How to Create a Legal and Compliant STO Project (Part 2) - Raising Mechanism and Tokenization
This article is from Digital China (ID: shenzhoushuzi_group), author: Sun Jiantao (CEO of Digital China, founder of Goopal Group), please indicate the author and source when reprinting.
This article is from Digital China (ID: shenzhoushuzi_group), author: Sun Jiantao (CEO of Digital China, founder of Goopal Group), please indicate the author and source when reprinting.
In the previous article, we described the four links that a qualified STO project should include: preliminary strategic planning and preparation, legal and financial compliance, tokenization of securities, and circulation of ST. At the same time, it introduces in detail the first link, namely the four steps of the preliminary strategic planning and preparation link.
As mentioned in the previous article, these four links of STO are progressive and interlocking, forming a complete STO business closed loop. This article will elaborate on the second and third links.
2. Legal and financial compliance
For the STO project, after completing the preparatory work of the first stage, it is necessary to carry out relevant legal and financial compliance issues. In the third article of the series "STO - Supervision is not just the sword of Damocles, but also the booster of the outbreak" and the fourth article "Science and Technology Innovation Board Attack 5, where will STO go under the frequent policies?" "In ", I have made a brief discussion on the legal compliance of global STOs. I will not repeat the discussion here, but focus on the decisive role of legal compliance on the project fundraising mechanism.
In fact, legal compliance is equivalent to the birth certificate of the STO project. At the current stage, it has serious geographical attributes and directly determines the registration and fundraising mechanism of the project. How to choose a compliance structure is actually determined as early as the first link of the STO project's commercial closed loop-the project's preliminary planning and preparation. We still look at the choice of compliance structure and the resulting registration and fundraising mechanism from some cases.
Take Aspen Coin, the first STO project in the real estate industry, as an example. After their IPO failed a year ago, they decided to start STO according to the exemption clause of Reg D 506(c). As you all know, Reg D is actually a regulation for private equity financing. Its key rules are: 1. There is no upper limit on the amount of financing, and it is only for accredited investors (Accredited Investors), including qualified investors of the United States and non-US citizens; 2. . No SEC approval is required, just fill in Form D, but there is a one-year lock-up period and a maximum of 2,000 investors; 3. Since it is only issued to verified and qualified investors, it can be widely publicized.
In addition, there are some additional elements, such as: open market promotion can be carried out; issuers need to conduct KYC and AML verification; intermediaries must be registered brokers, etc.
Therefore, Aspen Coin is not only the first STO in the real estate industry, but also a relatively complete legal and compliant project at this stage. Elevated Returns is its asset manager, Indiegogo is its main marketing platform, and Templum Markets LLC is its Issuers and trading platforms. At present, Aspen Coin has completed the initial fundraising and entered the lock-up period, and the RegD clause is also the main clause chosen by most STOs that follow US law.
Of course, under the US legal framework, there are several other provisions:
Reg S is a regulation that regulates U.S. companies facing overseas investors. It is aimed at investors outside the U.S. (outside the US) (offshore investors), allowing non-U.S. investors to invest in U.S. companies without any restrictions on the wealth of investors. SEC registration is not required, and stocks and bonds can be issued.
Reg A+ is a small IPO with two levels: Level 1 is a fundraising cap of US$20 million and requires SEC and state review, but there is no ongoing reporting requirement; Level 2 is only SEC review, with a fundraising limit of US$50 million, Each investor can invest up to 100,000 US dollars, and there is a 2-year financial review period. After financing, all financial disclosures and annual reviews are required, which will generate a lot of legal and audit expenses. Investors are limited to over 18 years old, and non-qualified investment is allowed By.
Reg CF is the first step in the capital ladder of early companies. Investors are limited to over 18 years old. It is the fastest and cheapest way to raise funds from qualified and non-qualified investors up to US$1.07 million.
Let's show it with a diagram
There are also negative cases, such as CarrierEQ and Paragon Coin, two companies that were fined by the US Securities Regulatory Commission some time ago. The U.S. Securities and Exchange Commission (SEC) stated that it will impose civil sanctions on the two project parties, including: the tokens must be valued at the time of purchase and returned to investors in U.S. dollars; the tokens must be registered as legal securities; Report at least once; $250,000 fine each. This is the first time that the SEC has announced civil penalties for cryptocurrency founders who violated the regulations. The most important reason is the content and method of fundraising.
The above cases are all STO projects in the United States, so what about the compliance process of STO projects outside the United States? We still look at the aforementioned case, HydroMiner (H3O), which is the first security token financing experiment in Europe that tries to comply with current regulations. The funds are used for the operation of large-scale, environmentally friendly electronic currency mining projects, and its compliance is quite complicated .
As Europe's first security token financing attempt to comply with regulations, the funds of HydroMiner (H3O) are used to establish a cryptocurrency mining business using clean hydropower stations in Austria. H3O Token is based on the ST of the participation right, and the participation right holder follows Regulations participate in liquidation proceeds of HydroMiner. According to the white paper on the official website, it can be seen that its issuance is regulated by the US SEC, and its ST is provided and sold to US and non-US investors under the Reg D and Reg S registration exemptions stipulated in the US Federal Securities Law, or through local securities in other jurisdictions. Sale by way of exemption from legal requirements. However, it is also subject to the Austrian capital market regulations, and a full prospectus is required to be published during the offering period and approved by the Austrian Financial Market Authority (FMA).
It can be seen from HydroMiner (H3O) that when the project compliance and fundraising mechanisms correspond to different jurisdictions, due to the need to take into account the supervision of multiple regions at the same time, the process will be more complicated and the restrictions will be stricter. Such as meeting the regulations of the Monetary Authority in two jurisdictions, issuing prospectuses, and so on.
