Determining Registration or Exemption for a Security Token Offering

Before launching a Security Token Offering (STO), issuers must determine whether the offering requires full regulatory registration or qualifies for an exemption under applicable securities laws. This decision defines investor eligibility, marketing restrictions, compliance obligations, and secondary market liquidity.

A registered offering must be approved by a financial regulator before any tokens are sold. In contrast, an exempt offering must comply with specific conditions, such as investor restrictions, marketing limitations, and resale restrictions. Establishing and documenting this classification is essential to ensuring regulatory alignment, investor protection, and legal transparency throughout the token’s lifecycle.

Registered Offering

A fully registered STO complies with all applicable securities regulations and is subject to strict disclosure, reporting, and investor protection requirements.

✔ Regulatory Approval – The STO is formally approved by a financial authority, such as:

• SEC (United States)

• FCA (United Kingdom)

• FINMA (Switzerland)

• ESMA / BaFin / AMF (European Union)

✔ Prospectus & Disclosure – Requires submission and approval of a prospectus and supplementary regulatory filings.

✔ Investor Eligibility – Open to both retail and professional investors, expanding the potential investor base.

✔ Public Marketing Allowed – General solicitation, advertising, and mass-market outreach are permitted.

✔ Ongoing Compliance – Issuers must fulfill financial reporting, periodic filings, and corporate governance obligations.

Example

A company tokenizing commercial real estate in Germany opts for a fully registered STO under BaFin regulations. This allows both retail and institutional investors to participate while ensuring compliance with MiFID II and EU securities regulations.

Exempt Offering

An exempt STO qualifies under specific regulatory frameworks, eliminating the need for full registration while imposing restrictions on investor eligibility, fundraising limits, and resale conditions.

✔ Regulatory Exemptions Include:

• Regulation D (U.S.) – Limits offerings to accredited investors without full SEC registration.

• Small Offers Exemption (EU/UK) – Allows capital raising below a set threshold without a full prospectus.

• Qualified Investor Exemption (Switzerland) – Restricts offerings to institutional and professional investors only.

✔ No Full Prospectus Requirement – Instead, issuers must provide disclosure documents tailored to exemption requirements.

✔ Limited Investor Pool – Typically restricted to accredited, institutional, or professional investors, excluding retail participation.

✔ Resale & Transfer Restrictions – Tokens may be subject to lock-up periods or limited secondary market trading.

✔ Restricted Marketing – Public advertising is generally prohibited, requiring direct outreach to pre-qualified investors.

Example

A private equity fund in the Cayman Islands launches an STO under Regulation D in the U.S., restricting participation to accredited investors and limiting resale options for one year under SEC rules.

Why This Step is Important

1. Ensures Legal Compliance

✔ Establishes whether the offering requires full regulatory registration or qualifies for an exemption in each target jurisdiction.

✔ Prevents legal risks associated with unregistered securities offerings.

2. Defines Investor Participation

✔ Determines whether the offering is open to retail investors or restricted to qualified/accredited investors only.

✔ Helps issuers structure the appropriate investor eligibility and KYC/AML process.

3. Affects Marketing & Distribution Strategy

✔ Registered offerings allow mass-market advertising, while exempt offerings may require direct investor outreach.

✔ Impacts how security tokens are positioned and promoted to investors.

4. Impacts Liquidity & Secondary Market Trading

✔ Registered security tokens have fewer trading restrictions, increasing their attractiveness on secondary markets.

✔ Exempt security tokens may be subject to resale limitations, affecting liquidity and transferability.

Actions for Issuers

1. Determine Registration Status

✔ If registration is required, prepare and submit a prospectus to the appropriate financial regulator.

✔ If an exemption applies, identify the specific exemption framework and comply with all regulatory conditions.

2. Select the Appropriate Regulatory Body

✔ Identify which financial authority governs the STO’s jurisdiction and ensure all compliance requirements are met.

3. Record the Decision in the Smart Contract

✔ Store the registration status and regulatory body as metadata in the security token’s smart contract for transparency and compliance tracking.

Metadata Fields:

• Offering_Registration_Status = Registered / Exempt

• Regulatory_Body = SEC / FCA / FINMA / BaFin / Other

Conclusion: Structuring a Compliant STO Offering

By determining whether an STO is registered or exempt, issuers can align their tokenized securities with legal requirements, define investor eligibility, and optimize marketing and liquidity strategies.

Failure to comply with registration or exemption requirements can result in regulatory enforcement actions, legal penalties, and restrictions on token trading. Clearly documenting and structuring the STO within an appropriate regulatory framework ensures long-term viability and investor trust.