Regulated Token Offerings
Introducing the Regulated Token Offering (RTO) allowing a raise of up to $50 million from US investors.
The SEC hasn’t been very subtle on cracking down the ICOs in the past. The agency made it clear that tokens that fit within the Howey Test rubric are actually Securities — strongly messaging their belief that pretty much all ICOs are Securities and regulated. Cease and desist orders were sent to the ICOs that raised millions of dollars in 2017.
As a result, blockchain companies have been hesitant to conduct an ICO in the US. When they do launch an ICO outside of the US, the participation of US citizens is strictly prohibited in the token sale.
Now the time is different. All the hassle for ICOs is finally solved. In fact, the SEC is encouraging blockchain startups to come to them first and discuss how they can go about raising funds for the investors.
If you want to launch an ICO in the US, there are various ways you can go about it. At present, you can choose one of the three funding vehicles; Reg A+, Reg CF, and Reg D. All these regulations have different requirements and limitations but in a nutshell, they will allow you to raise capital from all kinds of US investors legally.
Blockstack became the first blockchain company to be qualified for Reg A+ token offering. The company had been working closely with the SEC to get the offering approved. They spent quite a lot of money to understand what the SEC wanted and this has paved the way for other ICOs that are interested to launch taken sale in the US. Needless to say all these tokens will be considered Securities.
The reason why we’re advising blockchain companies to use the JOBS Act exemption to facilitate the security token offerings is due to the fact that both accredited and non-accredited investors can participate in the token sale while raising up to $50 million.
If the issuer decides, these tokens can be traded on a marketplace at the end of the offering.
Interestingly, there’s a possibility that the issued token morphs from being a security token to a utility token after the offering. This will allow for it to be traded on many exchanges. Blockstack is not alone. YouNow received approval for their Reg A+ filing the next day.
Now that most of the work has already been done by Blockstack. There’s no need for startups to go through big law firms that could charge $1000+ an hour. All we need is to get your form 1A qualified by the SEC.
As of now, there are three ways ICOs can go about raising up to $50 million in funding from US investors. In the future, as this industry matures we believe the SEC will open more gates for ICO funding.
Regulation CF (Regulation Crowdfunding)
For the past 80 years, the United States government has been regulating private businesses in their capacity to raise capital. Under these limitations companies could only raise capital from a group formally known as accredited investors. The textbook definition of an accredited investor means someone who is part of the wealthiest 2% of all Americans.
Regulation CF was created by the JOBS Act of 2012 and is the smallest of the three online capital formation exceptions. It allows companies to raise up to $1.07 million from both accredited and non-accredited investors — much like a Kickstarter campaign. This regulation was designed to help small companies to raise gain access to capital to finance their growth. However, it is unclear as to how successful Reg CF has been since it became actionable in 2016.
The main objective of Regulation CF was to allow private companies in their early stages of development to raise capital from any American, regardless of whether they meet the criteria of an accredited investor. These changes to the law allowed startups to use equity crowdfunding to turn customers into investors.
One of the unique characteristics of Reg CF is that the statute created a new type of entity as an intermediary. “Funding Portals” are FINRA regulated online platforms where companies may pitch their business to investors.
In May 2019, at the third anniversary of the exemption, there were 44 funding portals in operation and 9 portals had exited the space. Since Reg CF became an option to raise capital three years ago, a total of $200 million have been funded for a variety of projects.
Regulation CF allows you to raise up to $1,070,000 throughout any 12-month period by selling your tokens, or securities convertible into tokens, to all investors, both accredited and non-accredited alike. To qualify, you must conduct your offering on an equity crowdfunding platform registered with the SEC. Additionally, the company must draft and file a Form C with the SEC before proceeding with its capital raise.
It should also be noted that any securities that you issue as a result of a Regulation CF offering will be classified as “restricted securities.” This means that, with limited exceptions, the purchaser must retain the equity shares for a minimum of 12 consecutive months.
Regulation D provides exemptions for private placement offerings. Reg D offerings are advantageous to private companies that meet the requirement because the funding can be faster to obtain and less costly than with a public offering. This regulation, usually used by smaller companies, allows capital to be raised through the sale of equity or securities without the need to register those securities with the SEC. However, many other regulatory requirements like federal securities laws governing anti fraud and civil liability, will still apply.
The SEC still requires issuing companies to furnish prospective investors with specific documents pursuant to the offering such as a Private Placement Memorandum. The real benefit of Reg D offering is its reduced cost, both monetary and in terms of time. These cost savings are substantial, with the resulting expense being far less than a traditional initial public offering
Under Rule 506 (c) of Regulation D, a company can raise an unlimited amount of money by broadly soliciting and advertising their Regulation D, Rule 506(c) offering to the general public.
