A Detailed Look into SEC Regulation A+ Compliant Security Token Offerings

April 18, 2019exchangeadminSecurity Token OfferingNo Comments

Initial Coin Offerings or ICOs witnessed a staggering growth in 2017 as it turned into a multibillion-dollar market. However, the sharp rise was followed by an equally rapid downfall, owing to the unregulated nature of ICOs that led to an increasing number of scams.

According to TokenData, of the 902 ICOs floated in 2017, 142 failed at the funding stage while 276 failed over time. An additional 113 are now considered semi-failed as their teams have ceased all communication. In short, 59% of the 2017’s ICOs have either already failed or are nose-diving.

This downfall has been partly responsible for the rise of a more reliable alternative called Security Token Offerings or STOs. It is better because an STO falls under the federal securities laws governed by the Securities and Exchange Commission (SEC). In the US, an STO development company has to mandatorily follow is the Reg A+. It is a popular alternative for most STOs.

You can still see various crowdfunding sales sprouting all over the crypto market that may or may not be SEC-complaint. But, it is necessary to make sure that you are investing in an SEC-compliant STO.

Read on to know more, particularly about Reg A+ and STOs complying with it.

1. What is SEC Regulation A+?

The Reg A+ was established to make it easier for small and early-stage companies as well as startups to raise capital through crowdfunding. On March 25, 2015, the SEC adopted the final rules of Title IV of the JOBS (Jumpstart Our Business) Act. The resulting amendment expanded the Reg A+ into two tiers:

Tier 1 –Companies can raise up to $20 million over a 12-month period.
Tier 2 – Companies can raise up to $50 million over a 12-month period.

The amendment allowed companies and startups to offer security tokens to everyone, and not just accredited investors. It also modernized the Reg A filing process.

Finally, on December 19, 2018, the SEC made further amendments according to the Economic Growth, Regulatory Relief, and Consumer Protection Act, allowing companies that are subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act to use Regulation A.

However, only companies having a principal place of business in the United States or Canada are eligible to raise capital under Reg A+.

2. Why Regulation A+ is Suitable for STOs

The Reg A+ comes with a few compelling benefits that make it suitable for STOs.

Reg A+ allows you to raise a capital of up to $50 million in a year. This is more than enough for an STO development company to expand its business.
It allows you to test-market your offering in an informal fashion called “Testing the Waters” before launching the actual STO. In other words, using this process, you can gauge the interests of potential investors before taking the plunge.
Under Reg A+, you can use a specially designed convertible note to offer discounts to early investors, resulting in higher liquidity. However, this benefit is limited to Tier-2 capital funding ($50 million). Only accredited US investors can participate in this process, while you can solicit non-accredited foreign investors.
Reg A+ requires an STO development company to file semiannual and annual reports apart from following strict KYC and AML regulations. As a result, investors often view STOs under Reg A+ as more credible and less risky, creating an overall positive perception.
Instead of using a white paper, you can use an Offering Circular to educate the investors about your offering. The latter is far more specific and self-explanatory.

3. STOs with Regulation A+ Compliance

Only a handful of Reg A+ compliant STOs are available currently. However, as the SEC takes a firm stand on security tokens, all the companies providing a variety of security token offering services will have to invest in SEC-compliant STOs in the future.

A. Gab

Gab is a social network platform popular among advocates of free speech with a mission to defend free expression and individual liberty for all. Gab filed for a Regulation A+ offering in 2018, using an ERC-20 security token.

Gab is currently in the Test the Waters Phase for Title IV investments through StartEngine. StartEngine is a leading crowdfunding and security token offering platform.

It managed to collect over $172,000 in the first eight hours of launching the campaign. In August 2017, Gab raised over $1M on StartEngine through 1,001 investors. By now, the social network platform has raised more than $5 million.

B. RideCoin

RideCoin is an innovative ride-sharing venture backed by blockchain technology. It intends to eliminate the middleman by offering the first-ever peer-to-peer ridesharing network. RideCoin offers benefits to all its participants. For example, drivers and users can negotiate the ride cost, the decentralized model reduces the high rates, and users have more control over their personal information.

RideCoin has also chosen StartEngine as the security token offering platform. In March 2018, RideCoin released their white paper. Currently, it is in the Test the Waters Phase for Title IV investments. The launch of a full-fledged STO will take place only after the SEC approval comes through.

C. Knowbella Tech

Knowbella Tech is an open science collaboration platform. It intends to create a free science ecosystem where people can securely make scientific collaborations without any middlemen. The aim is to unlock up to $4 trillion of dormant intellectual property to researchers across the globe.

Knowbella Tech will be one of the first companies looking to raise capital under Reg A+. The company plans to make the Helix tokens available to all investors, and not just accredited ones. The STO investors will get voting rights in Knowbella Tech in exchange for buying Helix tokens.

Wrapping Up

The successful registration and launch of STOs such as Gab, RideCoin, and Knowbella Tech will open new doors for global investors, startups, and early-stage business owners. Hopefully, it will encourage SEC and regulatory authorities in other countries to set up new laws and amend current ones to promote STOs. For now, everyone needs to wait and watch what happens next. If you are a crypto enthusiast like the rest of us, keep an eye out for upcoming STOs and their compliance.