U.S. Commodity Futures Trading Commission (CFTC)

The CFTC has extended supervisory authority over the trading of digital currency derivatives and has supported self-certification of new digital currency derivatives contracts.

CFTC defined virtual currencies as “commodities”: In 2015, the CFTC issued an Order that found "virtual currencies" to be commodities under the Commodity Exchange Act (CEA),2 which subjects the trading of related derivatives to CFTC jurisdiction and requires a trading platform to register as a Swap Execution Facility or Designated Contract Market. 

Reg S

Cryptocurrency, expressed in a virtual currency or token, is a “digital representation of value that can be digitally traded and functions as a medium of exchange, unit of account or store of value.” SEC Investor Bulletin: Initial Coin Offerings (July 25, 2017).

  • 4. Rule 904, which provides a safe harbor for offshore resales that comply with specified guidelines (Secondary Market Safe Harbor); and
  • 5. Rule 905, which provides that equity securities of US domestic issuers sold in compliance with the requirements of the Primary Offer Safe Harbor are deemed “restricted securities” as defined in Rule 144 under the Securities Act and subject to holding periods (and related requirements) before they can be resold without restriction in the United States.

Reg D

Issuers have to work with the following three rules: Rule 506 (b), Rule 506 (c), and Rule 504. Rule 506(b) and Rule 506(c) have no limit for the fundraising, but allow only accredited Investors in the U.S. Rule 504 does not have restrictions on investor status. Rule 503, issuers are limited to $5 million of capital raise and are required to register the security with state regulators. Reg D also allows for General Solicitation, which allows the companies to advertise their fundraising and projects.

Reg A+

Reg A+ seems appropriate for businesses looking to raise under $50 million and looking to solicit non-accredited investors. Given the restriction to provide two years of financial statements, we could assume that Reg A+ would be a better match for established startups. In contrast to Reg D, securities issued under Reg A+ do not have restriction on resale, which should result in more liquid markets.

Reg CF

When raising funds with Reg CF startups can raise up to 1.07 million USD. This is meant to quickly fund small projects to boost innovation. We would argue that a lot of projects can be started with 1 Million US if done right. The downside is the 12 month lock on secondary markets.

The Howey Test

According to the Securities Act of 1933 and the Securities Exchange Act of 1934, any transaction that qualifies as an “investment contract” can be considered as security, and this means they are subject to specific requirements with disclosure and registration.

The test comprises of the components:

  • 1. There is an investment of money
  • 2. The investment comes with the expectation of profit
  • 3. The expectation of the profit is based on the efforts of others
  • 4. The investment is in a common enterprise

Security Token Offering (STO) in USA

Companies can explore security token offerings to finance their expansion or to tokenize assets such as real estate, equity, energy, and many more. Running a successful STO / IEO process in the USA starts with being compliant in the eyes of both the U.S Commodity Futures Trading Commission (CFTC) and the U.S Securities and Exchange Commission (SEC).

In the states, the U.S. CFTC and SEC have taken the lead to regulate digital currencies at the federal level in regards to trading of and investing in digital currency derivatives.

Ultimately, the goal is to educate and protect investors. Firms and projects looking at security tokens to tokenise their equity or other assets for sale, will need an STO Advisor to develop strategies and help identify regulatory requirements.

The hype around Initial Coin Offerings (ICO) has died out towards the end of 2018. Regulations have caught up with the high risk of investors being scammed out of their hard-earned money. This led to the rise of Security Tokens where the traditional securities law apply for the digital assets.

On the page, we will provide you with an overview of the various regulatory terms to take note of for security tokens:

  • 1. Reg S
  • 2. Reg D
  • 3. Reg A+
  • 4. Reg CF

Visit STO Financing to see how we can help you achieve a successful and compliant STO project in USA.

U.S. Securities and Exchange Commission (SEC)

The SEC's actions related to virtual currencies have focused on anti-fraud and securities registration issues.

On July 25, 2017, the SEC issued a report on ICOs and "token sales" used to raise capital for investments in projects and stated the conditions for when tokens offered in these ICOs were securities and therefore subject to the federal securities laws. 

The SEC noted that not all tokens are securities and applied its three-part Howey Test to define an investment contract.

Reg S which is a “safe harbor” exemption, only available to firms outside America, therefore not subjected to the registration requirement under section 5 of the 1993 Act. The creators are still required to follow the security regulations of the country where they are supposed to be executed.