Rule 506(c) also allows an issuer to advertise and broadly solicit their offering while remaining compliant. As many issuers are hoping to raise awareness of their product or service in addition to funds during an ICO, this could be an appealing option.
The caveat here is that all funds raised under Rule 506 (c) must come from accredited investors, meaning the top 2% of the wealthiest Americans. It must be noted that the potential for raising large sums of capital is real; Filecoin raised more than $200 million in capital via an ICO under Regulation D, Rule 506 (c) in 2017.
Under Rule 506 (b) of Regulation D, issuer can raise an unlimited amount of funds from investors; however, the issuer cannot use general solicitation. They are allowed to sell their securities to an unlimited number of accredited investors and up to 35 other non-accredited investors so long as any non-accredited investor is considered sophisticated.
According to the SEC, sophisticated means the investor “must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment”
Regulation D, Rule 504 allows issuers to raise up to $5,000,000 in a 12 month period; unless, you apply for Blue sky law for every state from your investor is from. It isn’t really practical to comply with every state’s blue sky law for every investor you have. They investors are most likely all over the US. If you want to focus on only one state then this may make sense.
Once an issuer first sells their securities they will be required to file Form D with the SEC. This form can be filed electronically and includes such information as the name and address of the company’s promoters, executive officers and directors and some details regarding the offering.
Under a Rule 504 exemption the issuer is not subject to any limit on the number of investors and they may be accredited or unaccredited. One caveat is that, except for limited circumstances, general solicitation is not allowed.
Also dubbed as “IPO-light”, Regulation A+ requires a filing with the SEC and you can take in accredited and non-accredited investors and raise up to $50 million. Although, non-accredited investors are limited to investments of no more than 10% of their income or net worth in any particular offering.
Usually, the regulation requires the company to raise at least $2 million and primary place of business must be in United States or Canada. The company must also file annual and semi-annual reports with the SEC.
Regulation A+ is much like Regulation D. They both were passed into law. as part of the JOBS Act signed by President Obama in 2012. Amendments to the JOBS Act in 2015 changed the classification from Regulation A to Regulation A+.
Under Regulation A+, you can sell up to $50 million in tokens or token-related investments during any consecutive 12-month span. The offerings require the filing of an offering statement on Form 1-A with the SEC. After a period earmarked for review, revision, and comment by SEC regulators, this offering statement is then “qualified” by the SEC.
Regulation A+ allows your company to offer and sell their securities tokens to the general public – not just accredited investors. Under Regulation A+, any tokens or other securities sold are fully and freely tradable by the purchasing owner. The only resale restrictions are the ones your company may elect to impose as part of the framework of your token offering.
The disclosure requirements associated with a Regulation A+ offerings are undeniably more stringent than for a Regulation D or Regulation CF offering, and the related financial costs are normally higher as well.
But as an offset to these increased costs, the SEC allows Regulation A+ filers to submit their Form 1-A for confidential review. This measure of confidentiality allows companies to “test the waters” and build a following prior to publicly filing their offering statement for final SEC qualification. In order to make use of Regulation A+, you must not only be a company organized in the US or Canada, but you must also maintain your base of operations in that country as well.
Regulation A+ offerings are available through two options:
Tier 1: The first option, identified as a Tier 1 offering, enables a company to raise up to $20 million in any 12-month period. Any company conducting an ICO or STO under this exemption must provide investors with an offering document (more specifically referred to as an offering circular).
Tier 2: This type of Regulation A+ offering allows a company to raise up to $50 million in capital during any consecutive 12-month span. An offering circular document must still be filed with and ultimately qualified by the SEC, just like a Tier 1 offering, but there is one noteworthy difference. Tier 1 offerings are not required to be filed with any state regulatory agencies; the only filing jurisdiction is with the federal government.
While Tier 1 offerings do not require ongoing reporting after the ICO or STO is complete, Tier 2 offerings must report to the SEC. These reporting requirements also mandate the disclosure of financial reports. Additionally, individual investments in Tier 2 offerings are limited based upon the investors’ net worth.
Regulation A+ may be an attractive route for smaller companies issuing an ICO or STO if the principal goals include raising capital through the offering of tokens or coins while avoiding some of the more burdensome disclosure requirements inherent in other types of fundraising efforts.
Choosing the precise route for your ICO or STO can be challenging, which is why you need a devoted team of experienced team. The IBC team brings a wealth of knowledge and expertise in marketing, technology, legal and capital raising to ensure a secure and successful ICO, STO and IEO. We also work on various enterprise and educational projects with various governments and enterprises.