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Join the Tokenization Revolution
The following post describes the possibility to utilize security tokens as the new asset class to generate an alternative to venture-backed funding and to bring liquidity to traditionally illiquid markets. This development is still in its early days, but given the swift market shifts of the last months, a fast response is essential.
Security tokens are designed to be an investment contract similar to traditional financial instruments. They give the investor revenues, dividends and the chance to profit from favorable price movements on his investment, a “digital share” of the venture’s equity, assets or part of its revenue. Since they are considered as securities under the local security legislation, they have to fulfill the jurisdiction’s regulatory requirements for this.
By providing similar rights as shares, companies have the potential to access more investors and at a lower cost than if they were to carry out an IPO (Initial Public Offering) by listing shares on a stock exchange. This makes them more appealing to investors that look for more convenient investment opportunities. Also, security tokens can incorporate other types of financial securities such as debt offerings.
Tokenomics – the sweet spot between IPO and ICO
The tokenization has to be clearly distinguished from Initial Coin Offerings (ICO). At least in the viewpoint of the U.S. Securities and Exchange Commission, unregulated ICO typically do not avoid the qualification as securities. As a consequence, the free issuing to the public is unlawful and the ICO promoter is only allowed to offer the generated tokens to accredited investors. Also, tokens must remain compliant when they change hands.
The application of the Howey-Test to digital tokens is still unclear. Also, these aspects should be taken into consideration:
- Substance over form: The risk that coins that are marketed as utility token are qualified by regulators to be a security token will become for many issuers too great to bare. As a side note, all crypto exchanges listing security tokens might be required to register as securities brokers.
- Economic reality over intention: The regulators look to the tokens the way they are actually used rather than the way they were intended to be used.
- Mixed-use tokens: Just because a token has a certain use-value doesn’t automatically prevent it from being qualified as a security token.
The whole shebang: Security tokens represent a perfect mix of digital assets and venture capital. It is the law firm’s expectation that security tokens will replace utility tokens as the standard for crypto issuance as investors realize they offer a better economic incentive. A new cryptoeconomic model of funding that disrupts traditional financial services.
Security token regulations – how to offer and sell
Under the national securities laws, an offer or sale of a security must typically either be registered with the domestic SEC or meet an exemption provision. Even if a coin offering takes advantage of an exemption from registration, the issuer typically has to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws.
The laws typically require that any information a company provides to investors is free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading.
The devil is in the detail. Depending on the particular case, the licensing/approval by the local SEC might be the simpler way or the fulfillment of the exemption clauses.
Professional services in Thailand’s Fin-Tech sector
PUGNATORIUS Ltd. offers legal and tax advice as well as transaction support services to develop Security Token Offerings in Thailand and on an international level. This includes a comparison of pros and cons of the STO in different jurisdictions and the assistance to get the crypto transaction done.
With respect to Thailand’s fintech sector, the law firm offers mainly these seven legal and tax services:
- Thai crypto-compliant company formations
- Regulatory-avoiding and tax-efficient cross-border structuring
- Digital asset and financial services licensing
- Blockchain and ICO/STO advisory services
- Thai and cross-border tax structuring
- Cryptocurrency transaction support services
- Legal opinions and professional statements