Step 19: Selecting STO Regulations
When launching a Security Token Offering (STO) or tokenized asset issuance, one of the most critical aspects is ensuring legal compliance. Unlike cryptocurrencies or utility tokens, security tokens represent ownership, investment rights, or financial interests in an underlying asset. This means they are subject to the same laws as stocks, bonds, or traditional securities, and ignoring regulations can result in legal penalties, fines, or even the shutdown of the offering.
Each country has its own set of rules for security offerings, investor protections, and financial markets. Some jurisdictions are crypto-friendly and provide clear regulatory guidelines, while others impose strict restrictions or outright bans on STOs. Choosing the right regulatory framework ensures that your token offering is legally valid, protects investors, and allows you to successfully raise funds without running into legal trouble. Importantly, the issuer must be compliant with the regulation in each country where tokens are offered.
This step provides a guidance for selecting the appropriate regulatory framework based on your target investors and offering jurisdiction. The Stobox Methodology breaks it down into different regions, so you can choose one or multiple regulations that fit your needs.
Key Aspects of STO Regulations
Investor Type Matters
Some regulatory frameworks only allow accredited investors (wealthy individuals or institutions) to participate. Note that the definition of an accredited investor varies depending on the country.
Others permit retail investors (general public) but often require more compliance and investor protections.
Fundraising Limits Vary
Some frameworks let you raise unlimited funds, while others have a cap (e.g., £8M in the UK Small Offers Exemption or €5M in the EU Small Offers Exemption).
Marketing & Advertising Restrictions
Some regulations allow public marketing and solicitation, while others require private investor networks and prohibit general advertising.
Compliance Requirements Differ
Some jurisdictions require a full prospectus (detailed legal disclosure document) before you can raise funds.
Others allow simplified filings or exemptions for smaller offerings.
Jurisdictions May Overlap
If you plan to sell tokens in multiple countries, you may need to comply with several regulatory frameworks at the same time.
To make things simple, the Stobox Methodology divides into different sub-steps based on jurisdiction, so issuers can easily select the right regulatory path.
United States (SEC Frameworks)
For issuers targeting U.S. investors, the Securities and Exchange Commission (SEC) provides several exemptions:
Regulation D, rule 506 (c): Private offerings for accredited investors (unlimited fundraising, but no retail investors).
Regulation S: For international investors outside the U.S. (not subject to SEC rules).
Regulation A+: Allows both retail and accredited investors but requires SEC qualification (mini-IPO).
European Union (Prospectus Regulation & MiFID II)
For issuers targeting EU investors, the key regulatory pathways include:
Qualified Investors Exemption: For selling to professional investors, no prospectus registration is required.
Small Offers Exemption: Allows fundraising up to €5M, requires local compliance.
Full Prospectus Registration: Needed for large public offerings, provides access to EU-wide markets via passporting.
Switzerland (FINMA Frameworks)
Switzerland offers three options for STO issuers:
Qualified Investor Exemption: Unlimited fundraising, but only for institutions and high-net-worth individuals.
Small Offers Exemption: Retail-friendly, fundraising capped at CHF 8M.
Full Registration: Requires an approved prospectus for large-scale public offerings.
United Kingdom (FCA Frameworks)
The UK’s Financial Conduct Authority (FCA) provides:
Qualified Investor Exemption: No cap on fundraising, but only for offerings targeting professional investors.
Small Offers Exemption: Allows fundraising up to £5M for retail investors.
Full Registration: Required for large-scale offerings, enables marketing to all investor types.
Global Investor Outreach (Other Jurisdictions)
For issuers targeting investors outside major markets, this section explains how to:
Identify target markets based on investor demand and regulation.
Understand local securities laws to avoid non-compliance.
Verify investor eligibility to meet local requirements.
Work with legal advisors to ensure smooth cross-border fundraising.
What Happens if You Ignore Regulations?
If you fail to comply with STO regulations, you risk:
Legal action & fines – Governments can penalize issuers for unauthorized securities sales.
Investor lawsuits – If an investor feels misled or loses money, they can sue the issuer.
Token trading restrictions – Security tokens that don’t follow regulations may not be allowed on exchanges.
Project shutdowns – Non-compliance can lead to regulatory bans, stopping the token sale entirely.
Final Thoughts: Choosing the Right Regulatory Framework
Selecting the right regulatory framework depends on:
Who your investors are (retail, accredited, or institutions).
How much money you want to raise (smaller vs. large-scale fundraising).
Where your investors are located (U.S., EU, Switzerland, UK, or globally).
How much compliance you are willing to handle (simplified exemptions vs. full registration).
By following Step 17, issuers can strategically structure their STO to remain legally compliant while maximizing their fundraising potential. Whether targeting institutional investors with exemptions or launching a fully registered public offering, choosing the right framework ensures a smooth, risk-free, and successful tokenized asset issuance.
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