The Compliances and Regulations For Security Token Offerings
Regulations and Compliance
Under the Securities Act of 1933, the offer and sale of securities must be registered unless an exemption from registration is available. The Securities Act provides a number of exemptions, allowing some companies to compliantly offer and sell securities without having to register the offering with the SEC.
Title III of the Jumpstart Our Business Act (JOBS Act) added Securities Act Section IV which provides an exemption from registration for certain crowdfunding transactions. In 2015, the Commission adopted Regulation Crowdfunding to implement the requirements of Title III.
Both Title III and Title IV help entrepreneurs crowdfund capital investments from non-accredited and accredited investors alike. The differences between these regulations are related to the limitations imposed on investors, the amount of capital companies are attempting to raise, and the different disclosure and reporting requirements.
EGW Capital notes that a large number of compliant security token offerings are structured pursuant to Regulation D and Regulation S exemptions and that for reasons that are debatable, Regulation A+ offerings are not likely to meet the approval of the Securities and Exchange Commission.
Regulation A+ (Reg. A+, also known as Title IV of the JOBS Act) allows companies to raise up to US$50 million from both accredited and non-accredited investors. This regulation is similar to a traditional initial public offering (IPO). However, in a Reg. A+ offering, a company soliciting investments from the general public will remain private. Additionally, Reg. A+ offerings allow companies to raise capital faster and less expensively than in an IPO. There are two tiers to Reg. A+ offerings that a company may raise under depending on how much capital is being raised.
Regulation A+ offerings are available to companies that are incorporated in the United States and Canada, primarily conduct their business in the United States and Canada, and are seeking to raise a minimum of US$2 million. Lastly, it is important to note that Reg. A+ offerings incur significantly higher accounting and legal costs, have more stringent qualifications with SEC, and have ongoing disclosure requirements for investors and the public.
Title III of the JOBS Act, also known Regulation Crowdfunding (Reg. CF), was adopted in 2016 as a way to reduce regulatory restrictions for small companies and startups, making it easier to raise capital from both accredited and non-accredited investors. This means that companies who seek to raise up to US$1.07 million are now able to do so through crowdfunding portals.
Regulation D (Reg. D) offerings are advantageous to any private company because they allow an entity to obtain funding faster and avoid the costs associated with a public offering. Additionally, Title II does not impose capital raise limitations. Regulation D may allow offerings to be openly solicited to prospective investors in a network, though the company raising capital still needs to provide disclosure documentation and ensure that their investors are accredited. However, these requirements are significantly less than what is required in a public offering. Companies must still electronically file a Form D with the SEC, which includes names and addresses of their executives and directors and some details regarding their offering.
Among the other requirements of Title II, the issuer of the securities must provide disclosures of any prior “bad actor” events in advance of the sale. If such information is not provided, the issuer can prove they are not at fault if they establish that they were not aware nor could have become aware of the undisclosed information.
The benefits of Reg. D are only available to the issuer of the securities, not to affiliates of the issuer or to any other individual for resale of the securities. Exemptions offered under Title II only apply to the transactions, not to the securities themselves.
For decades, companies wishing to sell private securities had to rely on friends, family, or their own networks because securities laws did not allow for general solicitation. However, this changed when Title II of the JOBS Act came into effect in September 2013. The Rule 506 exemption was split into two: 506(b) represents the old approach and 506(c) — in keeping with the age of transparency and sharing of information — allows general solicitation or advertising to the public.
Companies selling securities under Rule 506(b) can — but do not usually — sell securities to accredited investors and up to 35 non-accredited, but sophisticated investors. Determining what constitutes a “sophisticated investor” is sometimes debated between issuers and the SEC. Under Rule 506(c), companies are required to sell only to accredited investors.
Regulation S (Reg. S) was adopted by the SEC in 1990 and provides that offers and sales of securities that occur outside of the United States are exempt from the registration requirements of Section V of the Securities Act of 1933. Regulation S is generally intended to facilitate two capital-raising scenarios: either a U.S. company that issues securities only to foreigners, or a U.S. investor who enters a foreign market to buy foreign securities. In essence, Reg. S permits these types of transactions, among others, to occur without SEC registration and imposes a 40-day lockup period on the trading of securities issued under the exemption.
As traditional, accredited, non-accredited, and even first-time investors turn to the burgeoning and accessible STO market to seek profit, the Securities and Exchange Commission's goal of investor protection becomes more compelling than ever. As new technology companies enter into the world of securities exchanges, and as traditional financial instruments are converted into digital securities, there is an even greater need for sound market regulation.
We are a private equity firm specializing in growth companies. We acquire or build portfolio companies in high growth industries, deploying a proprietary crowdfunding platform and other direct to market capital formation strategies to provide growth financing for our portfolio holdings, and decades of experienced corporate management experience to maximize value for our shareholders.
We look to own companies in high growth industries, with disruptive technologies or significant market advantages, a top flight management team and a compelling strategy for exponential growth. We look for special opportunity wherever it can be found, and we bring a full array of services to our portfolio companies, including strategic growth and marketing, technology, management and long term strategic planning initiatives, grooming our companies for ultimate IPO or other liquidity event. We never stop looking for the next great opportunity, and we work tirelessly for our shareholders.
Company Name: EGW Capital Inc.
Contact: James Law
Address: 1100 Peachtree Street NE, Suite 200, Atlanta, Georgia 30309
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