Security tokens fall under the federal security regulations. So, in USA security tokens need to follow the following four security token regulations as per the Securities Act of 1993:
Regulation D will allow an offering to be registered with SEC, provided a “Form D” has been filled by the creators after the securities have been first sold. The individuals offering this security may solicit offerings from investors in compliance with Section 506C. The section 506C requires verification that the investors participating are accredited. Also, the information provided during the solicitation is free from false and misleading statements. Generally, in Regulation D offerings, investors are not allowed to sell their ownership stake for at least 12 months after the purchase.
This regulation allows the creator of the security token to offer SEC approved security to the non-accredited investors. Solicitation for up to $50 million is required. The issuance of regulation A+ offering generally takes more time and costs more as compared to other options. This regulation treats all the money raised as revenue and tax it like the money doesn’t represent equity in the underlying company.
Regulation crowdfunding or Regulation CF provides a simple option for the issuer for tokenization. But, it is limited to a small amount of capital ($1.07 million or less). This regulation allows companies to raise up to $1.07M in a year on a SEC-registered platform. Investors are subjected to investment limits based on their income and net worth. There are less financial and information disclosure requirements than Regulation A+.
This happens when the offering of the security is set to be executed in a country other than the US. It is not subjected to registration requirements under the section 5 of the 1993 Act. But the creator of the offerings still has to abide by the rules of the country where the offering is set to be executed.
Also Read: Five benefits of Security Tokens
The crypto community took a sigh of relief when SEC ruled Bitcoin and Ethereum to not be securities. However, the scene of regulations regarding the security tokens is still not clear. As, there is no set path for it. The lack of proper regulations is hampering the growth of security tokens in the market. But just suppose that if every type of ownership can be tokenized, it in itself is a multi-trillion-dollar market.”
Disclaimer: The above summaries of US securities law of Regulation D, Regulation A+, Regulation CF and Regulation S, are merely just rough compilation. They should not be used as legal or investment advice. You should consult a lawyer for any and all questions you have.