How to Run Security Token Offering in Compliance with New SEC Guidance?
Coin Offerings (ICOs) brought transformational wave of fundraising to the
cryptocurrency market, making it easier for businesses to raise funds for their
projects. ICOs raised over $22 billion in just 2 years. However, the increase
in popularity of ICOs led to the proliferation of ICO scams. It is estimated
that investors lost over $100 million in ICO scams.
control these events, the U.S. Securities and Exchange Commission (SEC) started
cracking down on ICOs. The SEC has put forth a framework to determine if a token
sold in an ICO is under their regulatory purview.
In the wake of the downfall of Initial Coin Offerings arouse the need for a regulatory compliant token, hence security token. The industry is shifting towards Security Token Offering (STO), to capitalize on legal fundraising. Thus, the demand for security token development services is also increasing. Since security tokens are backed by a legal framework, regulatory compliance is indispensable. Other considerations to run a successful STO include technology infrastructure and secondary market.
governs how to conduct the STO, who can be approached to raise funds and what
are the restrictions on the tradable asset after its launch. Technology
infrastructure includes secure storage and transaction execution, and
determines ecosystem interoperability. Secondary markets are the platforms for
investors to trade security tokens.
idea behind fundraising through security token offering is to raise money from
investors without the registration burden of an Initial Public Offering.
there are varying degrees of regulation to launch the Security Token Offering,
depending on how much you plan on raising, from whom you plan to raise and how
you plan to do it.
clear intend to launch the STO helps determine the SEC regulations that need to
be adhered. The STO that has been launched simply to raise the funds has to
comply with different set of regulations compared to the STO launched with the
idea to get the funds in the hands of customers.
An experienced security token development company that offers comprehensive STO development services can help address all of the legal aspects related to the STO. Partnership with such a company can help in successful launch of SEC-compliant STO.
it is important to consider on which blockchain the token will be created. Next, there is a need to decide upon the
design of the token so it is both secure and interoperable with the market.
token issuers choose to standardize on the ERC-20 standard. It creates a new
ledger with its own native token or unit of account on top of Ethereum
blockchain. The major reasons attributed to worldwide acceptable of ERC-20 are
its simplicity of design and ease of interoperability.
is important to design a token with interoperability in mind. Choosing the
wrong standard is more likely to deter investors from securely storing their
tokens. In addition, secondary markets may lack the capability to host such
tokens. The wide network for ERC-20 standard enables most cryptocurrency
exchange platforms and wallets to easily integrate ERC-20 based tokens.
that security tokens need to comply with regulations around who can buy, trade
and interact with tokens, companies have created new standards. They take the ERC-20
model and include additional complexities, like address whitelistings and
locking, to enable tokens to adhere to security regulations. These new
standards are ERC-20 backwards compatible. It means that any cryptocurrency
exchange or wallet that can host ERC-20 tokens already has some or complete
infrastructure required to easily host a token built on new standard.
cryptocurrency market offers various other standards, except for ERC-20, to
build security tokens. Considering business needs and selecting the right standard
accelerate the development of SEC-complaint security token.
markets are the platforms where STO investors can sell their tokens in an open
market. Secondary markets are extremely essential for a successful STO as they
provide the investors with a way to trade.
considering security token exchange platforms as a secondary market, businesses
can choose between two options – centralized and decentralized exchange.
Centralized exchanges are regulated and user-friendly. With decentralized
exchanges, users need to manage their private keys on their own. Furthermore,
there is a greater reliance on smart contracts.
tokens are fueling the future of legal fundraising and unlocking better
opportunities to raise funds. Businesses that comply with SEC regulations,
partner with the right security token
development company to steer their STO journey, and have the right
marketing strategy in place can enjoy the real benefits of STO and position
themselves for growth.