Security Token Issuer - Decision Time

A security token offering is rarely an issuer’s first choice for funding however it has its use case. Traditionally, companies seek funding from friends and family, then VCs and clients, then strategic investors and institutions then the public markets. This is a path well trodden.

Many startups have taken the recently made available crowdfunding path, working with companies such as Republic, Crowdfundr and StartEngine through the Reg CF. These companies facilitate issuers to raise up to $5MM a year from an unlimited number of US and global retail investors. This method is popularly used by startups to realize seed capital, and by more established small issuers to raise investment to launch new product lines. The regulated companies that offer these services often have hundreds of companies raising capital accessed through their portal and web presence.

Reg CFs can be quite successful if the issuer has an existing client base or social media following. If they lack these, then they often ride the coattails of their Advisory Board - often filled with influencers with both experience and extensive social media followings. Consistent tweets and articles from the Advisory Board members can drive traffic to the investment portal on behalf of the company, raising both capital and awareness.

Perhaps the best attribute to the Reg CF is the speed with which it can be constructed. Most portals describe a process that will only last a few months, with minimal legal work and the minimum in terms of audited finances and company history. With a strong following a company could go from raise conception all the way to completion over the course of about 4 months and with very little upfront employed cash flow.

The downside of Reg CFs is their $5MM per year limit. For companies that want to raise considerably more than this, then other capital raising options need to be explored. These further options can require significant tradeoffs, many of which are not so apparent at first glance. 

US Retail or No?

Issuers have to decide whether they want to raise from US retail investors, and if they do, then how much do they want to raise. If it is less than $5MM, then the Reg CF is perfect. If it is less than $75MM then a Reg A+ should suffice (for a US issuer). But if it is more than $75MM, then a Full Prospectus (S1) is in order. As the issuer moves from Reg CF to Reg A+ to Full Prospectus S1 both the time to market and the upfront costs increase substantially. As we noted earlier, the Reg CF is fast and cheap. However the Reg A+ and S1 brings greater detail and disclosures in the offering memorandum that will need to be crafted by legal teams, and at times go through a question and answer period between the SEC and the issuer. Legal is costly.

If the issuer does not want to raise from US retail investors then their raise becomes significantly easier, with less cost and less time. Here they will raise capital via a Reg D/S.

The Reg D allows them to raise an unlimited amount of  capital from US accredited investors and US institutions. The Reg S allows them to raise capital from retail outside the United States. This Reg D/S combination has proved to be the most popular so far in the security token space. Firstly it costs about the same as the Reg CF, and secondly, there are arguably more international retail investors that are familiar with - and interested in - investing in securities in the form of tokens.

These few snippets tell us that if you want to raise capital relatively quickly in a cost effective manner from retail investors then you have 2 choices - Up to $5MM from US investors through a Reg CF and an unlimited amount of $$$ from Outside the US investors through a Reg S.

Institutions?

For security tokens, institutions have so far been behind the curve as they wait for greater regulatory clarity over custody and accounting. The exception would be the BUIDL token offered through the Securitize platform.

Full prospectus offerings - catering to institutions and retail in and outside the United States have so far been limited only to The INX Digital Company (INX Limited). In this offering they raised ~$85MM from over 7,250 global investors.

The majority of security tokens offered today are done so under Reg D/S with marketing campaigns largely seeking accredited investors in the US and retail outside the US, predominantly located in South Korea and Japan where education on digital assets is more widespread and accepted.

Why a Token?

The question remains. Why on earth would an issuer decide to raise via a security token rather than via the traditional route? Well this comes down to their audience.

If the issuer is looking to tap into both investor $$$ and investor crypto then the token route makes sense. If the issuer’s product is in demand by crypto pioneers - for example a custody wallet, or a crypto trading platform - then a token makes sense. If the issuer is looking to use their token in gaming Web3 infrastructure, then a token makes sense. Finally, if the issuer’s token can be used for stable yield generation by those in the crypto space then a token makes sense.The issuer may decide to use a security token because that is what their audience or utility demands.

Of course, raising capital is only the first step. Once the capital has been raised is there any hope of liquidity? While many portal platforms exist for the raising of capital under Reg CF, few actually allow for secondary trading and exits. While many broker/dealers exist for the raising of capital under Reg D/S few have an ATS for the trading of those assets after any lockup periods have been exhausted. Finally, while secondary exchanges like NASDAQ and NYSE exist for the secondary trading of public companies with capital raised under Reg A+ and Full Prospectus S1, the company still has to jump a few hurdles in order to reach the minimum listing requirements.

Security Tokens on the other hand have a growing secondary market. Digital Broker/Dealers like Securitize, Tzero, Oasis-Pro and INX all offer capital raising services followed by secondary listing availability on their digital ATS’s. This is rather revolutionary.

Most of the time investors in traditional Reg CF, D and S are left in an uncertain state of lock up perhaps indefinitely. However with Security Tokens, a secondary market listing is often available, allowing investors to cash-out of their investment at any time should they change their minds on the investment thesis originally presented to them.

In addition, by being able to physically hold their Security Tokens as proof of their investment in their own digital wallets, investors are often able to claim utility and discounts offered by the issuer - from discounted trading fees (INX) to discounted hotel rooms (ASPEN). 

Decision Time:

Most issuers will make their first decisions based on their capital on hand today. If they have very little, then the Reg CF, D/S routes are the only way to go. If they have capital and are seeking US retail involvement then the Reg A+ and Full Prospectus (S1) may be the correct path  - but only if they have both capital today and time tomorrow, as the speed with which these last two options can be delivered is solely in the hands of the SEC.

The most obvious issuer of a security token would be one that has an audience already in the crypto space and a product that appeals to that audience. If their audience is used broadly outside the United States then this use case would be underlined in bold. Of course, a number of issuers are now not deciding either/or when it comes to tokens and are looking at Hybrid Security Tokens -  a bit of both worlds.

This landscape is developing rapidly with new players, new issuers and new regulations arriving weekly. Subscribe at

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Douglas Borthwick