What is the difference between a Security Token Offering (STO) filed under Regulation A versus one filed under Regulation D? For investors looking to invest in STOs, what are the comparative advantages and disadvantages of each?
Regulation D
Under Reg D, generally only accredited investors have access to the securities being offered. Rule 506(b) technically allows up to 35 non-accredited investors, but most issuer avoid them due to the increased burdens. Rule 506(c) only allows accredited investors that are verified. Since Reg A allows general solicitation, it makes sense to compare it with Rule 506(c) which also allows general solicitation, but not Rule 506(b) as it does not allow general solicitation.
Any STO using Rule 506© will have limitations on who can participate, including the requirement that investors must be accredited –that is, they must be shown to meet certain sophistication, net worth or income thresholds.
The U.S. Securities and Exchange Commission (SEC) has defined an accredited investor as an individual with a net worth (or joint net worth with a spouse) of greater than $1 million. An investor can also qualify using their income, which must be more than $200,000 individually for the two most recent years, or more than $300,000 with a spouse for the same timeframe, with a reasonable expectation of achieving the same income in the current year. There are other categories that apply to entities as well.
Investors who are not accredited or who cannot provide the requisite evidence to comply with Rule 506(c) accredited investor verification may not participate in a Reg D, Rule 506(c) STO. The SEC has put this limitation in place to protect non-accredited investors from the risks associated with many investment opportunities offered under Reg D, including STOs.
Regulation A
Any investor is permitted to invest under Reg A.
The STO accredited investor status requirement described above does not exist under Reg A. In its place, the SEC mandates stringent reporting and filing requirements for the issuer. In terms of investor limitations, A Reg A Tier 2 offering caps how much a non-accredited investor can invest to ten percent or less of the greater of the person’s or married couple’s net worth or income, or in the case of an entity, ten percent or less of the greater of annual revenue or net assets at fiscal year end.
This means that all investors have access to Reg A STOs, not just high earning or net worth investors. Under this model, everyone can participate in both the risks and rewards of investment.
For the issuer of an STO, filing under Reg A is more time-consuming and expensive than Reg D. The SEC has these extra requirements in place to protect non-accredited investors, who may not always have the financial means to absorb losses. Additionally, as of the time of this article, the SEC has not yet approved any Reg A STOs.
As an investor in STOs and other private securities, it’s important to know the regulatory requirements of the particular offering in which you wish to invest. This will help you make more informed investment decisions, and can help protect yourself and your investment in the long run.
