Are you searching for an experienced STO team of attorneys? Do you need help launching an STO? If so, look no further. Below you will find information about STOs, from the definition to the types of tokens, and more.
Overview: STOs and Compliance
Security token offerings are public tokenized digital securities offerings facilitated on the blockchain. The offerings happen on online exchanges and are generally favored when compared to ICOs since they comply with securities legislation.
However, compliance comes with high costs. What's more, failing to comply with applicable legislation on registration, reporting, anti-fraud provisions, disclosure, and more can open up individuals or entities behind an STO to federal investigations.
Seeking legal counsel from lawyers experienced in STOs is the best way to avoid compliance issues and other risks related to STOs. However, lawyers knowledgeable on security token offerings are scarce.
Luckily, you can find all the help you need at Blockchain Lawyer. We have a team of expert blockchain attorneys and consultants with vast experience in STOs and related issues. We can assist in launching compliant STOs to offering legal defense on STO and related charges.
What's an STO?
An STO is a security token offering that resembles digitized securities like bonds, stocks, and equities. Individuals and entities keen on launching digital offerings compliant with current federal securities laws usually launch STOs. They serve similar purposes to traditional securities, with the main difference being they are launched on permissioned/permissionless blockchains.
STOs represent a portion of an asset and usually offer similar rights as those of traditional securities – i.e., dividend and voting rights. STOs arose from the regulatory uncertainties of ICOs. Initially, ICOs were the dominant means of getting funding for businesses since anyone could launch them.
However, this quickly became a problem as ICOs were unregulated and attracted fraudsters whose purpose was stealing from investors or compromising U.S. capital markets. To date, ICOs are under unmatched scrutiny from federal agencies like the SEC. The cons behind ICOs lead to the birth of STOs.
Like ICOs, STOs allow individuals and entities to launch digital tokens using blockchain technology. However, STOs comply with securities legislation resulting in minimal to non-existent regulatory compliance risks. They, however, have significant SEC registration, reporting, and disclosure requirements.
The SEC, Security Token & Utility Token Offerings
All security tokens issued through STOs require SEC registration unless they qualify for an exemption. Security tokens can be defined as digital shares for a company – i.e., a digital IPO. The token derives value from the company's value.
Utility tokens are launched via ICOs and don't require SEC registration as they aren't considered securities. What's more, utility tokens are used within closed ecosystems only, such as an arcade token and their value is independent of a company's value.
The distinction is critical since utility tokens don't require SEC registration and compliance with reporting and disclosure rules mandatory with securities. However, utility tokens come with significant fraud and manipulation risks since they are unregulated.
Howey Test
Establishing whether a token offering is indeed a security can be a challenging thing to do. However, it must be done to ascertain the need for SEC registration. The SEC uses a special test (the Howey Test) to decide if a coin, token, or digital asset is a security (or investment contract) requiring registration.
The test was named after a 1946 case (SEC vs. Howey Company) where it was first used to determine a security. The test requires a token/digital asset/coin offering to have four key elements, namely: money invested in a common enterprise where there is an expectation of profiting and the profits are realized from third-party efforts. If all these four elements are met, the asset qualifies to be a security and requires SEC registration.
Types of Security Tokens
A security token can either be:
Equity Token
An equity token resembles a traditional security such as a stock in that it gives the holder ownership interests in a company and gives them voting rights and a right to get a portion of profits represented in their holdings.
Debt Token
This type of token works like short-term credit on a specific interest rate. The data pertaining to the debt (i.e., repayment terms) is stored in the blockchain.
Asset-backed Token
Asset-backed tokens resemble traditional commodities like oil and gold. The tokens are powered by blockchain, making trading them more secure.
The Journey from ICOs to STOs
ICOs started in 2013 and became incredibly popular in 2017. In a record four years, they became the most popular way of getting funding as they didn't attract regulatory burdens like traditional IPOs. However, it wasn't long until regulators turned their attention to ICOs to tame the fraud and theft cases plaguing offers.
The SEC investigated many ICO offerings and related wrongdoing. The regulatory crackdown on fraudulent ICOs decreased ICO market activity and a search for a better alternative. STOs surfaced to solve the fraud and regulatory compliance issues of ICOs.
STOs solve oversight issues of ICOs since they are registered with the SEC unless there is an exemption. SEC registration avoids fraud-related issues as investors have remedies in case of violations or breaches in securities regulations. Because of regulatory registration and strict compliance issues, STO issuers aren't likely to launch fraudulent offerings. They are also compelled to follow strict disclosure and reporting.
ICOs began as unregulated offers to the public with a global participation. Most importantly, the offers didn't need to follow strict regulatory guidelines and involved digital assets that weren't necessarily backed by anything. STOs, on the other hand, must be registered. They also involve underlying assets with some value.
Do I Need Legal Assistance with My STO?
Yes. Security token offerings attorneys are critical for individuals and entities launching STOs. Their help is crucial from the initial launch stage to meeting STO reporting and disclosure requirements. Here's what you will gain from seeking legal assistance on your STO:
- Assistance in structuring the STO from pricing to risk analysis and using SEC registration exemptions (if possible)
- Advisory services on STO compliance obligations
- Developing KYC/AML policies
- Advisory services on secondary market trading
- Legal assistance when drafting subscription agreements, investment contracts, PPMs, and more.
- Defense when faced with federal investigations or charges related to the STO offering
- Advisory on taxation issues as per IRS requirements on STOs, blockchain companies, and virtual currency transactions
- Applying a Howey Test to ascertain if the offering is a security offering
Advice on STOs
STOs are relatively new offerings involving digital assets. The offerings solve ICO issues but also come with some risks and other issues, such as a limited investor pool. The offerings must comply with federal securities laws, which makes them better than ICOs but riskier to launch.
They also come with added costs and reporting obligations. Disclosure obligations are also mandatory. These makes STOs very complex offers. To avoid compliance risks, you need seasoned blockchain attorneys by your side.
Blockchain Lawyer has the expert team of security token offerings you need to launch a successful STO that is free of compliance issues. Don't wait for the SEC to start investigating your STO. You risk hefty fines and other unfavorable penalties if found guilty of securities law violations. Contact us today and secure a free STO consultation.