It is also worth noting that for companies registered in China, since China does not yet have regulatory provisions for STO, there is no legal and compliant path for the time being. However, it is possible to imitate the overseas listing process of Internet companies, first register an offshore company, and then control the domestic company through a foreign-invested enterprise or VIE structure, and the offshore company will issue ST. At present, this approach seems to be able to bypass supervision, but the project party needs to consider STO regulatory risks, foreign exchange control risks, tax risks, and investors need to consider VIE control agreement risks.
It can be seen that in terms of compliance process selection, STO projects in the United States follow relevant laws and regulations. Regulatory landscape in global markets.
3. Securities Tokenization
After the legal and financial compliance and the fundraising mechanism are determined, the next step is the key link of STO, the tokenization of securities. There are two key points. One is that asset securities are tokenized (that is, certified) through blockchain technology. ; The other is that the tokenized asset securities will enter the issuance process. This is the transformation of the carrier of securities by the blockchain, and it is also the most important step in what we call financial practice. There are currently multiple standard protocols for tokenization of securities. Let’s take the current STO service platform as an example to see three typical securities tokenization processes: Polymath-ST 20 protocol, Habor-R-token protocol, and Hashgard-TAMT protocol.
Polymath (ST 20 protocol)
Founded in 2017, Polymath is a platform that helps assets realize securitization tokens. It provides the underlying protocol (ST20) of security tokens, allowing individual and institutional investors to complete the certification of qualified investors, and allowing legal investors to participate in STO under the premise of complying with government regulations.
KYC service providers, legal advisors, technology developers, and investors gather on the Polymath platform. Token-issuing companies or teams can trade security tokens, authenticate investors, matchmaking with judicial advisors, and connect to the developer market through the Polymath platform. The platform uses ERC20 native tokens as the underlying commodity unit of account that connects customer authentication, legal services, and developer services.
Polymath's ST issuance process is as follows:
The project side uses the ST20 protocol to generate its own security tokens on Ethereum through the platform. At this time, all the tokens are in the project side and do not support transactions (until the compliance procedures are completed);
The project party chooses a legal agent in both directions on the platform to jointly complete the compliance procedures of ST;
The project party sets trading restrictions on tokens according to compliance requirements, such as only compliant investors can purchase, etc.;
The project party selects technology developers in the platform to write the transaction restrictions suggested by the legal agent into the STO contract;
Investors complete KYC through the KYC service provider in the platform;
After passing KYC, investors purchase tokens that match their own situation.
Before investors can buy tokens from the initial offering, they must be whitelisted. The whitelist process can be executed according to the wishes of the issuer, and the final result is a list of ST smart contract Ethereum addresses that are added to the whitelist. When the pass is to be transferred, since it belongs to the ST-20 pass, the verification transfer (verifyTransfer) will be called internally before the transfer; in turn, the verification transfer uses a whitelist to determine whether the transfer between two accounts is possible.
Habor (R-token protocol)
Harbor is another common open source platform based on the Ethereum blockchain. It uses a decentralized compliance protocol (R-token compliance protocol) to help project parties implement and issue ERC20-based ST. Habor can also provide standardized processes such as KYC and AML, compliance services, taxation, and information disclosure.
The R-token protocol is a smart contract for ERC-20 tokens, which checks regulatory requirements and executes transactions for ERC-20 tokens during transactions. It defines an open source standard for compliant transactions of security tokens, realizes KYC and AML on the Ethereum chain, and regulatory services such as taxation. The tokens that meet the R-token standard can be traded on any exchange that supports the ERC-20 standard trade.
It is worth mentioning that R-token has designed two compliance levels, namely the participant level and the token level. The participant level mainly stipulates the circumstances under which qualified investors can send and receive tokens; the token level mainly stipulates the lock-up period under legal compliance or the number of qualified investors holding.
Under the above two compliance levels, R-token realizes the compliant transaction of tokens, converts compliance requirements into codes, and ensures that only qualified investors can trade tokens; at the same time, the issuer can also limit the number of investors and holding period. Investors need to pass KYC and AML identity verification, and can be added to the whitelist of Ethereum after approval. R-Token self-manages all transactions. When a transaction is initiated, the whitelist is checked to ensure compliance with regulatory requirements.
Hashgard (TAMT protocol)
TAMT is a relatively popular protocol recently. This is due to the fact that the platform Hashgard it is on is a digital financial public chain. The Hashgard technology empowerment platform has been created on the chain, which can complete services such as auditing and management of smart contracts. Through integration from Participants in a series of links from compliance to smart contract security, wallets, exchanges, etc., solve technical and service issues for STO issuance.
TAMT is not a pass, but a standard that specifies a series of standardized interfaces in smart contracts. Smart contracts that meet this type of interface design specification are collectively called TAMT. This standard is backward compatible with ERC20, and is open source and easy to expand. It has the function of atomic exchange of digital assets that does not require the trust of trading parties.
In essence, TAMT uses a pass to represent a share of the equity of the asset package it belongs to, so it belongs to ST. TAMT puts traditional asset management on the chain, realizes asset on-chain, management process on-chain, fund issuance, subscription redemption, liquidation, and dividend on-chain. At the same time, it simplifies the proof of rights and interests under the chain of STO. It does not require complicated off-chain processes and high costs to prove the corresponding relationship between ST and the rights it represents, and realizes the corresponding beneficial rights in ST and asset packages through smart contracts.
At present, TAMT is in the drafting stage, and will implement the standard on the ETH network first, and will migrate to the Hashgard public chain in the future.
