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Security Tokens Explained: Security Tokens vs. Traditional Securities

Security tokens are treated just like traditional securities in the eyes of the SEC—as ownership interests. Both must be registered as a security offering or meet an applicable exemption. Both must comply with various disclosure and reporting obligations. When there is uncertainty about whether the security token is a “security,” the Commission uses the “Howey Test” to determine whether the token qualifies as an “investment contract.” But what is the difference between a traditional security and a digital security token? A traditional security refers to any representation of an ownership interest in a publicly traded entity. It is an investment contract that can be resold on the secondary market. A digital security—or security token—is issued digitally as an online representation of an asset. These digital assets can represent equity, real estate, investment contracts, company shares, commodities, and so on. The main difference is that ownership proof of security tokens is stored on the blockchain.

Another difference involves the type of issuer. Traditional securities are offered by publicly traded companies. These companies are registered and listed on U.S. stock exchanges that allow the public to invest in their securities at any time. Before launching an IPO, the company needs capital—often significant amounts—from angel investors or venture capitalists. On the other hand, security tokens are usually issued by private entities and are not listed on a stock exchange. The private companies issuing them do not need such large amounts of capital for an ICO. Blockchain technology allows anyone to purchase a security token. Thus, these security tokens offer start-ups greater access to capital and place little entry barriers on investing.

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