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Security Token (Cryptocurrency) Offerings
Security Token Offerings (STOs) are a method of raising capital using blockchain-based tokens that may be classified as securities under U.S. law. Unlike traditional ICOs, STOs require compliance with U.S. securities regulations, making them significantly more complex in structure and risk. Companies must navigate the Howey Test, design compliant tokenomics, and often use instruments such as SAFTs (Simple Agreement for Future Tokens) to mitigate legal exposure.
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1. Security Token Offerings: Avoiding Securities Classification Through the Howey Test
The Howey Test remains the primary tool used by the SEC to determine whether a digital token qualifies as a security. A token offering that satisfies all four prongs—investment of money, in a common enterprise, with expectation of profits, derived from efforts of others—will be regulated as a security. Structuring an STO to avoid one or more elements of this test is essential to avoid falling under federal securities laws.
Security Token Offerings: Token Utility and Decentralization Strategies
One way to mitigate Howey Test risk is by ensuring the token has genuine utility—access to platform services, governance participation, or network usage—not just investment appeal. Additionally, designing decentralized governance and limiting pre-sale to non-U.S. investors are common risk reduction tactics.
2. Security Token Offerings: Designing Tokenomics for Compliance
Tokenomics—the economic model behind the token—must be carefully structured to avoid characteristics of investment contracts. Overpromising returns, lockup structures that resemble equity, or vague utility descriptions can trigger SEC scrutiny. Legal counsel should be involved in defining value, liquidity mechanisms, and vesting conditions.
Security Token Offerings: Pre-Sale Structuring and Investor Classification
Pre-sales should be structured in a way that limits sales to accredited or international investors under exemptions such as Regulation D or Regulation S. Defining investor eligibility early and documenting disclosures meticulously is critical to shielding the offering from liability.
3. Security Token Offerings: The Role of SAFTs in Legal Structuring
SAFTs (Simple Agreement for Future Tokens) are widely used to provide a legal framework for early-stage token investments. While SAFTs do not exempt the tokens themselves from later classification as securities, they provide a defensible structure for fundraising by delaying the token issuance until the network is functional.
Security Token Offerings: When Legal Counsel Is Essential
Even with strong token design, failure to monitor enforcement trends or SEC guidance can expose sponsors to enforcement actions. Legal teams help navigate shifting regulatory expectations, review offering materials, draft risk disclosures, and maintain compliance post-launch.
The information provided in this article is for general informational purposes only and does not constitute legal advice. Reading or relying on the contents of this article does not create an attorney-client relationship with our firm. For advice regarding your specific situation, please consult a qualified attorney licensed in your jurisdiction.
