A Primer March 20, 2019 Last updated on - It all began with an investor-directed venture fund called . In May 2016, it set the record for the largest crowdfunding campaign in history, with a participation of 18,000+ stakeholders that raised 11.5 million Ether (ETH) or US $150 million. It was enabled by the Blockchain technology where the or at least it was until some bad actor(s) exploited a vulnerability concerning recursive calls in smart contract code, enabling them to divert one-third of the funds to a subsidiary account. The stolen funds were put in a 28-day holding period and the Ethereum community debated about possible solutions which resulted in a split of Ethereum network: where the hacker still has the funds and; the one in which they do not - .[1] The DAO Code is Law The DAO (ETC) Ethereum Classic (ETH) Ethereum Later on July 25th, 2017 - the ( ) concluding Tokens as securities. So, a computer code behind a decentralized autonomous organisation, essentially became a security in the eyes of SEC and government agencies around the world started taking note; issuing statements which resonates with those of SEC, and at times more generic resulting in a unclear stance on cryptocurrencies and tokens for the public.[2] US SEC SEC from here issued an investigative report The DAO We must understand that was a special token. It was and not tied to any particular nation state or country and embodied specific claims in its structure and that the code itself was the . The questions of how to deal with the governments was really hard to answer and it still is. Professionals in favor of cryptocurrency regulations are welcoming the stance of SEC to consider most tokens as security while still exploring exemptions (e.g. ) to raise funds for their businesses. provides a from US securities regulation if there are no direct selling efforts within US to US residents/companies. The DAO stateless prospectus SEC Form D Regulation S safe harbor to issuers A research paper entitled proposed two policies to mitigate legal uncertainty concerning token sales - Crypto-Securities Regulation First, we suggest tailoring disclosure requirements to the code-driven nature of token sales. Such an ICO-specific safe harbor would offer a clear and less burdensome path to EU law compliance for token sellers who suspect that their tokens may qualify as securities. This only requires the Commission to amend its delegated 2004 Commission Prospectus Regulation. Second, we propose that, on an international level, governments form a compact to bestow certainty about the application of their respective securities regulation regimes to token sales. This is, first, to avoid regulatory overkill on the one and regulatory lacunae on the other hand in online-mediated, global token sales. Second, overlapping, and partially contradicting, securities regulation regimes can even undermine each other. In the end, only a joint international regulatory regime can efficiently balance investor protection and investor access in the face of the novel generation of decentralized blockchain applications. [3] The paper also calls for an International Convention for crypto securities to help provide the investors and issuers a clear understanding of regulatory landscape. provided a nice summary of the STO Market in her which tells us that geographically, Tatiana Koffman article Due to the nature of complex regulatory environments, US is in the lead for total STOs in the market, with Switzerland taking the second spot. Additional activity is noticeable in European countries, while Asian markets, although leaders in ICOs, are yet to catch up to STO activity. We expect untapped markets to continue to be curious about STOs, following the regulatory lead of the US. while the securities on offer lead by with revenue-share, tokenized funds and asset-backed deals, equities and bonds trailing behind. So to summarize… STOs allow projects to raise funds in a regulated manner, provides investors with rights over assets, profits or revenue in a company and reduces legal risk. Security Token Standard The call to extend the popular and the has been in work for months resulting in describing it as having many of the characteristics of both fungible and non-fungible tokens . Security tokens are designed to represent complete or fractional ownership interests in assets and/or entities. While utility tokens have no limitations on who can send or receive the token, security tokens are subject to many restrictions based on identity, jurisdiction and asset category. [4] The token is believed to have incorporating differentiated ownership, error signalling, document references, gate keeper (operator) access control and issuance / redemption semantics. ERC-20 non-fungible ERC-721 ERC-1400 Supported by participating organisations and individuals including but not limited to - , , , , , , , , . The efforts for a standard will bring uniformity in its structure for the issuers to tokenize and issue various kinds of tokenized assets (securities on blockchain) easily. Polymath OpenFinance Tokeny.pl Vertalo ChronoLogic Scott Purcell Goldmoney Securitize.io celebrus strategies According to a report published in , the securities token platform and recently that tokens can be compliant on a decentralized exchange. CoinDesk Polymath Loopring demonstrated hooray! Recent STOs auctioning