenization makes it easy for the common man to own a share of a real estate through crowd ownership. A person can invest a small amount of money by purchasing the minimum required amount of security tokens in real estate to become a shareholder of real estate. Also, the security tokens are more liquid and owners can trade them thus fostering growth-financing.

Below is a case study of a process done using blockchain technology without the use of middlemen or the need for an agent.

After unveiling major announcements, towards the end of 2019, about the future of blockchain technology in China, the Bank of China is set to introduce a tough security token protocol soon. The bank is also seeking to create its cryptocurrency that will be centralized and pegged on the Chinese RenMinBi (RMB).

This has brought hope to blockchain startups in China where Security Token Offering (STO) campaigns were banned almost immediately after the Initial Coin Offering was banned in 2017.

China’s hard stand on Cryptocurrencies

Despite being the country with the most blockchain startups and cryptocurrency adopters worldwide, China has had a hard stand on cryptocurrencies. In 2017, just as cryptocurrencies were making their debut, China banned exchanges, ICOs and STOs making it practically impossible for blockchain startups to raise capital for their projects through fundraising campaigns.

Interestingly, China has also been very hard on the cryptocurrency miners even though the government controls some of the largest cryptocurrency mining rigs/facilities.

The turnaround

It appears Chinese officials, especially at the Bank of China, have finally realized that blockchain technology is here to stay.

China outlined its new strategy on cryptocurrencies and blockchain technology through Weimin Guo, the Chief Scientist at the Bank of China, in a Finance Technology Summit held towards the end of 2019.

Among those new strategies is the intention of China to release its cryptocurrency that shall be called China’s Digital Currency Electronic Payment (DCEP). The DCEP shall be a stablecoin pegged on the Chinese RenMinBi (RMB).

According to the DCEP developers, the introduction of the digital coin will streamline the obsolete traditional financial practices currently in use. They also anticipate that the digital coin will rival Bitcoin, one of the most adopted cryptocurrencies in the world.

According to Weimin Guo, Bitcoin failed in its purpose to provide a better financial market compared to avoid the manipulations of the traditional markets.

Proposed strict regulations on STOs

As China loosens its stand on cryptocurrencies and blockchain technology, it still wants to ensure that the technology is kept in check.

Among some of the strict regulations that China seeks to introduce is the tough security token protocol that will see all Security Token Offerings (STOs) operate within an austere “regulatory sandbox mechanism”. By giving STOs a leeway, the country seeks to promote blockchain technology innovations as it maintains complete control of the sector.

However, as China inches back into the game, it is interesting to see how the Chinese regulators continue to embrace blockchain technology. The country seems to be realizing that times are changing and changing fast. Regulators seem to have realized that the country has to embrace blockchain technology or get left behind as the completion across the world hits up. Other countries are doing all they can to ensure that they conform to the technology by introducing laws and regulations to govern it.

ICO/STO PR is all about making sure the public gets to clearly understand the project behind your ICO or STO. It deals with managing the spread of information about the project behind the ICO/STO to the public in a bid to market the project.

PR is, therefore, an integral part of marketing an ICO or STO. A well-marketed ICO or STO ends up attracting millions in investments while a poorly marketed ICO or STO could end up not hitting their targeted amount in the fundraise.

With that said, it is therefore very important to plan and manage the PR to ensure that it gives the right results. PR campaigns are quite expensive and if not handled professionally, they could end up eating into your pocket without any returns.

Planning an ICO/STO PR

To start with, it is advisable to get your development team together and figure out a PR strategy for your project. The strategy should be guided by the project objectives and milestone deadlines.

Of importance, you should come up with a content plan containing the content topics, titles and the targeted media where the content shall be published. Once the content plan is ready, you should hire an experienced copywriter to create the planned texts, which your PR manager send out to the various media outlets.

The cost of an ICO/STO PR

The cost of ICO/STO PR is not something that is universally set. It all depends on how much campaigning you want to do and how much you are willing to cough for it. Nevertheless, you should work at ensuring that every coin used in the PR is bringing in investment into the project. Otherwise, your PR will become a total loss.

Below is an average of what various PR practices would cost you:

  1. Hiring content writers

You should hire a professional content writer that will produce quality content for your project. Remember the quality of the content has a direct impact on the image of the project. Therefore, you should not settle for a cheap content writer.

You can hire freelancers through the various freelancer sites available. The cost could range from anywhere between $100 and $1000.

  1. Having your PR articles posted on popular websites

Having articles that talk about your ICO/STO project published on popular websites makes it easy to reach more probable investors who visit these sites for updates.