The US Securities and Exchange Commission (SEC) adopted Regulation S to clarify the application of the Securities Act registration requirements (US Registration Requirements) outside the United States and its territories.3 Regulation S consists of five rules:

  • 1. Rule 901, which sets forth the general statement that the US Registration Requirements apply only to “offers and sales” of securities that occur within the United States and its territories;
  • 2. Rule 902, which sets forth definitions for Regulation S;
  • 3. Rule 903, which provides a safe harbor for transactions involving issuances of securities that comply with specified guidelines (Primary Offer Safe Harbor);

Reg D
Rule 506(b) Rule 506(c) Rule 504
Annual Offer Limit None None $5 million
General Solicitation No Yes Permitted in certain situations
Investor Requirements Unlimited Accredited investors. Up to 35 sophisticated but non accredited investors Unlimited Accredited investors None
SEC Filing Requirements Form D Form D Form D
Restriction on Resale Restricted Restricted Restricted
Preemtion of State Registration Yes Yes No
Reg A+
Tier 1 Tier 2
Annual Offer Limit $20 million $50 million
General Solicitation Permitted before qualification (to check) Permitted before qualification (to check)
Investor Requirements None Non-accredited insvestor subject to limits
SEC Filing Requirements From 1 - A + Two years of financial statements From 1 - A + Two years of audited financial statement (annual, semi-annual, current)
Restriction on Resale No No
Preemtion of State Registration No Yes

The Howey Fact vs ICO Fundraising

Using the test, the SEC seeks to understand if cryptocurrency investors (ICO, STO, IEO) are participating in a speculative enterprise.

Security tokens offer their holders’ ownership rights in a company. According to the Howey Test, this makes clear security since there is an investment of money and a profit is expected. Also, the gain is based on the labor of others (if the project is to succeed).

Utility tokens usually represent a unit of account within a network. The more the system grows so does the utility of the token. As the network grows in size so does the transaction volumes, and this increases demand for the tokens. So, are utility tokens also securities? 

✓An investment of money. ✓The expectation of profit. And even though a utility token may not represent shares in a company, they usually ✓grow in value. This will lead to ✓profit in the future for token holders. That profit is also based on the ✓labor of others. Hence, utility tokens likely are securities as well.

slide

Security Token Offering (STO) in USA

Companies can explore security token offerings to finance their expansion or to tokenize assets such as real estate, equity, energy, and many more. Running a successful STO / IEO process in the USA starts with being compliant in the eyes of both the U.S Commodity Futures Trading Commission (CFTC) and the U.S Securities and Exchange Commission (SEC).

In the states, the U.S. CFTC and SEC have taken the lead to regulate digital currencies at the federal level in regards to trading of and investing in digital currency derivatives.

Ultimately, the goal is to educate and protect investors. Firms and projects looking at security tokens to tokenise their equity or other assets for sale, will need an STO Advisor to develop strategies and help identify regulatory requirements.

The hype around Initial Coin Offerings (ICO) has died out towards the end of 2018. Regulations have caught up with the high risk of investors being scammed out of their hard-earned money. This led to the rise of Security Tokens where the traditional securities law apply for the digital assets.

On the page, we will provide you with an overview of the various regulatory terms to take note of for security tokens:

  • 1. Reg S
  • 2. Reg D
  • 3. Reg A+
  • 4. Reg CF

Visit STO Financing to see how we can help you achieve a successful and compliant STO project in USA.

U.S. Commodity Futures Trading Commission (CFTC)

The CFTC has extended supervisory authority over the trading of digital currency derivatives and has supported self-certification of new digital currency derivatives contracts.

CFTC defined virtual currencies as “commodities”: In 2015, the CFTC issued an Order that found "virtual currencies" to be commodities under the Commodity Exchange Act (CEA),2 which subjects the trading of related derivatives to CFTC jurisdiction and requires a trading platform to register as a Swap Execution Facility or Designated Contract Market. 

U.S. Securities and Exchange Commission (SEC)

The SEC's actions related to virtual currencies have focused on anti-fraud and securities registration issues.

On July 25, 2017, the SEC issued a report on ICOs and "token sales" used to raise capital for investments in projects and stated the conditions for when tokens offered in these ICOs were securities and therefore subject to the federal securities laws. 

The SEC noted that not all tokens are securities and applied its three-part Howey Test to define an investment contract.

