As we’ve mentioned before, security token offerings are a way for companies to raise money but instead of using traditional methods, they offer digital tokens to investors. Depending on the type of token you get, you might get special privileges. For example, if you have an equity token, it’s like having a say in company decisions or getting a share of the profits. If it’s a debt token, it means you get paid back, like receiving interest on a loan.
However, what makes a token a security can vary depending on where you are. In some places, a token might be seen as a security, but in another place, it might not be.
In a lot of countries, if a token promises any kind of financial reward or claim on the company, it’s treated like a security. This means it has to follow strict rules and regulations, just like regular investments. This article is going to talk about these rules in the Asia Pacific, Europe, and the United States.
In the Asia Pacific region, Security Token Offerings (STOs) are usually subject to the existing laws about securities. This means they have to follow the rules and get the necessary approvals. The rules can be a bit different in each country, so anyone thinking of doing an STO needs to understand and follow the rules in the specific place they’re operating.
There isn’t a universal way of sorting or defining crypto assets throughout Europe when it comes to STOs. Although there is no one-size-fits-all rule, there are some general regulations in Europe for things like issuing securities (which is what these tokens are). Each country in Europe might have its own extra rules on top of the general European ones.
The EU also introduced its Pilot Regime in March 2023. This regulation establishes a temporary framework for testing and developing innovative DLT-based market infrastructures for the trading, custody, and settlement of securities. The Pilot Regime is designed to facilitate the adoption of DLT in the securities markets while ensuring that adequate risk management measures are in place.
In the United States, tokenized assets can fall within the regulatory framework based on the Howey Test. The Howey Test states that the funds raised by a company are deemed as an investment contract if:
According to the Howey Test, if a company collects money or assets from people with the idea that those people will make a profit, and that profit comes from the efforts of someone else (promoter or a third party), then it’s considered an investment. Basically, they’re checking if it ticks all those boxes above.
STOs in the United States also have to comply other regulations, including Regulation A+ and Regulation S. Depending on the type of asset and the amount to be raised, the appropriate regulation can be chosen and used for a given STO.
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