Security Token Offerings – Compliance in an Era of Regulatory Uncertainty

In the uncertain regulatory structure that exists now, the majority of block chain startups determining whether to issue token offerings are moving away from public crypto markets and exploring the new world of security token offerings. The word on the street is that STOs are the next big push in the world of block chain fundraising.

Many blockchain startups have moved ahead with a“utility token” business model; this refers to a software license enabling the use of the token on a platform, often as a form of currency to earn rewards or pay for services in a block chain-powered digital marketplace. As the industry continues to shift from ICOs to regulated STOs, questions remain about whether the STO will be the all-in-all answer.

Security Tokens With a Blockchain

Currently, the majority of security token offerings are started as private placement securities offerings to accredited investors.

However, relying on private placements leads to various unresolved issues for blockchain companies who want to use tokens on their platforms. These issues have to be evaluated under the circumstances and facts of each blockchain platform.

However, some general considerations to be made include:

Each time the platform issues tokens, do the accredited statuses of investors need to be checked, even in cases when the tokens are issued as earned rewards on the platform?

One-Year Lockup
Do initial token users need to hold the tokens for one year every time they earn tokens on the platform, prior to using them for paying for services or other purposes?

State Issuer Dealer Registration
Will blockchain companies be required to register as issuer dealers, in States that have these requirements, prior to transacting their own securities on their platform?

Registration as an Alternative Trading System
If the blockchain platform is functioning as a marketplace to connect purchasers and sellers of security tokens, when is it required to be registered as an alternative trading system (ATS)? The SEC has not yet provided unequivocal guidance regarding the conditions under which a blockchain platform operating in security tokens should be regarded as a securities exchange. This is a particularly challenging issue in cases in which the platform does not refer to itself as exchange.

The Future
The rest of 2019 promises to be an eventful and exciting year when it comes to security token offerings. The blockchain industry will determine if it has a way forward from the informal guidance previously provided by the SEC, that the majority of token offerings will need to be issued or registered under an exemption from registration. In addition, the recent introduction of a new bill modifying the Securities Act, defining cryptocurrencies as non-securities provided they are used on a functioning network, is another factor in the equation.

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