Europe is more Democratic than the US for Security Token Offerings

The STO market is undergoing rapid worldwide development. For certain STOs, the EU is making it easier to engage a broader group of investors than the US

Claus Skaaning (DigiShares) and Scott McKenzie

This material is intended for general information purposes only and does not constitute legal advice.

STO platforms, such as DigiShares, can manage 1,000 small investors as easily as 10 large investors and automate many processes. This improvement in logistics allows companies to expand their group of potential investors and engage a far broader group – some might call this a more democratic approach to investment. This draws from ideas of engagement as a key part of society. As Louis L’Amour described the concept of democracy “we must be…participants, not simply observers.” In comparing the different legislations concerning private placements and public offerings in the EU and the US, we can see that often Europe may be a better choice for launching an STO.

The DigiShares platform is not enough to facilitate this expansion in participation, technology and law need to work hand-in-hand. One of the most important choices that a company must make is where the legal entity that will conduct the STO is located. Having a good roadmap is critical for a raise, so that needs between engaging the most investors, speed, and cost can be balanced.

DigiShares is based in Europe and works with projects world-wide. Most clients need a jurisdiction that is receptive to business, provides a clear framework for token offerings, and where all needed pieces can be assembled quickly and without undue expense. For example, many clients need jurisdictions that have low levels of corruption, a good financial industry, and are based in a jurisdiction that is acceptable to their potential target investors. They need the STO to happen with legal clarity so that if required, securities such as stocks and bonds can actually be tokenized in a legal manner – and treated fully digitally on the blockchain. Finally, the cost and ease of notification and registration of the STO in the local jurisdiction and the degree of difficulty in producing investor materials for the STO in this jurisdiction should not be excessive.

Europe does not require a prospectus to be approved by a national competent authority (such as BaFin in Germany or Financial Conduct Authority in the UK) if the raise is less than EUR 1M (across all member states). Between 1-8M, Europe provides flexibility to let states make their own regulations with many (such as Denmark) not requiring a prospectus to be filed. Any type of investor may be targeted, bringing the real sense of participation and not just observation to a broader group of people. It is truly a democratic capital raise enabling smaller investors to invest at a very low minimum subscription price. Such a raise can be conducted by the issuer on their own and no special license is required. And the raise can be repeated in each 12 month period. A full listing of the EU prospectus thresholds can be seen here.

To conduct a similar raise in the US, a project has a more difficult path. Going by Regulation CF (Crowdfunding) they can raise up to $1.07M from retail investors. However, this must be conducted by special service providers who have a FINRA licensed crowdfunding platform (or via a broker-dealer) which adds an extra layer of cost. The well known Regulation D exemptions are also compelling for many looking to raise funds, however their restrictions limiting investment largely to accredited investors may not work for the strategies for all companies. It is imperative that companies follow the law, so they do not end up with extreme problems such as Kik or Telegram have recently had. A Reg A+ approach can go up to 20M, but the information about the offering must be filed and approved by the SEC. To date, very few companies have gone this route and the longer time-frame and higher costs may be prohibitive to many projects.

In an effort to find the most democratic and engaged group of potential investors, certain solutions present themselves as having some merit. A European EUR 5M prospectus-exempted raise (retail) and filing a US Regulation D (accredited only) would be one option that strikes a balance. Of course no blueprint is perfect and there are no one-size fits all approach so it is important that every project consult with competent legal professionals. The above suggestions are only a broad outline of what may work for some projects, the details of course are more complex and often require additional reporting and filing requirements and may require certain other restrictions on the liquidity of the offer.

As a STO platform provider and as a legal services provider, DigiShares and Scott McKenzie, are constantly reviewing and recommending legal structure for STOs. This material is intended for general information purposes only and does not constitute legal advice. For legal issues that arise, the reader should consult competent legal counsel in their jurisdiction.

About DigiShares

DigiShares provides a platform for issuance and post-issuance management of tokenized securities. It helps with the initial design of the security token such that it fulfills the requirements of the issuer jurisdiction, using the most popular security token protocols and helping ensure that the token may later be traded on forthcoming security token exchanges.
DigiShares is your trusted partner to ensure that your digital shares will be compliant and liquid.

About Scott McKenzie ([email protected])

Scott is an American lawyer who has worked with a range of blockchain startups and companies looking to raise funds.