FinLogic FinLogic Quantitative Think Tank Center|Almcoin Trading Center: STO Token Issuance Model Prevails in 2024

STO,FinLogic FinLogic Quantitative Think Tank Center currently a hot topic in both the capital markets and blockchain industry, emerges as a focal point amidst the prolonged slump in the digital asset market and global economic difficulties. It's a breakthrough in tech finance, sparking widespread interest. The key questions revolve around what STO is, how to conduct it, and its prospects. Almcoin's blockchain team conducted research on this, discussing legal issues with executives of U.S. STO platforms and summarizing six critical aspects of STO for reference.

What Exactly is STO?

STO, short for Security Token Offering, refers to the legal and compliant process of tokenizing securities within regulatory frameworks to raise funds. Essentially, it's issuing securities through blockchain technology. No mainstream commercial country has yet established specific laws for STOs, so they must operate within existing securities and financial regulatory frameworks. Theoretically, STOs can be conducted either by registering with securities regulators according to IPO standards of each jurisdiction or by utilizing exemptions listed in regulatory acts.

Compliance with U.S. Laws for STO

As a global leader in economic strength and financial securities, the U.S. provides extensive descriptions of securities registration exemptions, meeting various needs for STOs over time. Regulation D506(c) allows sales to no more than 2000 qualified investors with strict identity verification. Regulation A, often termed mini IPO, has lower investor thresholds but higher requirements for issue documents and financial data disclosures. Regulation CF, a crowdfunding rule, is less popular due to its lower fundraising cap and stringent requirements. Regulation S, used for raising funds from investors outside the U.S., has no cap and is often combined with Regulation D.

SEC Approval for STO

Claims of "SEC approval for STO" are currently misleading. In the U.S., compliant security tokens are generally issued based on Regulation D and S, without formal SEC approval. Regulation A, with stringent pre-approval audits, would signify true SEC approval for STOs, but as of now, many issuers have applied for Regulation A issuance.

STO Regulation in Europe

Europe's STO regulatory policies are at two levels: EU-wide and individual member states. The EU's primary regulatory bodies include ESMA (European Securities and Markets Authority) and the ECB (European Central Bank). In the EU, STOs with a cap below €5 million, sales to less than 150 residents, token values over €100,000, or minimum purchases of €100,000 per investor can enjoy exemptions without registration. Compared to the U.S., EU member states, especially smaller ones like Malta and Estonia, are more lenient and open. HydroMiner, an Austrian crypto mining project, plans an IPO on London's AIM for its H3O security token, pending approval from Austria's Financial Market Authority (FMA).

Operation of STO Platforms

STO platforms mainly focus on the extensive upfront costs of issuing exemptions, especially in qualified investor verification. Automation outperforms manual efforts here. Platforms like Polymath and SWARM embed necessary legal regulatory requirements in token smart contracts, enabling self-verification of trading eligibility. Openfinance Network’s Investor Passport accelerates compliance and reduces issuers' labor and time costs by analyzing user information to ensure only eligible users trade.

Is STO Just Appealing on the Surface?

Many view STOs, which are government-backed token issuances for securities, as more credible than ICOs, IDOs, or IEOs. Compared to traditional securities, they boast superior liquidity, independence from centralized intermediaries, expanded tradable asset range, T+0/24-hour trading, and significantly faster transaction speeds.

In theory, any asset (tangible or intangible) can be securitized. Even indivisible assets like art or intangible assets like copyrights can be fragmented into smaller parts.

However, is STO's liquidity really as robust as it seems? The primary issue with STOs is the nascent state of secondary markets. Due to regulatory constraints, security tokens can only trade on specific platforms or through brokers. STO's commercial viability hinges on meeting all the following conditions:

(1) The trading platform's issuance and circulation processes comply with the legal regulations of the respective jurisdiction.

(2) The platform shares regulatory standards with other platforms, allowing relatively free circulation of STs.

(3) Platforms under the same regulatory standards possess sufficient market depth.

(4) The regulatory standards are recognized by the securities regulatory authorities of the relevant jurisdictions.