The previous blog talked about the assets which can be tokenized and the differences between the two types of STOs. This blog will be about the SEC regulatory compliance for STOs.

Note: The Following Blog is for companies who want to register in accordance with USA’s SEC regulations. We will publish a blog with European regulatory requirements soon!

The Following are the Regulations to abide

1.Founder’s Exemption- Sec 4(a) (2)

This is one of the most regularly relied upon exemptions under the Securities Act. However, it is the least known. SEC 4(a) (2) refers to the exemption of sale of securities that is not considered a public sale. The security tokens can be offered to the initial founders and early team members through Founder’s Exemption.

2. Reg D – Rule 506(c)

This is commonly referred to as the accredited investors crowdfunding exemption and is the most commonly used exemption. This will help you raise funds without a cap, however, only accredited investors can participate in it. Additionally Rule 506(c) also states that there must be a minimum of 12 month lock-in period.

3. Rule 506(b)

The rule is similar to the 506(c) however, the key differences are :

  • No Marketing of the Security Tokens
  • No need of accredited investor verification
  • Up to 35 Unaccredited Investors

Though there are benefits, the company’s disclosure obligations are much higher in this section.

4. Rule 504

Although not frequently used, Rule 504 has the following features :

  • Security Tokens are open to accredited and unaccredited investors
  • No Marketing or advertising of the offering
  • Capital up to $5 million can be raised
  • Blue Sky Laws Apply i.e. No State Preemption

5. Reg A + – The Smart Security Regulation

Reg A+ is the only regulations that give the U.S incorporated company exemptions from selling smart securities through STOs. This is subjected to SEC review through submitting of Form 1-A.

The features of Reg A+ is as follows :

  • Open to Accredited & Unaccredited Users
  • Immediate Transferability
  • Capital up to $50 million can be raised
  • Reg A+ offering in itself is a marketing tool
  • Investment Companies cannot participate
  • Blue Sky Laws Apply
  • Must be U.S./ Canadian Entity i.e. Pays taxes to the countries

6. Reg CF – Crowd Funding Exemption

This is the most commonly used exemption by Startups to raise capital from unaccredited investors. This, when combined with any other large exemptions, will serve as a good marketing tool. However, lack of marketing strategy denies the benefits of Reg CF.

7. Reg S – Non U.S Investors

These regulations apply to investors who are non-U.S. citizens. The restrictions of regulations depend on the securities offered, debt or equity., the company and the nature of securities.

The exemption has a focus for many startups selling their blockchain project (ICOs) outside U.S jurisdiction. The features include :

  • Offer and Sale must occur as an “offshore transaction” and no efforts to be made to sell security tokens inside the United States.
  • Requires additional compliance for U.S. companies/founders to sell under the Reg S.
  • Failure of compliance could lead to the violation of U.S. security laws.

Some of the above regulations will have an effect on secondary markets with re-selling restrictions. However, balancing a decentralized nature of blockchain and legal requirements could be a tricky task. At Blockchain App Factory, we will provide an end to end STO services with our blockchain and security token advisors which include tokenization, STO dashboards and branding through Security Token Marketing.

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