Though in their infancy, Security Token Offerings are fast becoming a reliable alternative to traditional crowdfunding resources. As a result, an increasing number of businesses and startups now prefer to offer security tokens over utility tokens or ICOs (Initial Coin Offerings).
So far, STOs are going strong with a success rate of 99%. In fact, companies such as Neluns raised a staggering $136 million through STOs, which is the highest amount till date, followed by Tzero gathering around $134.7 million.
However, the lack of legal frameworks is one of the problems still plaguing the STO market. Fortunately, different countries from across the globe have shown interest in revamping their existing laws and regulations to make it easier to issue, purchase, trade, and sell security tokens. Though such countries are only a handful, they are setting the tone to embrace the STO revolution.
Here is a list of the five most suitable countries for launching an STO.
Lithuania, one of the east European Baltic countries known for its Gothic, Renaissance and Baroque architecture is on its way to becoming a global STO hub. While leading economies such as China and Singapore are still working out the legal frameworks for ICOs and STOs, The Crowdfunding Law of the Republic of Lithuania has already become the first ever law to provide a legal basis to sell, purchase and trade security tokens.
The Lithuanian Ministry of Finance has already issued crystal clear regulations covering crucial aspects of STO and ICO such as taxation, accounting, issuance, and compliance. In Lithuania, you need to send your STO details to the supervisor of financial markets. They will get back to you with a firm reply on whether or not your STO fits into their legal framework.
Lithuania’s crypto-friendly regulations have attracted global STO players such as DESICO. The DESICO crowdfunding project, dubbed as the biggest fintech project in Lithuania, has introduced the first ever legal security token offering platform.
DESICO holds a brokerage license for the secondary trade of tokens along with an EU license for issuing electronic money (E.U. EMI). The latter allows the company to exchange cryptocurrency for fiat currency and also open international bank accounts (IBAN) for making payouts.
The island nation of Malta has started to attract companies providing security token offering services. The positive approach of this small country towards blockchain is grounded in three bills that were passed into law recently.
Malta Digital Innovation Authority Act (MDIA)
The MDIA lead to the creation of separate government authority to regulate the Distributed Ledger Technology (DLT) platforms and software. It provides a legal framework for defining technical and economic aspects of DLTs.
Innovative Technological Arrangement and Services Act (ITAS Act)
The ITAS Act provides an explicit legal framework for defining Innovative Technology Arrangements (ITA), Innovative Technology Services (ITS), and individuals or companies providing ITS services. It provides guidelines for creating, auditing, and certifying all software technologies concerning blockchain, smart contracts, and security token exchanges.
Virtual Financial Asset Act (VFA Act)
This Act provides a legal framework for regulating any activity related to virtual financial assets such as ICOs, crypto wallet providers, investment advisors, and security token exchanges, among others. It requires an STO development company to appoint a Malta Financial Services Authority (MFSA) approved VFA agent who will regulate their STO. You need to report to this agent on a regular basis.
Binance, the world’s largest crypto exchange by volume, recently joined hands with Malta Stock Exchange (MSX) to build a new security token platform in the country. People will be able to host and trade traditional financial assets using security tokens on this platform.
Canada is also one of the leading supporters of the crypto revolution. Any organization launching an STO in Canada has to comply with the Canadian securities laws. Canadian crypto laws are quite similar to US laws. Also, the STO compliance costs in Canada are almost as high as those in the US.
The Canadian Securities Administrators (CSA) use a test similar to the Howey test to define what constitutes as a security in Canada. In 2018, the Canadian Securities Administrators (CSA) published a further Staff Notice casting light on Securities Law Implications for both, security and utility token offerings.
Taking its pro-crypto approach further on Feb 13, 2018, the Canadian Securities Exchange, an alternative stock market founded in 2003, signed MOU with Kabuni Technologies Inc. The company provides Blockchain-based security token offering services. Jointly, they will be introducing the first ever Blockchain-based securities exchange platform providing real-time clearing and settlement of security tokens with complete legal compliance.
The United States of America
The United States of America is renowned for its strict securities regulations. The Security and Exchange Commission (SEC) uses the Howey Test to define if an investment contract is a security or not. The following are the most prominent regulations governing STOs on US soil and its territories.
- There is no need to register your STO with the SEC.
- As per Section 506C, only accredited and verified investors can participate in your STO.
- You have to file Form D after selling the security tokens.
- It was amended in 2015 from Reg A to Reg A+.
- You can sell SEC-approved security tokens to non-accredited investors as well.
- You can solicit up to $20 million in 12-months in Tier 1 or up to $50 million in Tier 2 in 12 months.
- It involves intensive SEC reporting.
- It is also the most expensive STO option.
- Your STO gets an exemption from the registration requirements of Section 5 of the Securities Act of 1933.
- You must launch the STO outside of the US and its territories.
- It must comply with the securities regulations of the country of the issuance.
Switzerland has been a financial and banking haven for decades. Also recognized for its low taxes and business-friendly governance, the country is fast becoming one of the most popular crypto destinations in the world. In January 2017, Switzerland established a global hub for virtual currencies called Crypto Valley near the town of Zug.
The Swiss Financial Market Supervisory Authority (FINMA) regulates all the security and utility token-related companies and transactions in Switzerland. It offers guidelines on the classification of tokens into payment, utility, and asset tokens.
An asset token represents assets including businesses, income streams, dividends or interest payments. As the existing law defines securities according to their form and not their function, these tokens are considered similar to equities and bonds.
In December 2018, Swiss-based startup Alethena completed the tokenization of its entire share capital on the Ethereum blockchain. It became the first ever European startup to take the STO plunge.
That’s it. Lithuania, Malta, Canada, the U.S., and Switzerland are the five most favorable jurisdictions to launch an STO currently. Of course, depending on your budget, legal requirements and other factors, you may need to choose a country not mentioned in this list to launch your STO. Make sure to learn all about the securities-related laws and regulations of the respective country before going ahead. Also, avoid launching your STO in a country without any legal framework as far as possible. Tell us where and how you plan to launch your STO in your comments.