Registered vs. Unregistered | Unrestricted vs. Non-transferable

We want to talk about “Security Tokens” and what can be drivers for their various structures, and what that means from an investor standpoint as well as a line of business owner/developer of an offer.

We’re one of the first Security Token Offer’s in the world, and we’d like to talk about some of the challenges we’ve faced and are facing in regards to the structure(s), restrictions, expectations and most importantly perspectives, that are in our opinion, the sum “collective state” of the blockchain+STO microcosm.

First, let’s get into structures and restrictions, and we’re going into these assumptions that we’re considering United States soil to be the place of business and rules and regulations we’re attempting to discuss, and doing so in relation to U.S., Canada and/or U.K. investors.

STRUCTURES & RESTRICTIONS:

*A security (i.e., token, share, coin) can be registered (a lengthy and costly process)

*A security can be unregistered

Registered Securities:

*Can be offered to non-accredited investors;

*Can be transferrable;

Unregistered Securities:

*Can be offered publicly ONLY to “accredited investors”;

**These investors must be verified as accredited;

*Can NOT be transferrable

With most if not many, you’re not going to see (at least not out of the gate), hundreds of thousands of dollars in upfront capital spent in registering a security. With that said, due to the above restrictions on unregistered securities, the token MUST be restricted.

So with that said, you should be able to sort the market a bit better knowing this. So, what is the implication to the investment structure then and it’s restrictions, these are the “investor expectations”.

EXPECTATIONS:

From an investor expectation standpoint, they’re buying “crypto”, and to date, that’s largely come in the form of an unrestricted asset via the ICO, being a coin or token. They could buy it, wait for exchange listing, and gain or lose on their initial contribution value based on market value fluctuation and volatility.

In the case of an unregistered security token, which if properly offered and structured, it’s restricted/non-transferable, going to an exchange or the open market is not going to happen. This leaves one solution, to provide language, a plan and architecture for liquidating the security.

Investors expect their investment to increase in value, or to have bought it at a discount, where upon liquidation they receive more than they contributed. Most investors, in not yet fully understanding the key features of different types of securities, are not aware of the restrictions and thus have expectations that can not be met.

To participate in a Security Token Offer, that is public, that is not SEC registered, means you have an investment that you can not “self-liquidate”; rather, you are completely reliant on the issuer of the security to liquidate you, either into another security, a utility or some other fiat or asset.

*Key point, investor can not self-liquidate technically, being that it’s non-transferrable, when dealing with unregistered securities that are publicly offered;

Now this could come in the way of converting, it could be a token purchase agreement where a liquidation value per security share is agreed/promised, or it could even be in that it entitles one to an allocation of the actual utility once the DApp/platform/framework that uses the utility goes live.

PERSPECTIVES:

People in large need to look at first, is this security registered or not; they need to ask where is the corporation that is offering the security located, offering to and by what means are they liquidating?

Most have been buying, selling, holding and trading cryptocurrencies and related digital assets for many years now, and even seasoned cryptocurrency folks are not yet plugged into the language and legalities of a security.

People consciously or sub-consciously have auto-tagged the word “Security” onto their concept of an ICO, however, the ICO look/feel, is only going to be seen on registered securities. Be sure you are aware, that your funds if invested in an unregistered security offering, are non-transferrable, and require your issuer to liquidate you by some manual or automated means; the how/when/where your security liquidation happens will be driven by the security issuer.

CONCLUSION:

No two STO’s will be the same, but the biggest thing to look for is registered vs. unregistered, as this determines transferability first and foremost.

In regards to the value/benefit of an unregistered security, is that the security issuer is responsible to liquidate you and not watch you fade into the rear-view mirror.

Being that the security is non-transferable, your only means of exit is for them to eventually redeem your security with an asset that is transferrable and/or able to be liquidated. This ensures perhaps not the record setting returns on investment of 30,000% that some have realized, but lesser degree of risk and a greater chance of realizing the gain.

Your token purchase agreement on a unregistered, non-transferrable security investment should include a liquidation value or exchange rate of some sort, or spell out how the security is anchored to the future utility, etc., and again, remember, in this case you’re not going to be receiving some asset that is going on an exchange, at least not in the legal state/structure it was in during the time of offer.

Thanks for reading, and please be smart, talk to your own lawyer or financial expert. We’re NOT giving legal advice here, and this article is NOT intended to be legal or financial advice. It’s sole intention is to get the large blockchain and crypto audience to tune in to these key attributes of securities and how they can impact your financial expectations.