US $66 million building on Ethereum Blockchain; a occupied property in downtown Miami, Florida. The company is said to tokenize some US $260 million in four private real estate and debt transactions[6] Invenium Capital Partners WeWork - A real estate investment trust (REIT); single-asset REIT intends to only own the St. Regis Aspen Resort raised funds_[7]_ Aspen Digital - A late stage, pre-IPO technology growth fund; an effort to democratize investment [ ] Andra Capital AndraCapital - Fine Art - Andy Warhol’s 14SEC through dutch auction bidding on platform Maecenas sold Maecenas - Real Estate; investors offered to receive either analog or digital interests in the property in partnership with using 436 & 442 East 14th St, Manhattan propellr AirSwap Ltd - Gaming/Gambling (revenue share token structure) [ ] Lottery.com Lottery.com - STO Exchange (offered equity with revenue participation) tZero - Venture Capital Fund (allowing investors to own up to 10% equity) [ ] 22x 22xFund , , , , , , , , , , , are also worth looking at. SPiCE VC Blockchain Capital Neufund Monetizr (MTZ) INDX Capital BlockEstate TrustToken Corl Gainfy Leaseum Partners Vertalo Hypd Securities Agencies’ crackdown on crypto crowdfunding , a bitcoin futures firm which got its domain seized by US authorities back in September 2018 recently announced -“ Funds of the investors will be returned and founder Patrick Brunner would also be required to pay US $26,000 in disgorgement fees. [9] 1Broker registered in Marshall Islands We are pleased to let you know that we settled the two lawsuits without admitting or denying the factual allegations of their complaints on March 4th 2019.” SEC did not bring any charges against (or ) but made it clear that federal securities law applies to anyone who offers securities in the US or to US citizens.[8] The DAO Slock.it [ ] ICO planned on August 1, 2017. Harbour not Harbor cancelled ether raised after SEC’s investigation several days after the ICO. Protostarr refunded ICO that promised 13x profit was . PlexCoin halted by SEC **Munchee’**s MUN Token was described as multiple times in their whitepaper, but it to be a . Munchee stopped the ICO ( ) and returned the proceeds while cooperating with the investigation. utility SEC concluded security which raised US $15 million In Conclusion Yes. Startups and Small & Medium Sized Enterprises (SMEs) are often facing cash crunch barriers for them to access capital markets doesn’t help. Young and innovative firms should not be restricted by existing system. Should STOs exist? Security tokens can have a huge impact on the financial system and society at large, as they combine the elements of blockchain technology, especially transparency and security, with the legal certainty of traditional financial instruments. This allows firms of any size to securely enter this new evolving ecosystem. Security tokens promise to provide startups and SMEs with an alternative form of financing that gives rise to a new capital market with 24/7 trading that obviates the need for brokers and bank custody of securities.[5] Perhaps. STO projects are usually registered entity which add to the legitimacy of the project and have the issuers accountable for their actions. Are they better than ICO? Does regulations mean Security Tokens will see upward-only growth ? Not really, but sure they are a regulated form of crowdfunding and have tremendous potential to change the securities markets. A on tells us that even the highly regulated traditional market is also driven by hype. is still feared among the investors. should be a lesson that even though the businesses are at times legit, the valuation should be accessed with utmost care. Just because the offering is now called ICO or IEO or STO - it still is risky, and being informed is important. Netflix documentary The China Hustle Financial crisis of 2007–2008 Dot-com bubble There is an old joke that the biggest lie on the Wall Street is that - This Time, It’s Different. — [Disclaimer] This article is not a legal advice. The views are personal and the ones that refer to external sources belong to them. Sources The DAO (organisation), wiki - https://en.wikipedia.org/wiki/The_DAO_(organization) Cryptocurrency Regulations - https://medium.com/@rahulmanuwas/cryptocurrency-regulations-a-complete-summary-912e6de0c7a4 Hacker, Philipp and Thomale, Chris, Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law (November 22, 2017). European Company and Financial Law Review Forthcoming. Available at SSRN: or https://ssrn.com/abstract=3075820 http://dx.doi.org/10.2139/ssrn.3075820 The Security Token Standard - https://thesecuritytokenstandard.org Ante, Lennart & Fiedler, Ingo. (2019). Security Token Offerings on the Blockchain: Capital Market Access for SMEs?. 10.13140/RG.2.2.21378.94408. Invenium Capital Partners - https://www.coindesk.com/66-million-building-to-be-tokenized-on-ethereum-blockchain-in-record-deal Coindesk report on Templum hosting token sale — https://www.coindesk.com/regulated-trader-templum-hosts-security-token-sale-for-luxury-resort Sean Au & Thomas Power (2018) Tokenomics - https://www.packtpub.com/big-data-and-business-intelligence/tokenomics Coindesk report on 1Broker - https://www.coindesk.com/sec-cftc-charge-bitcoin-futures-firm-1broker-with-securities-law-violations

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