Security Token Offerings (STO)

Get in the Know of STO Regulations!

When you go into the world of real estate, there are few opportunities for those that can't buy a whole unit or property. This is the same kind of situation experienced by those in the digital asset world, this is one of the reasons why Security Token Offerings are such are an effective investment tool.

STOs generally provide these same investors with the potential to secure ownership of real or virtual world assets, while not requiring them to put down thousands of dollars on a single share. STOs can be redeemed against assets like real estate property, stocks, among others. This is possible thanks to the fact that these same tokens are backed by a real-world counterpart.

But before diving headlong into investing in any one of these Security Tokens, here's a look at just what kind of relationship your government has with STOs across the world – here's what we discovered about each of them.

European Union –

Status: Regulated & Permitted

Within the European Union, MiFUD II does cover the majority of securities as well as securities tokens operating within the European sphere. The most relevant law to take into consideration would be Article 4 (section 1, chapter 44), which refers to the distinct definition given to securities in order for them to be protected under MiFUD II. Fortunately, this article does mean thta the vast majority of security tokens do fall under the EUs asset category.

The one ‘snag' associated with these laws is that any security tokens which have been newly issued need to adhere to the requirements set out by the Prospectus Directive. These issuers will then need to submit a detailed prospectus to the financial regulatory of that particular country.

From there, this prospectus would then need to be approved before being placed forward to the next step. In other countries, however, there may be exemptions given to issuers, such as in Luxemburg, where no prospectus is needed if the total value distributed through these security tokens falls below the 1.5 million Euro mark.

While this is the specification of one exemption for one state, there may be exemptions from other host countries where these security token offerings are taking place. The European Union is expected to release some new regulatory guidelines and laws this year. But these new articles will aim to relax laws on regulating STOs, making it easier for companies to conduct them.

United States –

Status: Allowed but Heavily Regulated

Within the United States, security tokens and any company seeking to begin a Security Token Offering are subjected to pretty strenuous regulations and already existing laws behind securities overall.

In particular, regulations enforced within the US are some of the most stringent and strict across the world, but in the eyes of prospective investors, these operate as a circumstantial safeguard for them.

Strict as they are, there are some special exemptions which do exist, and there are some further instances where these security tokens may find themselves exempted from laws in the near future. One of these exemptions would be if they are being used as a crowdfunding vehicle, which would make them exempt.

While this is the case, there is still a pressing need for greater clarity for businesses in order to make sure they don't end up falling into the legal red.

The People's Republic of China –

Status: Banned and Heavily Policed

Very much akin to Initial Coin Offerings, Security Token Offerings have not been spared the same hard-line banning treatment within the People's Republic. In the opinion of the Deputy Governor of The People's Republic of China, Security Token Offerings are believed to be a form of illegal activity.

Along with this heavy handed opinion, authorities within China are nothing if not highly consistent in policing against the legal status of STOs. Alongside the Bank of China, China's head of the Beijing Financial Supervision Authority has been overt in concluding that STOs are wholly illegal.

As a result of this, only those companies that have obtained regulatory approval from the state are legally allowed to conduct the distribution of Security Tokens and host an STO.

Australia –

Status: Allowed and Regulated

Interesting fact – Australia was among one of the first nations to set up a cohesive and highly functional regulatory framework for Security Token Offerings. The regulatory entity involved in overseeing this kind of activity is known as the ASIC.

Under these laws in Australia, financial and non-financial tokenized securities are treated differently and come under different segments of regulatory law.

For example: if a security token is a financial one, these would be placed under the legal framework of the Corporations Act as well as the ASIC Act of 2001. If, however, it is a non-financial token, then it would come under both ASIC and Australian Consumer Laws.

The United Kingdom –

Status: Allowed and Regulated

Within the UK, its financial regulatory agency, know as the Financial Conduct Authority (FCA), has managed to boil down the kind of regulatory issues which confront STOs and clear regulatory definitions. In total, the FCA has provided legal definitions for three kinds of DLT tokens:

• Security Tokens – Which would fall under the already existing laws for the governance of securities
• Exchange Tokens – these are treated as ‘actual currencies' and include cryptocurrencies such as Bitcoin and Ethereum, and currently operate outside of the kind of regulatory perimeter of the FCA
• Utility Tokens  – among this demographic of DLT Tokens, only Security Tokens come under the further specification of ‘Specified Investments. As a result, they come under what is known as the Regulated Activities Order and, consequently, come under the legal remit of the Financial Conduct Authority.

