How to Conduct a Securities Token Offering Legally: 10 Key Takeaways
Legal Nodes Team
On March 13, 2019, Legal Nodes co-hosted its very first public event in Berlin, Germany – a panel discussion “How to Conduct a Securities Token Offering Legally: Practical Tips from the Key Market Players”.
Security Token Offering has become one of the hottest topics in the crypto space and brought with it a huge number of legal and compliance questions surrounding such offerings. Moreover, conducting an STO legally does not only mean abiding by a set of rules, set forth to regulate securities market – it also requires establishing compliant tech solutions within a compliant blockchain ecosystem.
This is why in our pursuit of spreading relevant legal information, we teamed up with LongHash Incubator Germany headed by Jasmine Zhang, whom we are very thankful for her help and support, to organize a panel discussion with the best experts in the field of STOs. Our team of speakers comprised of:
- Nele Wollert, MD at Fractal Launchpad, a company that offers compliant customer identification service (KYC), which can be used during STOs;
- Philipp Pieper, CEO of Swarm, a tokenization platform that enables issuance of SEC-compliant security tokens;
- Henning Franken, General Counsel at Bitbond, the first global business lending platform that operates globally that is currently carrying out the first regulated sale of security tokens in Germany;
- Lele Canfora, Head of Token Sale Marketing at Bitwala, a crypto-banking company that provides accounts, which combine everyday banking features with ones built for the crypto economy;
- Margarita Sivakova, Co-Founder and CEO of Legal Nodes and a blockchain legal consultant, who advises on digital assets, token offerings and securities regulation, who moderated the panel.
10 key takeaways from the discussion:
1) STOs are more suitable for mature companies acting in the blockchain sphere and should not be treated as “cheap IPOs” as they carry with them cumbersome paperwork and financial expenses;
2) Issuers of security tokens should identify the type of financial instrument issued and geographical location of target investors. Both of those factors will influence the financial regulation and compliance measures the project would have to implement;
3) Territories and categories of investors included in the token sale define the scope and nature of the KYC procedure and due diligence mechanisms applied to investors. Your KYC-providing platform has to ensure that your due diligence mechanisms cover every possible verification scenario;
4) STO investors should not necessarily be only limited to affluent individuals but rather to those who have a good grasp of the blockchain technology, financial markets as well as take great care in studying the project's history, type of security issued and the team behind the project before investing;
5) Technical platforms for issuing security tokens should have the mechanisms for tracking changes of token ownership as financial market legislation often contains restrictions on their secondary trading. Thus, any transfer of ownership rights to tokens has to be in line with effective laws;
6) Choosing a safe custody of security tokens is one of the key challenges to any STO project that holds investor’s assets and needs to minimize the risk of them being lost or stolen;
7) There are potential legal issues with paying dividends under security token bought by residents of “restricted/ black listed countries” on decentralized exchanges and who should bear the risk of tokens being bought by citizens of such countries;
8) Secondary market trading is still quite restricted due to the lack of platforms on which such tokens can be traded as there is a lack of clarity in terms of how they should be regulated;
9) The difference between smart contracts for ICOs and STOs lies in the restrictions of transfer of assets in-build in the code: unlike security tokens that are restricted by design, the issuer of utility tokens cannot restrict the transfer of utility tokens from one wallet to another;
10) Re-issue of security tokens (e.g. in an event the key to a wallet has been lost) is possible, but has to be a complex procedure, including repeated verification, otherwise an asset could be deemed unreliable.
Evidently, legal side of things is crucial to any STO project’s success. For once, the word “legal” was mentioned more than “blockchain” during the discussion panel on the topic of STO.
With the continued spread of blockchain technology and growth in its adoption, we expect more countries to issue clearer regulation as to how STOs should be conducted so as to protect investors and encourage innovation in this highly promising field.
Here, at Legal Nodes, we will continue informing our readers on the latest trends in this industry in order to help them stay within the legal parameters at all times. Our legal experts are always ready to support startups in their journey.
Click the video link below to see how our discussion panel went all by yourself!
Once again, Legal Nodes Team would like to express our warm words of gratitude to everyone who attended our event.
We look forward to meeting you in the future!
Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.
Legal Nodes Team