Most companies find filing a security token offering (STO) confusing. That's not surprising given the different legal status and regulations governing STOs by region. STOs are considered a transferable security and, thus, are subject to securities regulation. Nonetheless, STOs fall into a legal grey area. New STO laws seek to remove ambiguities and promote uniformity and trust in the market.
Which token assets are STOs?
More jurisdictions are moving towards legalization. Even so, the regulations and how they are applied differ. The fundamental question of what constitutes a security token differs across countries. STOs are structured so as to qualify for an exemption from securities registration. The conditions under which KYC/AML is required differs.
Who can invest and how much?
In one of the world's most liberal markets for STOs, the newly formed Japan Security Token Offering Association is pushing for a clear legal framework for STOs. In May, Japan's new STO market regulations went into effect. Designed to protect client assets, exchanges are required to place an amount equal to client investments in crypto assets in cold storage. To ensure compliance, the Japan Security Token Offering Association (JSTOA) will conduct monthly audits.
Malaysia has mandated that all digit token offerings take place on an exchange through an initial exchange offering (IEO). The IEO platforms take part in the due diligence process. To reduce market concentration risk, retail and angel investors are subject to a maximum annual investment limit.
The streamlining of regulations will lower compliance risk and move security tokens towards standardization.
What documentation is required?
The legal limbo of STOs has created uncertainty regarding documentation and disclosure requirements. Generally, an STO project must file a prospectus.
New EU prospectus rules have been designed to make it easier to access the capital markets. A prospectus must receive financial regulatory approval in the country in which it is registered. However, larger token issues do not need to file a prospectus, but the cut-off amount differs by country.
The exemption amount has risen to $8 million. For larger companies, a prospectus-life can be filed. Some companies may be eligible for fast track approval.
As STO regulations rapidly evolve, issuers who fail to comply could have their STO canceled. STO attorneys know which STO filings have been successful and which ones have failed in a market, Precedence is one of the best rules of thumb to follow. For more information about the laws surrounding STOs, contact an STO attorney.
Share27 May 2020
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