Security token offering, commonly known as SEC STO or tokenized IPO, is a public offering where digital offerings are issued/sold in the form of tokens by the issuer at any security token exchange. They work by combining blockchain technology with regulatory securities markets to enhance liquidity in the market. The US Securities and Exchange Commission (SEC) has played a major role in regulating the STOs. Let’s learn in detail what it exactly means.
What is an SEC STO?
Security token offering (SEC STO) is a crowd-funding where digital tokens are issued to investors. STO tokens that are issued work as a security for the right to receive any monetary gain/claim on the issuer when accrued. SEC STO provides rights to its holder quite similar to ordinary securities as in the case of shares, voting, or dividends. In simple terms, they are liquid contracts in digital format.
Security tokens provide an ownership stake in a public ledger (blockchain). Those holding SEC STO are entitled to equity, dividends, profit shares, voting, or buyback rights traded at security token exchanges.
SEC STO was created because of the high demand for regulatory oversight of Initial Coin Offering (ICO), which might be used for scamming investors.
What is an ICO?
An initial coin offering (ICO) is an IPO (Initial Public Offering) of the cryptocurrency industry defining how the funds are raised for a new cryptocurrency offering. As in the case of IPO, to raise funds when a new company ventures onto the stock market, ICO is an event where a company sells a new cryptocurrency to raise money.
ICO vs. STO
The process of launching is similar in both the ICO and STO. The only difference lies in the features and working of the issued tokens.
In the case of ICO, the issuer raises capital by putting utility tokens on sale, where the right for using the product/service is conferred upon the owner once the company develops it. While in the case of STO, the company sells tokenized conventional monetary vehicles. Selling equity, where the token holders are conferred with the rights to future gains, is an example of STO.
The FATF’s guidance on virtual assets considers ICOs as virtual asset service providers (VASP). In contrast, the Financial Conduct Authority’s (FCA) UK guidance on crypto-assets classifies them as e-money services.
How can KYC for STOs help?
SEC STOs are not covered under national anti-money laundering laws. If the security token offering issuer involves dealers and brokers to showcase the token sale, AML measures like KYC must be implemented.
Know your customer (KYC) is an identification and customer verification process mandated by regulators and financial institutions to check illegal activities. For security token offering (STO), KYC pertains to the following:
- Compliance with anti-money laundering (AML)/Counter-terrorism financing (CFT)
- Checking the identity of STO investors – as for US citizens, registration rules or exemption rules apply.
Investor identity verification
Though different jurisdictions might have different norms, a standard norm for verification comprises of:
- Full Name
- Date of Birth (DOB)
- Residential Address proof
- Government issues IDs such as Aadhaar, Passports, PAN, driving licenses
So, to verify investors, businesses can ask for any document that is generally a photo ID, which any reliable, independent source has issued. You must submit recent housing insurance, utility bills, multiple taxes documents, or bank account statements for identification.
You need an automated verification process for all SEC STO projects. As the dealings go digital and voluminous, it’s nearly impossible to verify correctly manually. In 2022, Robinhood Markets’ cryptocurrency division was heavily fined $30M by the New York State Department of Financial Services. The accused was found violating cybersecurity rules and AML by using the manual system to review transactions while failing in proper monitoring. Their transaction volume exceeded 100,000 transactions per day.
It expedites the verification process and reduces onboarding time within a few minutes. This will significantly increase the conversion rates. It eliminates the need to hire extra staff to control the whole process.
HyperVerge can help you with the best user-centric KYC solution via its latest tech tools for all your SEC STO projects. Get in touch with them at their website. HyperVerge offers the fastest online ID verification to provide a smooth customer onboarding experience. Having processed more than 700+ million ID and fraud checks, it’s one of the best and largest solution providers in the last 2.5 years.
How are SEC STOs regulated?
Most countries regulate STOs per local securities laws, while some haven’t yet issued any particular laws or framework, such as China.
How are SEC STOs regulated in the US?
SEC STOs are regulated per the Securities and Exchange Commission (SEC) laws under the Securities Act of 1933. However, there are certain exemptions under the law.
How are SEC STOs regulated in the European Union (EU)?
There are no specific regulations for SEC STOs in the EU. However, some other EU regulations apply when it comes to SEC STO. The EU Prospectus Regulation applies when STO tokens are characterized as transferable securities.