To post PR articles on top-tier sites like CoinDesk and Cointelegraph, could cost you between $2000 and $12,000 per article.

To post on second-tier sites would cost you between $500 and $2000.

  1. Get Trusted YouTube Influencers

Getting a trusted YouTube influencer with thousands or millions of subscribers would give your project an insane exposure. However, you have to do thorough research on the influencer since some influencers have fake subscribers.

The cost of getting a good YouTube influencer could range between $4000 and $40,000.

  1. Get your ICO/STO listed on popular ICO/STO listing sites

In choosing the listing sites, you must ensure that you are fully aware of the target audience. You should get a listing that will ensure that your target audience is reached.

The average cost of having your ICO or STO listed ranges from $200 to $5000 per listing.

  1. Joining Cryptocurrency Forums

There are quite several cryptocurrency forums with a huge number of users who could be potential investors.

Examples of such forums are:

  • Reddit threads
  • com
  • Bitcointalk
  • Quora

Also, the majority of ICO/STO listing sites have platforms for social activity and if the team is active on the platform, it could become more influential and possibly sway investors to invest in the project.

This is usually the cheapest and most underrated method of marketing ICOs and STOs. You will not need to pay to be allowed to join any of these social forums. The only people you could pay are your contributors.

  1. Holding/Attending Events and Conferences

You should attend events and conferences oriented and related to your project’s objectives. For example, if your project is related to blockchain healthcare, ensure that you participate in as many events related to healthcare as possible.

And as you attend the events, also ensure that you get a chance to speak and let people know about the objectives of your project in terms of the services or products you intend to offer. You should also be ready to part with some money in the form of donations. The amount will depend on your judgment of what can make a significant impact.

Security Token Offering (STO) has become one of the most appreciated methods of raising funds for blockchain projects and startups. However, it is strictly regulated since it falls under financial securities. Therefore, any person, company or organization thinking of conducting an STO in any part of the world must first be aware of the regulations they need to adhere to.

The regulatory requirements set for STOs are primarily set to educate and protect investors.

Due to the seriousness and complexities involved in most regulations, individuals, firms or companies looking to tokenize their assets or equity for sale to investors through STOs are advised to hire an STO advisor like Gravitas international to develop successful strategies and identify the various regulatory requirements for the specific region they want to operate in.

It is worth noting that different countries have different rules for STOs.

In this article, we shall look at STOs rules and regulations in some of the counties around the world where STOs have gathered momentum over the past few years.

1. STOs regulation in the USA

In the United States of America, digital currencies are regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)

The CFTC in 2015 classified cryptocurrencies as commodities, which meant they were to be included under the Commodity Exchange Act.

SEC, on the other hand, has set in place several rules meant to deal with anti-fraud, and registration issues of digital currencies. Through the Howey Test, the SEC can tell if the token used to raise funds falls under securities.

There are three types of regulations that any STO issuer eyeing the USA market should be conversant with. These are Regulation D, Regulation A+, and Regulation S.

  • Regulation D

This specifies how some certain token offerings can avoid the SEC registration after filling a form known as “Form D” once the securities are sold.

The issuers, however, must stick to Rule 504, Rule 506 (b), and Rule 506 (c).

Rule 504 does not set any limitations to investors while Rule 506 (b) and Rule 506 (c) allow accredited investors in the US to take part but does not put any limit on the fundraising.

This regulation, however, has limitations on resale.

This regulation also allows the STO issuers to advertise their projects.

  • Regulation A+

STO issuers who want permission to issue SEC approved securities to non- accredited investors should work under this regulation. However, the regulation states that the maximum amount of investment by investors cannot exceed $50 million.

This regulation does not have any resale limitations.

However, it is more expensive and takes more time to register with this regulation.

  • Regulation S

This regulation shed light on how the securities act registration for security offering that shall take place outside the US should be carried out.

Whenever a security offering is being carried out outside the US, the issuer must follow the security regulations of the respective countries where the offering is being carried out.

This regulation comprises of Rule 901, Rule 902, Rule 903, Rule 904, and Rule 905 of the 1993 Act.

2. STOs Regulation in Europe

In Europe, STO issuers must create a prospect and also meet the security regulation of their respective local regulatory authorities. However, there are some exemptions for the European Union, which include:

  • The qualified investors’ exemption – STO issuers can freely request accredited investors to invest.
  • The limited network exemption – STO issuers can sell their securities to 150 people in any European member state freely.
  • The large investment exemption.
  • The nominal value exemption- if the value of each of the securities is worth 100,000 euros, then issuers can sell the securities without any need for registration.
  • The limited amount exemption – issuers can sell securities of up to 5 million euros without the need for a prospectus.