India –

Status: Un-Regulated

At . the moment, within India, there are no laws set in place in order to police or regulate the trading of digital security tokens or whole STOs. In more recent news, India has been attempting to take a much harder stance against digital currencies on an investment and individual level.

What India has to come to consider, however, is the fact that Security tokens are wholly different creatures in their nature. With this in mind, there may be some special regulation that India decides to go with instead of wholesale bans.

France –

Status: Allowed & Regulated

Within France, Security Token Offerings are subject to MiFID II regulation in accordance with laws passed by the European Union, making the country another of those which allows for the legal enaction of STOs.

Lawmakers within France, have also raised questions about whether there should be a limit raised under which Security Token Offerings should be exempted from the legal requirements set about under the Prospectus Directive. Aiming to increase exemptions to STOs going under the 8 million Euro range.

Switzerland –

Status: Allowed and Regulated

Security Token Offerings are officially legal and effectively regulated in accordance with laws set out by FINMA, which operates as the nations financial markets regulatory agency.

Because of this system, Security Token Offerings are placed under the same kind of legal framework which currently exists for investment markets like stocks and bonds. Along with this, these STOs are also placed under the regulatory framework of these investment tools, such as KYC and Anti Money Laundering legislation, along with professionalised Swiss Banking policies.

Like the UK’s FCA, FINMA has defined three classes of digital tokens:

– payment tokens

– asset tokens

– utility tokens

Lithuania –

Status: Allowed and Regulated

When it comes to governments and their approach towards distributed ledger technology, blockchain and cryptocurrencies, Lithuania has been one of the most progressive in the face of investment and application.

It's actually thanks to its fair regulatory positives that there were positive impacts upon both Initial Coin Offerings as well as Security Token Offerings.

This country actually operates as home base for the very first Security Token Offerings in Europe.

Brazil –

Status: Allowed and Regulated

In order to get any Security Token Offerings off the ground in Brazil, they would need to be registered with the Comissao de Valores Mobiliarios.

The overarching legal framework which keeps a vigilant eye on STOs within Brazil comes in the shape of the Securities and Exchange Act. Whether because of this legal framework or a lack of companies interested in delving into the world of security tokens, no STOs have since been registered with the CVM.

Mexico –

Status: Allowed With Some Legal Ambiguity

Mexico has generally been regarded as an open-minded government when it comes to digital currencies and especially security tokens. A recent example of this was the recent successful passage of the Fintech Act – which provides the foundations for a legal framework for Security Token Offerings.

While this is a great indicator of companies interested in security tokens, there's further legal clarity before momentum can be kicked up further.

Those companies and entities looking to host a Security Token Offering will need to be adherent to the Securities and Exchange act, while also obtaining approval from the CNBV.

Japan –

Status: Allowed/Regulated

The Financial Services Agency has since provided a substantial framework when it comes to the process of regulating and monitoring Security Tokens and Security Token Offerings.

It's in the world of security tokens that Japan's Financial Instruments and Exchange Act has proven highly successful as well, compelling the FSA to now seek to bring payment and exchange tokens underneath its regulatory umbrella.

South Korea –

Status – Banned for now

Similar to the kind of conduct that tokens have experienced in China, South Korea has joined in the total and unequivocal ban of tokens sales within the country.

It's with this in mind that research has shown that this is likely to be a temporary state of affairs, on account of local regulators already beginning to see security tokens in a far more favourable light. According to recent reports as well, there are already considerations for tokenized securities within South Korea at the moment.

While they are subject to a broad ban, it is looking far more likely that STOs may yet be within reach in South Korea.

Canada –

Status: Allowed and Regulated

Canada has been quite cautious in its regulatory approach towards Security Token Offerings and Initial Coin Offerings, according to recommendations by the Canadian Securities Administrators, who have suggested that they be monitored on a case by case basis.

