While the heads of the U.S. Securities and Exchange Commission participated in a historic Town Hall Wednesday, it was the breakout session on Bitcoin and ICOs that garnered the most attention.
The panel spoke broadly about the crypto space during their presentations, but when the time came for questions to be taken, it was the security token that was at the top of mind.
Commissioner Kara Stein moderated the discussion, in which the panel included staffers from the enforcement division, capital markets trends division, and the digital assets and innovation division.
Security tokens are thought to be the hot thing in the crypto space now, as the SEC has made it clear that tokens are securities. As such, any token-related dealings must be registered with the SEC.
This being the case, the security token offering (STO) has slowly, but steadily, worked its way into being a better means to raise funds than the ICO. STOs are thought to be easier for the SEC, and investors, to digest because they are actually backed by a tangible asset, or even profits or revenues from a company.
As you know, ICOs often raise funds for projects that haven’t produced any tangible products; they are often just ideas.
The A,B,C’s of regulations
At the Town Hall, Amy Starr, the SEC’s chief of the Office of Capital Markets Trends, explained how security tokens relate to the SEC’s various regulatory frameworks, which include Regulation A and Regulation D.
These frameworks basically allow small companies to raise funds from sophisticated or accredited investors. Issuing security tokens under regulatory frameworks such as these can reduce legal risks, too
“If you are conducting fundraising using Blockchain, you can use Regulation A. If it’s a security, you can use Reg A. Blockchain technology can greatly reduce transaction costs, including verification costs. The technology has been used in fundraising and security token offerings, including raising money for projects.”
One thing noted by the panel about security tokens was liquidity. Liquidity options for Reg A token offerings has not yet been qualified by the SEC.
As with many parts of the crypto space, or investing in general for that matter, there are still areas of fraud, or misinformation when it comes to STOs. Even though raising funds through an STO is more palatable than an ICO in many cases, investors should still do their due diligence.
An area that was noted by the panel members relates to platforms. According to Starr:
“A lot of these platforms say they are regulated and registered [with us] and they are not.”
This means they are absent of the protections that would be provided by the SEC.
Starr urged attendees who may be planning to hold an STO to call the SEC if they are doubtful about the structure because “you don’t want to structure something that is not going to be a security.”
In the worst case scenario, doing so could be deemed fraudulent because your offering could be passed off as a security when it’s not, which is a definite no-no.
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