Regulation of STOs in France

In France, any activities involving financial instruments must be regulated.

The French Treasury came up with a new legislative framework for token issuance after the Financial Markets Authority identified that lack of ICO regulations was a risk.

This was added to the Title V of the French Monetary and Financial Code (CMF) as a new chapter titled “Intermediaries in Miscellaneous Property and Token Issuers.”

The second chapter of the Title V gives the specifications of the tokens that can be registered, or transferred. As a token issuer in France, you must conform to the requirements and conditions under article L. 550-8.

Regulation of STOs in Switzerland

In Switzerland, token issuers must ensure that their tokens comply with Swiss laws. The Financial Market Supervisory Authority ensures that it examines every token sale.

But, in a nutshell, Switzerland is considered to be one of the friendliest states when it comes to token issuance.

STOs regulation in Malta

STO issuers in Malta should ensure that they comply with the Malta Digital Innovation Authority Act, Innovative Technological Arrangement and Services Act and the Virtual Financial Asset Act.

Authorities in Malta are required to first look into the technology behind any project to deduce if it is feasible or not.

3. STOs Regulation in Asia

Asia has grown to become one of the best places for blockchain and cryptocurrency startups.

STOs regulation in Singapore

In Singapore, any STO issuer must first submit a prospectus and register with the Monetary Authority of Singapore (MAS) unless they qualify for the exemptions in the “A Guide to Digital Token Offerings”.

The MAS is mandated to regulate digital token issuance that falls under the capital market products under the Securities and Futures Act (SFA). To determine if the token issuance falls under the capital markets, MAS examines the structure and characteristics of the digital token.

STOs regulation in South Korea

In 2017, the Financial Services Commission in South Korea announced that token sales are illegal in South Korea.

STOs regulation in China

China was the first to ban the sale of tokens in its country in 2017 before South Korea followed suit.

Nevertheless, we could see an ease on the STO stand by the Chinese authorities in future when they come up with STO regulations.

4. STOs Regulation in the Middle East

In the Middle East, the two most countries of interest are Israel and the United Arab Emirates.

STOs regulation in Israel

After forming a committee in 2017 to examine if the Israeli securities laws were applicable in tokens sales, the Israel Securities Authority (ISA) planned to be evaluating token sales on a case by case basis.

According to the ISA, security tokens are cryptocurrencies thus giving the holder of the token entity to the cash flows and ownership rights in the future.

STOs regulation in the United Arab Emirates

UAE Securities and Commodities Regulator plans to recognize tokens as securities, which are governed by the Dubai International Financial Services Authority (DFSA) in Dubai and Abu Dhabi Global Market’s Financial Services Regulatory Authority (FSRA) in Abu Dhabi.

Security Token Offering (STO) is slowly becoming a darling among technocrats, especially those involved in raising funds for blockchain projects. STOs are usually strictly regulated by federal regulations making them one of the best and most secure forms for raising funds. However, due to the strict regulations that the STO tokens must comply with, special standards are required to make them comply with the regulations.

The common ERC-20 standard is not sufficient for creating STO tokens. Therefore, companies and organizations had to come up with more advanced standards with an additional layer for regulations compliance. In addition to complying with the set regulations, the additional layer also helps in identifying who interact, purchase or even trade the STO token.

Available token standards for creating STO tokens

  1. ST-20

This security token standard was developed by a company known as Polymath. It is a smart contract that defines a set of rules, including who can interact with the security token and how they should interact.

Polymath, the company behind this standard, provides a set of pre-programmed regulatory modules that developers can use when creating a security token using the standard.

  1. R-Token

This standard uses a combination of three smart contracts, namely A, B, and C. The three smart contracts are interlinked in a way that they can associate. Smart contract A contains ERC-20 standards. Smart contract B contains the rules on who can interact with the STO token and how they should interact. Smart contract C dictates who can communicate with the token and how they should communicate.

  1. ERC-1404

This is a special standard, developed by Tokensoft. The standard enables tokens that are built using different standards, including R-Token and ST-20, to be interoperable with different cryptocurrency wallets and exchanges.

  1. ERC-1400

This standard was developed by ERC-20 and ST-20 developers. The standard is designed to incorporate gatekeeper access control, redemption semantics or issuance, error signaling, and differentiated ownership.

For non-fungible tokens, this standard is backward compatible with the ERC-777 standard.