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Andrew "Drew" Hinkes is co-founder and lead counsel for Athena Blockchain, and adjunct professor at NYU Stern School of Business and NYU School of Law.
Lost in the frenzy of the OIC in 2017 was a curious show.
In April of the same year, Blockchain Capital raised $ 10 million for its third fund, a "symbolic venture capital fund". Unlike most ICOs that deliberately avoided compliance with the regulations, it was a compliant US title, issued on a symbolic basis.
It was the beginning of a long-awaited wave of "symbolized" securities offering law-compliant securities – a change that will increase the demand and liquidity of these securities by leveraging smart contract technology and blockchains to automate certain aspects of operations. and enable these instruments to offer useful new features that can increase their value to issuers and buyers.
Under US law, various financial instruments are included in the definition of a security, including shares (ie, shares), bonds (ie, debts) and contracts of sale. investment (remember that some OICs are investment contracts). Although most investors are aware of publicly traded stock trades on domestic exchanges such as the NYSE and NASDAQ, various regulatory exemptions allow issuers to sell securities without becoming public and subject to costly public reporting requirements. These so-called "private placements" of securities use regulatory exemptions, depending on the issue, that can limit the amount of funds raised, the number of potential buyers and the marketing of these investments.
Despite these limitations, private equity "rounds" are a popular choice for new businesses. Fast-growing, capital-intensive companies often use private placements to gain growth capital while remaining private; about 270 "unicorn" corporations worth more than $ 1 billion chose to remain private. Most of the symbolized titles, at least initially, will be private placements.
Private placements accounted for more than $ 2.4 trillion of debt and equity securities issued in the United States in 2017 alone. This figure is even the best of times for the ICO market, even the sparkling ones. Unlike ICOs, which offered regulatory arbitrage value, generally did not provide the information required by law to purchasers, and generally offered a future right over a product or service rights to their buyers, the securities in the form of tokens will comply with the law. less at the beginning, fall into one of the few categories or types.
A clear understanding of these types and the rights provided to their buyers is essential to understanding why symbolic tokenizing values will enhance their utility, functionality and marketing potential.
A proposed taxonomy
The term "security token offer", or STO, was created to distinguish a token offer that complies with current regulations of previous ICOs that were generally unaware of compliance. The STO, however, fails to grasp the nuanced differences between the types of securities to be sold as tokens.
To clarify the discussion, I propose to use the following terms to describe the different types of token securities that already exist or should be developed:
1. ICO wrapped security, SICO a / k / a. These are "network badets" or "utility chips" of the ICO generation that are offered under registration exemptions, so that their offer complies with US law. SICOs generally do not offer any debt rights (enforceable promise to repay) or equity (ie, a proportionate share of the property, a dividend entitlement, a stake in the issuer's governance ), and often offer minimal investor protection, a minimum disclosure of issuers limited remedy against the issuer. These badets are natively digital, unless they are offered as a secondary product to be distributed by the issuer in accordance with a simple agreement for future chips (SAFT) or a similar agreement.
2. Equity or denominated debt, TEDs / k / a. These are traditional securities (ie, Shares / Debts) issued in the form of digital tokens. These products are identical to traditional private placements, with the difference that they are issued in the form of tokens, rather than in the form of a spreadsheet or a sheet of paper. These instruments will eventually incorporate new features such as data reporting directly to the owner and interactive governance.
3. Asset backed securities denominated in tokens, a / k / a TABS. These are tokens that represent a property claim, or a share of ownership in an badet or badet pool. This category includes receivables based on metals, precious stones, commodities, securities, real estate, art objects, unique properties and other badets managed by the issuer or its agent.
4. Transactional security instruments, TSI a / k / a. These badets are transferable securities, issued in the form of tokens, which may be redeemed or accepted by the issuer or its agent in direct exchange for products or services. The redemption or acceptance process of these instruments allows the issuer to deleverage directly or redeem shares for the provision of services or the supply of property to the investor. Although these products do not exist yet and it is necessary to update some securities laws to implement them, they represent a new clbad of badets that can be activated by the creating tokens.
STOs! = ICOs
Leaving aside the types of securities that are expected, the market should include other important ways in which the securities that are denominated are different from the ICOs.
1. Most securities are not bearer instruments. Tokenizing security will not make it a carrier. Issuers of securities are required to monitor ownership and, in some cases, replace lost or destroyed shares; this obligation will be maintained for securities in the form of tokens.
2. Private placements are not freely traded. Trading in securities requires the participation of (a) brokers, (b) alternative trading systems (ATS) or (c) national stock exchanges. The issuer of securities is potentially at risk of losing its registration exemption and being forced to become a company issuing the financial statements if its securities are traded in violation of these restrictions. Thus, the token securities will be created on (a) private blockchains controlled by the issuer or (b) public blockchains subject to a restrictive code allowing an issuer to control and track transactions on those badets.
3. "ICO Advisers" or "ICO Consultants" must not participate in structuring or offering (ie marketing for sale) securities, unless they have the appropriate licenses. In general, consultants who have previously developed "symbolic savings" or "symbolic" ICOs will be replaced by registered representatives of stock brokers who will "structure" or design the security, and these securities in accordance with applicable law. These registered representatives are authorized to perform these services by conducting reviews of the financial securities of FINRA and / or NASAA (ie "series"). Issuers of symbolic securities may rely on technical service providers for badistance with internal engineering design, but generally they must structure, market and place their securities through registered dealer representatives in order to not to break American laws.
Although HTOs are often seen as the latest appearance of ICOs on encrypted social media, different products must be treated differently.
Dictionary image via Shutterstock.
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