Reg S

Cryptocurrency, expressed in a virtual currency or token, is a “digital representation of value that can be digitally traded and functions as a medium of exchange, unit of account or store of value.” SEC Investor Bulletin: Initial Coin Offerings (July 25, 2017).

  • 4. Rule 904, which provides a safe harbor for offshore resales that comply with specified guidelines (Secondary Market Safe Harbor); and
  • 5. Rule 905, which provides that equity securities of US domestic issuers sold in compliance with the requirements of the Primary Offer Safe Harbor are deemed “restricted securities” as defined in Rule 144 under the Securities Act and subject to holding periods (and related requirements) before they can be resold without restriction in the United States.

Reg S which is a “safe harbor” exemption, only available to firms outside America, therefore not subjected to the registration requirement under section 5 of the 1993 Act. The creators are still required to follow the security regulations of the country where they are supposed to be executed.

The US Securities and Exchange Commission (SEC) adopted Regulation S to clarify the application of the Securities Act registration requirements (US Registration Requirements) outside the United States and its territories.3 Regulation S consists of five rules:

  • 1. Rule 901, which sets forth the general statement that the US Registration Requirements apply only to “offers and sales” of securities that occur within the United States and its territories;
  • 2. Rule 902, which sets forth definitions for Regulation S;
  • 3. Rule 903, which provides a safe harbor for transactions involving issuances of securities that comply with specified guidelines (Primary Offer Safe Harbor);

Reg D

Issuers have to work with the following three rules: Rule 506 (b), Rule 506 (c), and Rule 504. Rule 506(b) and Rule 506(c) have no limit for the fundraising, but allow only accredited Investors in the U.S. Rule 504 does not have restrictions on investor status. Rule 503, issuers are limited to $5 million of capital raise and are required to register the security with state regulators. Reg D also allows for General Solicitation, which allows the companies to advertise their fundraising and projects.

Reg D
Rule 506(b) Rule 506(c) Rule 504
Annual Offer Limit None None $5 million
General Solicitation No Yes Permitted in certain situations
Investor Requirements Unlimited Accredited investors. Up to 35 sophisticated but non accredited investors Unlimited Accredited investors None
SEC Filing Requirements Form D Form D Form D
Restriction on Resale Restricted Restricted Restricted
Preemtion of State Registration Yes Yes No

Reg A+

Reg A+ seems appropriate for businesses looking to raise under $50 million and looking to solicit non-accredited investors. Given the restriction to provide two years of financial statements, we could assume that Reg A+ would be a better match for established startups. In contrast to Reg D, securities issued under Reg A+ do not have restriction on resale, which should result in more liquid markets.

Reg A+
Tier 1 Tier 2
Annual Offer Limit $20 million $50 million
General Solicitation Permitted before qualification (to check) Permitted before qualification (to check)
Investor Requirements None Non-accredited insvestor subject to limits
SEC Filing Requirements From 1 - A + Two years of financial statements From 1 - A + Two years of audited financial statement (annual, semi-annual, current)
Restriction on Resale No No
Preemtion of State Registration No Yes

Reg CF

When raising funds with Reg CF startups can raise up to 1.07 million USD. This is meant to quickly fund small projects to boost innovation. We would argue that a lot of projects can be started with 1 Million US if done right. The downside is the 12 month lock on secondary markets.

slide

The Howey Test

According to the Securities Act of 1933 and the Securities Exchange Act of 1934, any transaction that qualifies as an “investment contract” can be considered as security, and this means they are subject to specific requirements with disclosure and registration.

The test comprises of the components:

  • 1. There is an investment of money
  • 2. The investment comes with the expectation of profit
  • 3. The expectation of the profit is based on the efforts of others
  • 4. The investment is in a common enterprise

The Howey Fact vs ICO Fundraising

Using the test, the SEC seeks to understand if cryptocurrency investors (ICO, STO, IEO) are participating in a speculative enterprise.

Security tokens offer their holders’ ownership rights in a company. According to the Howey Test, this makes clear security since there is an investment of money and a profit is expected. Also, the gain is based on the labor of others (if the project is to succeed).

Utility tokens usually represent a unit of account within a network. The more the system grows so does the utility of the token. As the network grows in size so does the transaction volumes, and this increases demand for the tokens. So, are utility tokens also securities? 

✓An investment of money. ✓The expectation of profit. And even though a utility token may not represent shares in a company, they usually ✓grow in value. This will lead to ✓profit in the future for token holders. That profit is also based on the ✓labor of others. Hence, utility tokens likely are securities as well.