Security Token Offering Regulation - An Overview

Security token offering regulations combine legal regulations and blockchain technology, producing a truly powerful tool.

Security Token Offering has grown in popularity in various contexts, demonstrating the ability to profoundly alter how assets and investments are perceived. Security tokens are blockchain-based cryptographic tokens that can represent a variety of assets (bonds, shares, investment funds, works of art, real estate) and are subject to securities laws and regulations.

Security token offerings (STO) have become a common concept in the financial world due to the popularity of these tokens. They are regarded as the evolution of ICOs and a more secure method of raising capital.

Please continue reading to learn more about security token offering regulations, how they differ from ICOs and IPOs, and which STO regulations exist in various jurisdictions worldwide.

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Security Token Offering Regulation - What are They? 

STO is governed in the US by the Securities and Exchange Commission (SEC). Securities Act of 1933 says that any security offering made to US citizens must be registered with the SEC or qualify for an exemption from the Act's regulations. The following list of frequent exceptions:

Regulation D

Regulation D Rule 504 exemption from registration of the offer and sale of up to $10 million in securities in 12 months. A company must file a Form D notice with the Commission within 15 days of the first sale of securities in the offering.

As per SEC Investor section:  <<Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $5,000,000 of their securities in any 12-month period.>>

Security Token may be sold to an unlimited number of accredited investors under Rule 506. Investors must self-verify their accredited status under this exemption, while issuers must confirm it.

Only accredited investors are permitted to purchase Security  under Rule 506. 

The STO issuer must perform a verification check or take "reasonable steps" to ensure that the investors are indeed accredited. The  exemption D (50)  allows for unlimited capital raising.

Regulation S

Regulation S exempts all STO offers and sales completed outside the United States from SEC registration and made only to non-US residents. 

Regulation A

Tier I exempts the sale of up to $20 million in securities in 12 months from registration, with no investor requirements.

Tier II exempts from registration the offer and sale of up to $75 million of securities in 12 months, with a non-accredited investor investment limit requirement.

CF Regulation

The sale of up to $5 million in securities in 12 months is exempt from registration under Regulation CF (Regulation Crowdfunding). It places no restrictions on accredited investors' ability to invest. Non-accredited investors face investment restrictions due to their annual income and net worth.

What are Security Token Offerings?

Security tokens (digital securities) are blockchain-based digital representations of various assets such as fixed income, real estate, commodities, and investment fund shares. They validate and ensure ownership rights while serving as value transfer instruments for a specific asset or set of privileges. 

Security tokens use blockchain technology to automate time-consuming manual processes and provide a reliable, secure source of truth on which all parties can rely.

Security tokens are typically programmed with unique features and have the regulatory protection that traditional securities have. Tokens are regulated by governing bodies accountable for determining how tokens should be issued, managed, and exchanged. To be designated as a "security token," it must pass the regulatory scrutiny of the governing body where it will be issued.

Security tokens are typically traded on specialized token exchanges, which must conduct extensive investigations into token listings and multiple investor onboarding procedures.

How is it Helpful?

Security token offering is a revolutionary concept. It has found itself at the crossroads of cutting-edge blockchain technology and traditional securities that safeguard investor interests. 

STO was created to bring institutional investors into the crypto and blockchain era and provide unprecedented transparency and convenience.

STO involves the issuance of digital tokens on the blockchain in the form of regulated securities. They grant the token owner access to the assets promised by the security.

STO vs. ICO vs. IPO — What's the Difference?

The issuance of digital assets via blockchain is gaining popularity. Initial coin offerings (ICOs) paved the way for blockchain-based investments, but their popularity began to wane once STO entered the fray.

Classical initial public offerings (IPOs) are still typical, but they fall short in cost-effectiveness compared to their STO counterparts.

STO is popular these days, and more and more organizations and individuals worldwide are focusing on this fundraising method. But what makes it unique, and what advantages does it have over other options?

To get answers to these questions, let's look at the differences between these three through this chart.

Difference Chart

What are the Advantages of Security Token Offering?

STO has risen to prominence due to the advantages provided by programmable, blockchain-based security tokens that can be easily transferred, traded, and traced. They also offer investors unprecedented opportunities and enable them to raise capital efficiently.

STO's primary advantages include

• Top security and reliability

• 24/7 access

• The absence of intermediaries

• High liquidity

• The ability to program required features.

UFUND enables its users to digitize any asset and provides the entire ecosystem required to run an STO campaign. In addition, the platform is highly customizable and allows for a quick and smooth STO launch.

Please get in touch with us if you want to learn more about our STO solution. Then, let us begin creating the future today.

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