A new form of financing, using Blockchain technology to offer digital securities that can represent an ownership stake in a real asset and simultaneously be as easily transferable as cryptocurrency. Real estate, home loans, debt, companies equity, commodities, funds, and funds of funds all can now be offered as digital security to reduce the capital friction associated with investing and taking ownership of assets. This new innovative way of digital securities does allow entrepreneurs and businesses to raise and transfer capital faster, while also giving everyday people access to what used to be untouchable investments (in the future). This will enable new economic growth. through foreign investments in local companies and communities within developing countries, therefore create new jobs, help better funding socio-economic projects, impact investments, and young entrepreneurs. Read more at part I.
Other benefits of assets tokenization:
- Immutable — once an investor buys tokens, nobody can “erase” the ownership;
- Accessible — tokens can be accessed from any place in a world, 24/7, via a smartphone app;
- Divisible — tokens hold a promise of greater liquidity which increases the expected value from trade and eliminates the need for minimum investments;
- Cost-effective — tokens eliminate the middlemen, which often limit investment accessibility by eg. restricting investments to accredited investors only, demanding high fees and requiring access to stock-trading accounts;
- Transparent — tokens eliminate asymmetry of information present during the transfer of ownership;
- Cross-border — with no territorial barriers an investor from any place in the world, can invest into a building on the other side of the world, without leaving their country, with the security, speed, and ease of transfer offered by blockchain network;
- Lower Investment Risk — the investment portfolio can become more diverse due to the possibility of owning parts/ fractions of several assets;
Tokenized Offerings USA
There are two primary SEC Regulations that are well suited to raising capital through the sale of securities to investors online. They are Reg D 506C and Regulation A+. Both can be used with STOs, as long as the Security Token Offerings are carefully developed with compliance to these rules. Reg A+ and Reg D 506C offer a legitimate method for ICOs and STOs to be made for US companies when care is used (Reg D and Reg S work well for non-US companies).
Reg A+ is a more natural fit because it allows investors of all wealth levels anywhere in the world to invest, which is one of the highly appealing aspects of STOs. This entails a public sale event, one deeply rooted vision of the Crypto community - that everyone can invest.
Traditionally, investing in startups and other growth-stage companies has been the privilege of the wealthiest accredited investors (people making $200,000 or more for two most recent years, or with a net worth of $1 million) only.
In 2012, President Obama signed the American JOBS Act into law, which allows companies that want to raise between $3 million and $50 million to do so from anyone – regardless of assets and income levels, under RegA+. Title IV allows startups and later-stage companies to use equity crowdfunding platforms to raise as much as $50M from both accredited and non-accredited investors. Title IV is broken up into two tiers, Tier 1 and Tier 2. Tier 1 allows you to raise up to $20M while Tier 2 allows you to raise up to $50M.
Tier 1 - Raise up to $20M
- Anyone can invest worldwide
- The company can publicly advertise
- Financials required
- Must satisfy Blue Sky laws in each US state that investors live in
- No limit on investment amount by main street investors
Tier 2 - Raise up to $50M
- Anyone can invest, worldwide
- The company can publicly advertise
- No state registration required
- Requires Audited Financials
- Non-accredited investors are limited to 10% of income/net worth per year
Furthermore, it is possible to use a convertible note to raise capital before the Reg A+ is SEC Qualified, and offer big discounts to early investors. Anti Money Laundering (AML) checks for all investors need to be adhered to, offered by many Token Issuing Companies.
A key challenge when using Reg A+ for an STO is that in most cases, the tokens have not yet been developed, so accepting payments from investors to buy the tokens directly is impossible because they cannot be delivered. Imagine selling stock in a company when you don't have any share certificates to sell. Here, warrants, convertible notes, or contractual agreements like SAFT (Simple Agreement for Future Tokens) offer a temporal solution.
If your company needs to raise less than $2 million, then Reg A+ is really not cost-effective, compared to other methods like Title II Equity CrowdFunding.
A company that specializes in selling products or services to other businesses would also not usually be a strong fit for Reg A+, but rather B2C oriented companies with consumers that might be excited about investing in growth companies with products that they like.
A company that does not have a strong user base or following could also struggle to raise the necessary funds in a Reg A+ setup.
Reg A+ is for US-incorporated companies only. So most non-US ICOs and STOs companies could only use Reg D or Reg S. The SEC allows non-US companies to use Reg D for US investors while raising capital from investors outside the US via other rule systems - for example, the regulations of Singapore, Switzerland or Hong Kong. The SEC also allows non-US companies to raise capital outside the USA using Reg S while raising US investor capital via Reg D.
Via a Reg D (506c) offering, the company can raise an unlimited amount of capital, but only from accredited investors. It is allowed for the issuing companies to promote and advertise their offerings. The issuer companies have to take steps to verify that the investors are actually accredited. Although the companies don't need to register with the SEC, they have to file a Form D, which includes information about the company's offering, promotors, the companies themselves, and some further information about the offerings.
Regulation D provides a great opportunity for international STO/ ICO companies to enter the US market and raise money from US accredited investors. Reg D 506C allows crowdfunding funding platforms to assist companies by listing their STOs.
Regulation D 506c makes a good pair with Reg S for non-US investors.
- Non-US investors are not required to be accredited
- Can be combined with Reg D for US investors, so the non-US investors invest through Reg S
- A natural complement for Reg D
- Raise capital from both accredited and non-accredited investors
- Max. Raise US$1.07 million
...to be continued...
Looking for Enterprise Consulting in Blockchain Technology?
With LTO Network, Moonwhale Ventures provides full services to identify and implement Distributed Ledger Technology solutions in Value Chains of SMEs and Corporations. We also provide STO solutions, helping businesses with our STO Financing service or tokenizing real estate. Based in the USA and Singapore, Moonwhale will assist you in One-Stop-Shop solution for your security token offering:
- Token Economics
- Token Creation & Issuances
- Marketing Materials
- Private Sale Fund Raising
- Public Sale Fundraising
- Secondary Market Trading
Please feel free to contact us. Moonwhale is also happy to announce a collaboration with LTO Network. For more information on STO, here are our articles entitled: What Are Security Token Offerings? or Tokenizing Commercial Real Estate.
About The Author:
Danny Christ is the CEO & Co-Founder of Moonwhale Blockchain Ventures Inc.
Based in Kuala Lumpur, Danny has over 20 years of IT, Operations and Supply Chain experience across Germany (home), US, Singapore, Indonesia, Thailand, Malaysia, Vietnam, and the Philippines. He managed IT projects (ERP, CRM, POS, BI) and regional expansion (franchise, M&A) for various SMEs in the Consumer Industry. His career rose to Vice President of a 3500 employees organization.
Want to explore STO Solutions or Blockchain Consulting for your business? Contact us to schedule a free 20 min consultation: https://calendly.com/moonwhalebv/20min