Compliantly Issued STO Tokens Drives Liquidity in the Secondary Market
The basic premise of raising capital is to entice investors to invest in your business and allow an investor to benefit from your growth with a prospect of a return and exit.
STO’s offer a newer, faster and lower-cost way of funding a business. Irrespective of whether it’s an IPO, ICO or STO, a securities issuer is accountable to investors.
Unlike cryptocurrencies that offer decentralized issuance, it’s the issuing company that forms the center of investor trust in this new and exciting STO universe in the US.
STO’s in 2019 will likely be offered pursuant to Regulation D Rule 506(c) which means that onward sale is restricted for a period of six months or one year. Restricted securities usually trade at illiquidity discounts of 20% to 25% which reduces their attractiveness to investors.
To bring liquidity into a secondary market traditional equity securities list on regulated exchanges such as NYSE. Security tokens need to list on an alternative trading system pursuant to SEC Regulation ATS.
However, in order to list on a regulated ATS, a security token must comply with various investor protections mandated by the regulators. Simple protections, such as suitability checks for investors, a restriction removal process including affiliates, compliance with insider trading rules, counterparty KYC/AML checks, are both obvious and legitimate requirements.
Planning an STO with such protections “baked-in” to a tokens smart contract from the outset ensures secondary liquidity on a US ATS thereby attracting more primary investors.
Compliant tokens must be issued to investors subject to KYC/AML checks and this should be done by a US registered broker/dealer and not outsourced to lower-cost economies.
The issuer also needs to appoint a blockchain-aware US securities transfer agent in order to custody the restricted tokens in a compliant manner. After US trading restrictions expire, such compliant security tokens are released by the transfer agent for free trading on a US blockchain ATS.
This is how US STO’s will escape the illiquidity trap that they face today and improve their attractiveness to investors.