Unlike all ICOs, Security Token Offerings should be registered with the Securities and Exchange Commission (SEC). If you are planning to invest in an STO, you will get some rights to the firm or organization that issued the token just like shareholders. So, this makes them similar to shares.
The registration process included in the SEC is part of what makes STOs a safer option for shareholders or issuers. Since investors also get more security, fraudulent companies are warded off. That is why many companies are likely to hire the most trusted STO platform that provides technical as well as a legal support structure for securities issuance, including KYC, AML compliances, setting up of tokens and development services. The registration process of STOs is quite similar to the registration procedure of IPOs (Initial Public Offerings).
SEC has foreseen and made a number of legal acts to regulate several kinds of securities and their offerings or sales. They are known as regulations or rules. They facilitate you to manage offers of securities on different conditions, which currently covers an extensive range of possible requirements and differ in conditions.
These regulations include Reg A+, RegCF, Reg D, and Reg S. STOs are counted amongst those regulated token offerings that are registered with the SEC (Securities and Exchange Commission) or use many available securities exemption like Reg A+ to do it.
Such regulations are explained in the following section. Let’s get started.
Regulation CF
Regulation CF is created for holding crowdfunding campaigns that is why it is also known as Regulation Crowdfunding. It enables eligible organizations to sell or offer securities via crowdfunding. According to the rules of Regulation CF, all transactions are required under regulation crowdfunding to take place online via an SEC-registered intermediary, either a funding portal or a broker-dealer portal.
- Under this regulation, any company or firm can raise a maximum aggregate amount of $1, 07,000 via crowdfunding offerings in 12 months duration.
- An issuer also should not aggregate amounts being sold in other non-crowdfunding offerings during the preceding period of 12 months for the purpose of determining the amount sold in a specific Regulation Crowdfunding offering.
- The amount that a company or an individual can invest is limited.
- If the annual income or net worth of an investor is less than $107,000, then the limit for investment is greater of $2,200 or 5% of the lesser of annual income or net worth of the investor.
- If their annual salary as well as net worth both are equal or more than $107,000, then investment limit would be 10% of the lesser of their annual salary or net worth.
- During the time duration of 12 months, the aggregate amount of securities that are being sold to an investor via all Regulation CF offerings may not exceed the amount of $107, 000, regardless of the net worth or annual salary of the investors.
- Companies that are registered with the USA can only apply for getting started with STO via Regulation CF. Investors should also be the citizens of the US. Companies that are Exchange Act Reporting Companies are not eligible to use the Regulation CF offerings.
Form C
Any issue who is conducting a Regulation CF offering should fill its offering statement on Form C online via the Commission’s EDGAR system, and any intermediary allowing CF offering. The cover page of this form will be created when an issuer provides details in XML-based fillable text boxes on the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system. The disclosures that are requesting the text boxes can be filled as attachments to Form C. This form also does not need any specific presentation format for the attachments. Nonetheless, Form C includes an optional Q/A format for issuers’ usage to provide the disclosures that are required but not included in the XML textbox section.
Form C also consists of many other variants. All of them are discussed in the following section:
- Form C – contains the original offering statement
- Form C/A – covers amendments to a previously filled Form C
- Form C-AR – filled by issuers for providing required annual reports
- Form C-U – filled by issuers at the end of the CF offering to disclose the total amount of securities that are being sold
- Form C-AR/A – used for amendments to form C-AR that is previously filled
- Form C-TR – used for issuers who are likely to terminate their reporting
Registration Rules for Intermediaries
- An intermediary person in a transaction including the sales of securities for someone else should register with the SEC as a funding portal or broker. Regulation CF generates simplified registration steps for funding portals. However, non-US funding portals are not allowed to register themselves in the SEC.
- An intermediary should also register with a self-regulatory organization or SRO.
Filling Review Process
The filling review process is established with the purpose to monitor and upgrade compliance with the applicable accounting and disclosure prerequisites. In this process, The Division of Corporation Finance focuses its resources on the most important disclosures that can not obey the rules of Commission or conflict with relevant accounting standards and on disclosure that are appeared to be lacking in clarity or explanation.
The division assigns fillings by several firms in a specific domain to one of seven offices and conducts its primary review duties via these offices, whose members are experienced and specialized in industry, accounting, and disclosure reviews.
To safeguard the efficiency and integrity of the selective review process, The Division of Corporation Finance does not reveal the main procedure used to recognize companies or filling for review publically.
Regulation A
Initially created as Regulation A, some people began to call it Regulation A+ or Reg A+, which often created some confusion. However, its official name remained to be Reg A. This regulation is majorly suitable for just US or Canada-based companies that were not formerly SEC-registered. This Exemption applies to those public offerings of securities that do not exceed the funding amount of $50 million in any 1 year period.
It is easier because there are no such restricted laws for potential investors (except for the citizens of the US). This process of registration is not extremely difficult, but more overwhelming than other options available; it requires the approval of the SEC before the beginning of fees.
The issuer under this offering should give buyers documentation with the issue, likewise to the prospectus of a registered offering.
Amongst the benefits offered by this exemption are more simplified financial statements without any audit obligation, three achievable format options to use in order to organize the offering circular, and no necessity to provide Exchange Act reports until the firm holds more than 500 shareholders and $10 million in assets.
According to the updates that were done in 2015, companies are now allowed to generate income under 2 tiers. Most importantly, investors should now invest in buying securities being sold by several companies using this exemption to know what tier the offering is being provided under. Every company should indicate the tier its offering is carried out under on the front of its offering circular or disclosure document.
The Difference between Regulation A Tier 1 and Regulation A Tier 2
According to Regulation A Tier 1, any company or firm is allowed to offer a maximum amount of $20 million in any 1 year period. The issuer should also provide an offering circular. This circular should be filed with the SEC. An offering circular is also subject to a vetting procedure by the securities regulators and commission in the individual states valid for the offering.
If your company is issuing under tier 1, there is a requirement of generating reports frequently. Also, you do not need to issue the report mentioning the final status of offerings.
If you are issuing offerings under tier 2, things would be different. You can offer up to $50 million in any 1 year period under tier 2 but not under tier 1.
The offering circular does not have to qualify by any state securities regulators. However, it is needed and is subject to the vetting and review process by the SEC. Moreover, the companies that are offering securities under Tier 2 should provide frequent reports on the offering and its final status.
SEC Form 1-A is filling with SEC (Securities and Exchange Commission) by entities looking for an exemption for registration prerequisites for specific public offerings under Regulation A.
Regulation A Disclosure Forms:
Form 1-A
This form is an offering statement that involves an offering circular and other offering disclosures.
Form 1-Z
This form is an exit report that contains the information of the end or completion of an offering. Companies conducting Regulation A tier 2 can instead disclose this on the Form 1-K.
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