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.