Once upon a time, two months ago, AirdropAlert has spilled a lot of ink over the concept of STOs.
We have talked about the differences between ICOs and STOs and even questioned two noble gentlemen, the VP of Product Strategy for Securitize, Jorge Serna, and Patrick Campos, a chief strategy officer at Securrency.
All of that – for one purpose: to keep you updated with the new trend in the market, the tokenized securities.
Why this article, then?
Not many people have time to read all of the in-depth pieces, so this one will present you with an easy and short explanation of security tokens.
Here is what we’re going to do. We will take the definition popular on the Internet and deconstruct the security token based on this definition.
See for yourself.
A crypto token that passes the Howey Test is deemed a security token.
Yes, this is the first part of the definition, right?
In short, crypto tokens represent tradable assets often found on blockchain.
Now, let’s move to the second part of the definition, the Howey test.
The Howey Test? Sounds familiar…
Not for nothing.
You might have heard about it in the context of the SEC, the U.S. agency responsible for enforcing the federal securities laws, including the electronic securities markets.
The SEC has deemed that cryptocurrencies that pass the Howey Test are therefore securities, and are therefore subject to securities regulation.
It’s not the time to discuss the origins of this beautiful name for the test. But let’s just mention that it’s a good tradition for the Supreme Court to look at an investment’s substance, rather than its form, in deciding Howey.
So what would be the conditions to pass the test?
- The condition number one: is the investment opportunity open to many people?
- The condition number two: do investors have little to no control or management of investment money or assets?
That’s basically it.
Now you know what a security is. You can stop reading now. Seriously, go update the home page of AirdropAlert.
The only thing left to say is that because the tokens are deemed a security, they are subject to federal securities and regulations, which is something ICOs don’t really like.
Why? Because they could be the subject for penalties. Plus, it’s much harder to invest in securities for a retail investor.
As an illustration, the SEC has ordered fund manager CoinAlpha Advisors LLC to pay a $50,000 fine following what it deemed to be an unregistered securities sale.
Also, the SEC said it settled separate cases with start-ups companies Airfox and Paragon, which raised more than $10 million each in initial coin offerings that weren’t registered.
And cases like that pop up all the time.
Can I invest in security tokens?
Hmm, it’s a good question. Let’s see if you can. Google the security law of the country where you live. Can you invest in securities? Different country – different rules!
Look at how it works in the States.
As we’ve already covered in the article about differences between ICOs and STOs, you can invest in a security token in three cases.
- you’ve got a crock of gold. Because certain security tokens come with the price.
Regulation D — this STO type covers accredited investors only. Are you an accredited investor? Let’s see. If your net is worth $1mln, or your annual income is $200k+ for the past two years or $300k in combined annual income for spouses, you have a chance to take part. But, first, verify your accreditation status and get a specific letter from a legal counsel.
- you don’t have much money, but you’ve completed KYC/AML and some other certain forms
Regulation A+ — this STO type covers everyone in the crowd. There are STOs to pursue Reg A+ out there but here’s the pain point. No STO has been qualified by the SEC for this type of funding, to date. Maybe for the reason that Regulation A+ issuance can cost more and take longer compared to other options. Yet, the annual raise cap limit for these STOs is up to a total of $50,000,000.
- you don’t live in the States
Regulation S — this STO type is valid when an offering of securities is deemed to be executed in a country other than the US.
Depending on the Regulation type an STO is compliant with, the financial requirements for investors and security token issuers might very dramatically.
In some cases, as an investor, you’ve got to have a lot of money and certain paperwork verifying your credentials. But in all the cases, it’s one of the most secured option for investment in crypto!
Is this where your history with security tokens begins? Tell us in the comment section below.
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