With all the uncertainty surrounding the legality of ICOs, there’s been a lot of talk about Security Token Offerings (STOs) lately. So as blockchain companies scramble to adhere to compliance protocols, there’s a key question to be asked here. What is a Security Token Offering (STO)?
Most attorneys and industry experts agree that holding an ICO in the United States is an unwise move today. With the latest rhetoric to come out of the SEC and their recent enforcement activity, it’s clear that most offerings will be subject to existing securities laws.
Co-Founder, Chief Legal Officer, and General Counsel of Athena Blockchain Andrew Hinkes says that “new token offerings will have to comply with or make use of existing exemptions from formal obligations.”
Enter the ‘STO’. A term that we’ll be hearing a lot more of through the rest of the year.
Security Token Offering (STO)
A Security Token Offering is a way of ensuring that your token sale is compliant with the current guidelines issued by the SEC. Since no one wants to get slapped with a subpoena or spend time in jail, blockchain companies in the US will either have to move to greener pastures or follow a legally compliant path.
But STOs (despite the fancy acronym) are really nothing new. In fact, the legislation for blockchain companies in the States is nothing new either.
You can think of an STO as a compliant ICO but there are a lot of intricacies that need to be considered. For example, there are four different paths that a blockchain company seeking funding can take:
- Register with the SEC and issue an IPO: This is an unattractive option for a majority of startups since they lack the budget or financial documents needed to utilize such a stringent pathway.
- Hold a Reg A+: This is a compliance offering that may work for you, depending on the amount of funds you seek to raise and the stage your company is in. There is also a cap on the raise which is currently set at $50 million.
- Reg D 506 (c): This is a much easier option since you just have to file a form and there’s no cap on the raise. However, you’ll have to throw your utopian, democratized investing views out of the window, since you’re limited to accredited investors only.
- Reg CF: Also known as Regulation Crowdfunding, this is an option that should only be availed of if you’re not seeking to raise a significant amount of money. Reg CF allows you to raise just over $1 million over the course of a year and it’s relatively cheaper and easy to put together than many of the other methods available today.
Wrapping it Up
While STO seems to be a new term, it’s really just a way to raise funds compliantly using existing securities exemptions. It should be noted that in other jurisdictions, including Germany and Switzerland, there are different types of securities and more flexible ways to conduct a legal ICO.
Whether the United States will continue down this path or create new legislation remains to be seen. For now, if your company is registered and operating in the US or if you’re looking to raise funds independently, you could consider one of the aforementioned paths.
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