What are securities
In the cryptocurrency industry, most people have heard about utility tokens and security tokens. Utility tokens provide users with a ‘utility’, normally in the form of a product and/or service. Think of them like gateway tokens. A crypto token that passes the Howey Test could be classified as a security token. The Howey Test is a test to check whether a certain transaction can be classified as a security. The Howey test encompasses these 4 points https://www.investopedia.com/terms/h/howey-test.asp
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
A security token represents an investment contract into an underlying investment asset (security), such as stocks, bonds, mutual funds, and real estate investment trusts (REIT). Security tokens are actual financial securities and the tokens are backed by something tangible like the assets, profits, or revenue of the company. This means there is an expectation of profits and therefore the token is a security.
When companies want to fundraise more capital for their business, or when there is a switch from traditional securities into digital securities, there is a process of creating and/or selling tokens -> a Security Token Offering or STO.
Regulations around securities
It is important to know what the rules and regulations are concerning securities in order to know that an offering is legit. All investors should check if a token follows all applicable laws.
The Securities Act of 1933 has two basic objectives: one, it ‘requires that investors receive financial and other significant information concerning securities being offered for public sale’; and two, it aims to ‘prohibit deceit, misrepresentations, and other fraud in the sale of securities.’ https://www.sec.gov/answers/about-lawsshtml.html
When looking at US-based Security Tokens, there are three regulations in the Securities Act of 1933 that people should be aware of: Regulation D, Regulation A+, and Regulation S. https://medium.com/@apompliano/the-official-guide-to-tokenized-securities-44e8342bb24f
- Regulation D — Regulation D allows a particular offering to avoid being registered by the SEC provided “Form D” has been filled by the creators after the securities have been sold. The individual who is offering this security may solicit offerings from investors in compliance with Section 506c that requires verification that the investors are indeed accredited and the information which has been provided during the solicitation is “free from false or misleading statements.
- Regulation A+ — This exemption will allow the creator to offer an SEC-approved security to non-accredited investors through a general solicitation for up to $50 million in investment. To meet requirements to register the security, the issuance of Regulation A+ can take a lot more time compared to other options. For the same reason, Regulation A+ issuance will be more expensive than any other option.
- Regulation S — This happens when a security offering is executed in a country outside the US and is therefore not subjected to the registration requirement under Section 5 of the 1993 Act. The creators are still required to follow the security regulations of the country where the security offering is executed.
The SEC has ruled that Bitcoin and Ethereum are not securities. As of right now, security tokens have a relatively low market share compared to utility tokens. However, they are becoming more popular.
At Elite Mining Inc, we are in the process of holding a Security Token Offering (STO), offering company equity as digital shares (tokens). The minimum requirement for accepted investment is 7,500 USD to subscribe to the round.