The best jurisdictions to launch a Security Token Offering?

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This is a guest contribution by Lionel Iruk. If you would like to submit a contribution please contact Bill Beatty for submission details. Thank you.

So you want to launch a Security Tokens Offering?

A Security Token Offering (STO) is the process of offering for sale a cryptocurrency which may be considered as a security (Security Token). A Security Token may represent the Tokenized version of a number of securities such as equity, debentures or bonds or have features similar to a security. It is essential to note that dealing in securities is highly regulated in most countries across the world and any unauthorized transactions in securities may invite close scrutiny from the regulators.

In this situation, issuance of a Security Token through a Security Token Offering is a process which needs to be conducted in consultation with legal professionals who will guide you about the correct approach and this article is not a suitable for such decisions. An overview of the popular jurisdictions where a STO may be considered are as follows:

1. Malta

Malta has emerged as the first jurisdiction which a detailed legislative framework for the issuance of Security Tokens. With the promulgation of specific legislation such as the Malta Digital Innovation Authority Act, 2018, the Innovative Technology Arrangements and Services Act, 2018 and the Virtual Financial Assets Act, 2018 (VFAA Act), Malta has indicated that it will welcome innovative developments in the field of cryptocurrency with open hands.

Malta through the VFAA Act has indicated that it will use the Financial Instruments Test to determine whether a particular security may be Tokenized. As such it has laid the path for conducting Tokenization of securities. In association with an approved exchange, companies may choose Malta for the tokenization of their equity and conduct a STO. With the wide purview provided under the legislation for tokenization, it is expected that more sophisticated tokenized securities will be offered soon.

2. Cayman Islands

The Cayman Islands may also be chosen for conducting a STO if you only plan to offer the securities to ‘sophisticated persons’ as defined in the Securities Investment Business Law of the Cayman Islands. In case a STO is planned for such sophisticated persons (high value and selected investors only as specified in the definition), a STO through the Cayman Islands would only require a filing with the regulators. It must however be ensured that the general public are not solicited in the process.

3. Vanuatu

Vanuatu may emerge as a prominent destination for conducting a STO owing to its business friendly environment. Potential issuers may seek a securities dealer license from the Vanuatu Financial Services Commission before proceeding to issue a Security Token. You may work together with a cryptocurrency exchange licensed in the country or may seek a license on your own account for dealing with the securities. It may however be ensured that you have the necessary technological expertise for completing the entire process of Tokenization and issuance of the Tokens. Vanuatu with its well developed financial services industry must be on the radar if you are considering a STO.

4. Canada

Canada has emerged as a possible destination for an STO if you are willing to seek the necessary permissions from the regulators before conducting your offering. Canada boasts of a very stable legal system and a certain degree of expertise. A stock market based in the country has already promised to seek regulatory approval for approval for establishing an exchange which can handle STOs. It must however be noted that Canada follows similar legislation on securities like the United States and the compliance costs may be quite high.

5. Switzerland

Switzerland is home to the town of Zug which became world famous as the cradle of the cryptocurrency industry. It is hence no surprise that the Swiss industry noticed the potential of STOs. As a part of this development, it is now known that a digital exchange where Security Tokens can be listed is in the pipeline. The costs for regulatory permissions may however be high considering the strict regulation on securities in the country. An STO in Switzerland is however likely to be very high up on investor agendas.

6. USA

The USA which has some of the strictest regulation for securities across the world also provides exemptions for certain security offerings. Exemptions are provided under Private Placements (Rule 506(b)), Rule 506(c), Rule 504 (Limited offerings), Regulation Crowdfunding and Regulation A. So, if a particular STO is meant to be offered to a limited group of accredited investors only, a STO under one of the exemptions is also a possibility. USA has one of the biggest markets for securities and a STO which has been designed in consultation with legal experts to be compliant with exemptions can be a wonderful way to access this market.

As an issuer of a Security Token, it is essential to understand that there will be a higher degree of scrutiny than a normal utility token. The costs for compliance may consequently be higher. This high price also brings in added advantages. A listing of a STO with the necessary approvals from regulators may be accessible to common investors in comparison to certain utility tokens which were limited to accredited or qualified investors only. So, it is highly recommended that before planning an STO, you must determine your goals for the offering and work closely with legal professionals to ensure that you are compliant at every step.

7. Bermuda

Bermuda has emerged as a leader in the field of crypto based businesses with the innovative Digital Business Act, 2018 which defined ‘digital assets’ to also include a representation of debt or equity. This effectively opened the path for issuance of Security Tokens from an enterprise which has obtained a Digital asset business license from Bermuda. It must however be noted that for an enterprise seeking a license, maintaining a head office in Bermuda has been made mandatory. However, with a favorable regulatory environment and access to world class financial services, Bermuda may emerge as a prominent location for STOs.

Hat tip to Steven Rees Davies from Appleby Global for suggesting the inclusion of Bermuda.

About the Author:

LIONEL IRUK, ESQ., is a CryptoCurrency, Licensing, I‐gaming, international wealth management, attorney and manager at Empire Global Partners LLC and the Iruke Law Firm, PLLC, and frequent legal contributor to CalvinAyre.com. He has been involved in international Business, Real estate, asset development, and iGaming projects throughout the Continental United States, Europe and South East Asia since 2008. His practice focuses on citizenship and residency planning, e-Gaming licensing, tax management, international wealth management, corporate structures, Financial Technology/Bitcoin Law, and issues affecting for profit and non-profit organizations and charitable foundations. He can be contacted at [email protected] or via Skype at leoslaw2.