As regulations on the crypto market tighten, companies are shifting their focus toward security token offering (STO). The STO is a kind of security issuance that is compliant with the SEC regulations (or any jurisdiction) and the security is being stored on a chain. Depends on which SEC exemption one decided to file through, it is the same as private equity issuance, equity crowdfunding or even debt issuance.
Honestly, the STO is not a new financial instrument or an innovative tool for financial engineering. The STO has the attributes of a traditional security with the exception of being documented on blockchain.
If a company is raising funds through STO do investors and entrepreneurs have to consider equity dilution? Yes. Do entrepreneurs have to consider cost of capital? Yes. Do investors and entrepreneurs still have to prepare cap table? Yes, unless you are not interested in knowing who actually owns your company. Companies conducting STOs face the same considerations as those of traditional fund raising mechanisms.
Before jumping into the regulatory landscape of different Asian countries, it is important to clarify the differences between the security token and utility token. Fundamentally, a security is a financial instrument that represents certain financial value. Under the context of company fundraising, STO generally means debt or equity. After purchasing equity, the equity owner holds a share of the company and the company’s future cash flow.
In contrast, utility token holders neither own any share of the company, nor own the company’s future cash flow. In theory, a utility token holder owns a share of the company’s future revenue at a particular time. Because of this fundamental divergence between an STO and ICO, the valuations and regulations of those two kinds of tokens should be different too.
There is certainly a lot of hype around STO in Asia right now. However, hindered by complicated approval process and regulations, STOs haven’t rolled out as rapidly as last year’s ICOs. At the end of the day, STO is still a security issuance. Issuing security token does not equate to a magical world where projects can solicit funds internationally from unaccredited investors. Neither does it mean that projects conducting STOs can be legally listed on every exchange.
With this background in mind, here is a brief overview of the regulations on STOs in various Asian countries
Singapore
According to Monetary Authority of Singapore (MAS), digital assets are categorized as security unless they comply with the following exemptions:
Small and private solicitation under 5 million Singaporean Dollars in 12 months
Can not solicit more than 50 investors in 12 months
Private solicitation from investment institutions
Private solicitation from accredited investors
China
The Chinese government is always relatively conservative about cryptocurrency outside of activities associated with bitcoin mining. The STO is still illegal in China, unless it complies with all the existing equity issuance regulations.
On December 1st, the director of Beijing’s Municipal Bureau of Finance said publicly that the STO is illegal unless it goes through a proper security issuance process.
Hong Kong
Cryptocurrency is part of the Fintech Regulatory Sandbox. According to “Statement on the Regulatory Framework for the Cryptoasset Portfolio Management Companies, Fund Distributors and Operators of Trading Platforms for Cryptocurrency Portfolios” institutional investors can invest in STOs compliant with proper registrations.
In sum, the regulatory climate around STOs in Asia remains ambiguous. The current overarching theme in both Asia and the US is that there is no specific regulatory exemption tailored to STO. As a result, security token issuance has to go through proper registration process under current regulatory frameworks. Although STO is a nascent field, capital raising has been more an art than a science for the past centuries. Perhaps STOs can take a note from the equity crowdfunding pagebook.
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