The kind of laws that Canada plays host to for security . tokens at the moment includes prospectus requirements as well as exemptions, registration requirements or exceptions such as Anti money laundering and Know Your Customer requirements.

Israel –

Status: Allowed and Regulated

One of the best ways to summarize the kind of regulatory and legal requirements for STO within Israel is this – That security tokens are to be subjected to the same kinds of laws as a publically traded company.

As a result of this, issuers of STO will have to submit a prospectus for their security token, as well as deliver regular reports on the sale to the Israeli regulatory agency – the ISA. These STO offering entities will also have to adhere to regulations regarding countering insider trading, as well as register with a known exchange.

It is because of this regulatory climate that there is some understandable ambiguity as to where utility tokens enter into this picture.

Germany –

Status: Allowed and Regulated

While we know that Germany, being an adherent to the European Union, means that there is a regulatory framework in place for the launching of Security Token Offerings. But this is counterbalanced with the fact that the entire process of issuing a security token is met with an overly lengthy and convoluted process.

The crux of this issue with regards to a token is just what it classifies as under the law. It's in this way that Germany is akin to Canada, where decisions are made on a case by case basis.

Those looking to issue a security token will need to draft a prospectus before submitting it onwards to the BaFIN for further approval.

Many of the laws that come into force over security tokens derive from the German Securities Trading Act, as well as the larger European Markets in Financial Instruments Regulation and lastly the European Market Abuse Regulation.

Russian Federation –

Status: Not Regulated

At this moment in time, there is not substansive legislative or regulatory framework in place in order to police and monitor Security Token Offerings taking place.

It's with this in mind as well that the climate within economic and bureaucratic circles is not cordial to the notion of these kinds of activities either. At the moment, there are three draft laws on the theoretical table, all of which regard the matter of Security Tokens and offerings either in a direct or indirect manner.

While this is the case, legislators and lawmakers have not exactly shown much of an interest in actually letting them gain traction for passage.

Thailand

Status: Regulation imminent

The Security and Exchange Commission within Thailand is actually in the process of setting up a legal criteria for any company looking to tokenize and establish a Token Offering.

According to recent news, the Thai National Legislative Assembly paved the way towards regulatory approval through a February 2019 decision.

The decision made here would concern the amendments to the country's already existing Securities and Exchange Act, allowing it to accommodate tokenized assets and securities.

United Arab Emirates

Status: No Regulation yet but efforts are underway

Regulatory agencies within the UAS have since promised to deliver a comprehensive framework for Security Token Offering regulation by the middle of 2019. As of right now, however, this has not arrived.

While hopes are for a more nuanced approach towards STOs, it is looking more likely that the government will bring about something which is far stricter and conservative in tone. There is greater concern regarding financial crime.

Singapore –

Status: Allowed and Regulated

Singapore has since provided a very meticulous approach towards regulation when it comes to tokenized securities and STOs. The underlying framework of laws governing companies is the Securities and Futures Act.

When it comes to the supervision and invigilation of laws regarding these Securities comes under the Monetary Authority of Singapore (the MAS).

In order to have any security token taken up by the Singapore government, issuers will need to draft and submit prospectus in order to have it obtain MAS approval unless it is provided with some kind of exemption. The drawback with these exemptions is that they then cannot advertise their offer.

So What Does This All Mean?

One thing that is made all the more clear from authorities, as well as regulators from across the world, is that they are steadily becoming more accepting of Security Tokens and Security Token Offerings in stark contrast to Initial Coin Offerings.

When looking at them from a regulatory and legal perspective, for example, these same entities appear to have a far easier time placing these Security Tokens under an already existing conceptual blanket of securities legislation. The issue is that these tokens don't exactly lend themselves well to legislation in this kind of way.

It's with that in mind, however, that regulators have to do more in order to provide better definitions for which tokens come under the category of securities and which ones shouldn't. In this way, a case by case basis can be effective, if last course of action.

Takeaways

• It is clear that STOs represent a significant alternative to ICOs and a natural progression for Securities Markets.
• Investing in unregulated STOs is still not a good plan for investors
• Investors need to grasp the true depths of various regulatory jurisdictions to understand the extent and nature of the protections the laws grant them.