Regulation and legality are still some of the most discussed topics when we talk about cryptocurrency tokens, because of how some legislations remain cautious about a technology that has widespread so quick and allows for fund raising from non-traditional ways.
The U.S. Securities and Exchange Commission (SEC) is always under the spotlight because of their regulations and, given that many projects wish to thrive in the American landscape, they must abide to these rules. Of course, many have found ways to circumvent the situation by basing their funds or offices in countries with less restrictions, but long-term planning requires considering the SEC guidelines at the moment.
What we see today is a variety of projects that sell their own cryptocurrency tokens to raise funds for launch or expansions, which can either be considered utility tokens (if they serve a specific purpose within the platform) or securities, and the SEC is in charge of overlooking the latter. This is a departure from traditional models like IPOs, where a company goes public and their stock can be traded by anyone in the stock market, or Private shareholding, which is more oriented towards institutional and large-scale investors.
Raising funds from tokens not only makes it viable for non-verified investors to dip in, but also open the possibility for users from all around the world to enter the sale. Of course, this seems like risks for the SEC, which is why special regulations need to be defined, and we have seen this debate gaining strength with talking points like the Bitcoin ETF or Facebook’s Libra.
But one of the great opportunities the SEC has opened comes in the form of Regulation A+, an expansion to their traditional Regulation A that was adopted in 2015 and split it into two tiers:
Tier 1 gives permission to raise up to $20 million, allowing for nonaccredited investors to participate in the purchase and does not require a formal audit from the state they take place, although said state may request it.
Tier 2 has a higher limit, allowing for raising up to $50 million, but it also has more restrictions than Tier 1, as nonaccredited investors have a limit of 10% of their income or net worth, and require an audit from the state in which they will raise their funds, along with filing annual, semiannual and recent reports.
As the conditions imply, Tier 1 is oriented towards small businesses that don’t require a very high ceiling to start operations or projects and that would benefit from having more open ways for investors to reach them.
On the other hand, Tier 2 can help companies that already have a reputation or that have raised enough attention for their project and need more than the Tier 1 ceiling allows. With this comes a more arduous process to pursue a Reg A+ offering, but it’s up to the company to decide which tier is the best suit for their needs.
Of course, there are some reasons not to initiate such a process, the main one being the costs that come with hiring lawyers to get SEC approval, given that the process might take up to 6 months. Other factors include the need of raising public interest to a sufficiently high level, situations in which the limits (even the lower one) are too high for the company needs and the difficulty of managing such high funds.
There have been some examples of companies that pursued the Reg A+, Blockstack and YouNow. The first one is a development platform that gives users all the tools necessary to create their products on decentralized technologies which received support from big names like Winklevoss Capital, and the latter is an online broadcasting platform built on an Ethereum-based token infrastructure (Props) that are given to content creators as a reward for boosting up the engagement with the platform.
Regulation A+ may not be the perfect model for token-based fund raising, but it’s definitely a step in the right direction and represents a great opportunity for startups and mid-stage companies taking course into blockchain technologies.