Can exchange token feasible as security token?

[briansparks]

Hello,

I need a suggestion from legal point of view.
Since ICO are difficult to go in current market and STO have better market. For an upcoming exchange, we can register token as security in Reg D scope. And that can be presented as STO, instead of ICO. Is there any legal complication later ?
Compare it like BNB token of Binance. Suppose if BNB is a security, would there be any legal complication, if users will sell/buy and trade with BNB ?
Suggestions please.

Thanks in advance

[squatter]

Hello,

I need a suggestion from legal point of view.
Since ICO are difficult to go in current market and STO have better market. For an upcoming exchange, we can register token as security in Reg D scope. And that can be presented as STO, instead of ICO. Is there any legal complication later ?
Compare it like BNB token of Binance. Suppose if BNB is a security, would there be any legal complication, if users will sell/buy and trade with BNB ?
Suggestions please.

Thanks in advance

One of the conditions under Regulation D is that the securities being sold contain restrictions on their resale. That means you're likely to see less liquidity in these markets because investors can't freely trade them (legally) on secondary markets. Per the SEC:

“Restricted securities” are previously-issued securities held by security holders that are not freely tradable. Securities Act Rule 144(a)(3) identifies what offerings produce restricted securities. After such a transaction, the security holders can only resell the securities into the market by using an effective registration statement under the Securities Act or a valid exemption from registration for the resale, such as Rule 144.

More specifically:

A security owner willing to sell a security restricted to the public has to meet five conditions:

• Holding Period: typically between 6–12 months
• Current Public Information: Information regarding the nature of its business, the identity of its officers and directors, and its financial statement publicly available
• Trading Volume Formula:<1% of the outstanding shares
• Ordinary Brokerage Transactions
• Filing a notice of proposed sale with the SEC

Here's an article that explains all the trouble investors need to go through to sell Reg D restricted tokens.

[briansparks]

Thanks for reply and nice links.
I am assuming that, it is supposed to be US-residents. I US/China residents are excluded (as will be written in TnC) from ICO sale, these complication will not come into picture ?
I am looking at having this token as security, but not selling it to US residents. Many investors (even outside US) prefer to go only with Security tokens. That is the reason, looking possibilities in this option.

[squatter]

Thanks for reply and nice links.
I am assuming that, it is supposed to be US-residents. I US/China residents are excluded (as will be written in TnC) from ICO sale, these complication will not come into picture ?
I am looking at having this token as security, but not selling it to US residents. Many investors (even outside US) prefer to go only with Security tokens. That is the reason, looking possibilities in this option.

If you're not selling to US residents, then the Reg D restrictions don't apply.

However, it's definitely not enough to simply write in the terms and conditions that US residents are prohibited. You likely need to go further than restricting US IP addresses too. You'll need an adequate KYC screening process to keep out US investors. If you don't implement it carefully, you may run into problems from federal or state regulators, like this:

In his defense, Bensonoff raised the fact that the tokens are not available for sale to U.S. citizens and that screening procedures had been established to ensure that sales would not be made to U.S. residents. However, the Division found that the screening procedures were inadequate to prevent the sale of Caviar tokens to U.S. residents, noting that at least two U.S. residents were approved to participate in the ICO. The complaint further describes the types of general solicitation Bensonoff and Caviar used to promote the ICO, including websites and other social media platforms (including those of third party promoters) that are accessible by investors in the United States.

[briansparks]

I am getting more understanding now. For our purpose of issuing security purpose, I am learning -
- I can register it under Reg D 506, which is a quick process at SEC.
- I should mention it in TnC, followed by proper KYC and restricting US IP address.
- I can sell it to non-US residents (UAE and Saudi, in our case), saying that it is registered with SEC and a security token.
Please correct me if I am missing any point here.

I am still looking for one more answer. After ICO and after development, when out exchange will be launched, are there any legal limitations to trade (or trady by) a security token. Usually exchanges avoid to keep their token as security and I read few similar posts too. That is reason, I was little concerned. For reference, consider if BNB was a security token, which operates all over world (including US).