By Looking back on 2018 it’s safe to say that it was quite the turbulent year with regards to the regulatory front for the crypto and blockchain arenas.
2018 kicked off with the news that the SEC had issued several subpoenas for multiple blockchain startups who had dished out unregistered token offerings which spread panic like wildfire through the global crypto community. Some of these investigations have to lead to penalties, mandatory securities offering registrations and in some severe cases, investors have had to be reimbursed.
Willaim Hinman, Director at the SEC, issued informal guidelines which stated that Bitcoin and Ethereum were not securities because they had become “sufficiently decentralised”. As we enter the first quarter of 2019, rumour has it that the SEC will issue “plain English” guidance pertaining to security token analysis.
Due to the current uncertainty in the regulatory environment, many blockchain startups are steering away from public crypto markets and are instead taking their token offerings to the unchartered waters of security token offerings.
The current word on the street is that STO’s might be the next big thing for startups diving into blockchain fundraising.
That being said, many startups originally set out with their business model surrounding some form of utility token – a software license of sorts to use the token on a platform, with many using the currency as a means to pay for services or earn rewards in a digital marketplace.
As many of these start-ups move away from using ICO’s toward the regulatory-friendly space of STOs, the question on everyone’s mind is whether the STO is going to become the remedy everyone needs. Which possible legal issues might we face this year? Which technical advances are currently racking the brains of securities attorneys as they begin to fall in line with regards to STOs?
How Would Security Tokens Work?
For the most part, many STO’s currently on offer are in the form of private placement securities offerings to accredited investors.
That being said, private placement securities are not without their problems for blockchain startups wishing to make use of tokens on their platforms. These problems, or better yet, issues, require careful examination under each blockchain platform’s circumstances.
Accreditation:
Firstly there is the issue of accreditation status. Will the status of investors require constant checking up every time a particular platform issues tokens? Will this have to happen each time tokens are issued as rewards earned on the platform?
Registration As Alternative Trading Systems?
Let’s say a particular blockchain platform is operating as a marketplace in order to attract sellers & buyers of security tokens, at which point does the platform need to register as an ATS? The SEC is yet to issue their layman’s terms guidelines regarding under which circumstances a blockchain using security tokens would need to be regarded as a securities exchange. This will, of course, be particularly tricky in cases where the startup does not refer to itself as an exchange of sorts.
State Issuer Dealer Registration:
Do these startups need to register as issuer dealers with the fact that several states in the USA require that they do before they can transact using their own securities on their blockchain? The American Bar Association has published a whitepaper on state issuer dealer laws. We do know that these issuer dealer laws usually apply to public offerings of securities rather as opposed to private placements, but the big question here is, whether blockchain platforms which deal with their own securities would need to register if they’re dealing in these tokens on a regular basis after the initial issuance?
One-Year Lockup:
Would the initial token investors have to hold onto their tokens for a year each time they might earn tokens on the platform? Would they have to wait before being able to use for functional purposes such as paying for services?
Reg A + & STO’s, a New Frontier:
For blockchain startups who have planned for their tokens to be sold to the general public as opposed to accredited investors, without any resale restrictions, everyone has eyes on the current backlog of exempt public security offerings also known as Regulation A+ STOs which are currently awaiting SEC approval.
Despite some blockchain startups that have filed Form 1-As under Regulation A+ regard their discussions with the SEC as confidential, word on the street is that there are some unresolved hurdles to SEC compliance with regards to these offerings. Fingers crossed that this year might see the first qualifications of Reg A+ STOs and that these exempt public securities offerings will no longer sit in the “experimental” drawer of regulation.
Secondary Trading Problems?
As soon as the many obstacles around federal securities laws on resales are cleared, blockchain companies will have to figure out a way around the state Blue Sky laws pertaining to secondary trading.
Each state in the USA has their own set of exemptions by which secondary trading could happen. Many states also offer the “unsolicited brokerage transactions” exemption. This year should hopefully be the year where these issues surrounding state securities laws on secondary trading are resolved.
2019 – An Eventful Year:
This year promises to be an eventful and exciting year for the realm of security token offerings.
For the first time in blockchain history, the industry will figure out of there is a way forward from the SEC’s current informal guidance in which most tokens need to be registered or issued under the exemption from registration.
Not to mention the spanner which has been thrown in the mix with the recent announcement of a new bill which makes an amendment to the Securities Act which has defined cryptocurrencies as not being securities if they are utilised on a functioning network.
At this stage, it’s too early to gauge whether STO’s will be the godsend for blockchain startups who planned on using utility token models. Hopefully, the securities attorney at work on issues will resolve them in a timeous fashion.
Do you believe that STO’s might be the messiah for startups? Let us know your thoughts by leaving a comment below.
Follow CoinBeat on Facebook, Twitter & Telegram
Subscribe to our CoinBeat Newsletter
Submit an article to CoinBeat
View live Marketcap Prices here
Comments