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What is an ICO or STO?

A new type of capital raising method for startups based on digital blockchain technology.

ICO means Initial Coin Offering. STO means Security Token Offering (because the tokens are sold as securities to the investors). It’s a process where a company creates and sells its own specialized Tokens (generally) in exchange for payment in Bitcoin, Ethereum and other digital currencies (also called cryptocurrencies), with the purpose of raising capital to build a startup business. As a result, the company collects capital to fund the product development and marketing of their business, and the investors receive new specialized Tokens. These Tokens are developed with specialized functions built in, that enable innovative new blockchain based capabilities.

Are ICOs and STOs legal in the US?

In early August of 2017 the SEC made it clear that in most cases Initial Coin Offerings are considered by the SEC to be securities transactions, so the existing body of SEC regulations apply fully to them. This announcement by the SEC reduced uncertainty for US entrepreneurs planning ICOs but presents them with the challenge of figuring out how to make their ICO conform to the SEC securities regulations. Essentially, if investors buy your token expecting to make a profit by owning it because they hope it will go up in value, then it is a security.

How to conduct ICOs that conform to US SEC securities regulations;

There are two primary SEC Regulations that are well suited to raising capital through the sale of securities to investors online. They are Reg D 506C  and  Regulation A+. These rule systems are used widely and are well understood. Either one of them can be used with ICOs, as long as the ICOs are carefully developed with compliance to these rules built in. Reg A+ is a more natural fit because it allows investors of all wealth levels anywhere in the world to invest, which is one of the highly appealing aspects of ICOs.

By clicking this link, you can see an interactive webinar about SEC compliant ICOs.

In the investment process, companies can use the usual Smart Contracts, and convertible notes can be used to raise investment capital before the tokens have been completed.

Reg A+ and Reg D 506C offer a legitimate method for ICOs and STOs to be made for US companies when care is used.

ManhattanStreetRegA+ICO(TM)

- Allows companies to raise up to $50 mill from investors of all wealth levels worldwide.

Can use a special Manhattan convertible note to raise capital before the Reg A+ is SEC Qualified, and offer big discounts to early investors.

- Ability to accept investment from non-accredited investors (not into the convertible note though).

- Already defined Anti Money Laundering (AML) checks for all investors included. The Accreditation Verifications and AML checks are done by Manhattan Street Capital as an automatic part of our investment process.

- Up front SEC legal filing required (offering of securities to investors is not allowed until the SEC Qualifies the Form 1-A filing), this takes time and involves upfront costs.

Tier 1 level offers some advantages for raises of less than $20 mil.

- The purchased tokens are liquid, the buyers can sell them immediately in many cases.

- Note that implementing an ICO so that it conforms to Regulation A+ can be complex and must be approached in a thorough manner with advice from expert securities attorneys.

Click here to see the timeline for the Tier 1 Reg A+ICO

Click here to see the timeline for the Tier 2 Reg A+ICO

ManhattanStreetRegD-ICO(TM)

- Regulation D 506c is the form that is most suited. Can be paired with Reg S for non-US investors.

- Can use a convertible note to raise capital before the Tokens exist. In the convertible note offering, the issuer company is allowed to use discount-steps to reward early investors. Subsequently, the notes are converted into investments in Tokens through the Reg D.

- Generally no fixed cap on how much capital can be raised.

- Only accredited US investors are allowed to invest, non-US investors are not required to be accredited via Reg S.

- The offering company has to take reasonable steps to verify that its Reg D investors are accredited. The Accreditation Verifications and AML checks are done by Manhattan Street Capital as an automatic part of our investment process.

- The Reg D Form D must be filed with the SEC, but this is a simple filing, not a lengthy process - a few days to file.

- The Tokens bought by investors are not liquid and can only be sold to accredited investors after the one year holding period has passed, unless a liquidity event such as an IPO  or a Reg A+ occurs. These restrictions must be built into the tokens and smart contract.

- Note that implementing an ICO so that it conforms to Regulation D can be complex and must be approached in a thorough manner with advice from expert securities attorneys who we work with closely and introduce to you.

Click here to see the process and summary time schedule for a Reg D ICO.

Bitcoin, Ether, Stellar, ACH, Wire, check and debit cards accepted to increase the ease with which investors can pay. 

Digital currency payments are offered in addition to other payment methods such as debit cards, check, ACH, and wire transfer, at the ICO companies' option. 

We conduct KYC, AML and accredited verifications (where relevant) as a part of our funding platform, automatically, for investors worldwide.

To see a flowchart for the cryptocurrency payment process click here.

 

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Related Content:

Timeline for a Reg A+ ICO via Convertible Notes

Services that we provide for ICOs

Schedule for a Reg D ICO

Cost guide for a compliant ICO

 

Rod Turner

 

Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital marketplace for mature startups and mid-sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves and eASIC .

RodTurner@ManhattanStreetCapital.com

www.ManhattanStreetCapital.com

Manhattan Street Capital, 5694 Mission Center Rd, Suite 602-468, San Diego, CA 92108.

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THOMAS LEPPARD on February 22
Hi Rod, I found this most interesting. We are interested in making our forthcoming ICO SEC compliant under Regulation D. What is a concern is getting the token listed on a crypto exchange. If we can become SEC compliant (this is something we would like to engage with you on) which exchanges do you consider most likely to list the token, which would be a security token with dividend rights?

Rod Turner on March 05
Hi Thomas Generally it will be relatively easy to get a new token traded on multiple exchanges if it is a compelling concept and it's well promoted. Of course, trading is only allowed in the way that the particular offering is put together using one or other SEC exemption. So a token that is made liquid via Reg A+ will be very liquid, while one that is issued via Reg D will have less liquidity. Check our FAQ for more details. Thanks Rod

JasonK on September 21
Hi Rod, Great article and response to the SEC note that was recently published. If a company raises funds through Reg A+, can it list immediately on any ICO exchange or does it have to be an SEC regulated exchange? And are there any such regulated exchanges at the moment designed for ICOs?

Rod Turner on September 28
Hi Jason The first two SEC intended to be compliant regulated exchanges have announced, although they are not yet open, the first by Overstock.com. SEC-regulated exchanges are the best for US investors. US investors that sell through a US exchange can only use an SEC-approved exchange. Where Tokens can be traded post-Reg A+ ICO will depend on the specifics of the offering. If a Tier 1 Reg A+ is used, then the Tokens can only be sold in the States in which Blue Sky filings have been completed (if any were set up) and in countries outside the US, for example. The Token re-sales must be restricted in the Smart Contract and in the Token programming so that they will only occur in the circumstances that the Reg A+ provided for. Tier 2 Reg A+ is generally easier than Tier 1 in this regard, but there are still significant choices to be made which influence where the Tokens can be sold. International purchases of Tokens are a part of Reg A+, and those purchasers, as well as potentially the US purchasers, can sell their Tokens on non-US exchanges. We can introduce you to an attorney for detailed legal advice. International purchases of Tokens are a part of Reg A+. For Reg D and Reg S the situation is different.

Rod Turner on October 02
Jason, I just realized you may have been asking a different question than the one I answered! If you meant to ask where can an ICO company make or offer it's listing when the Reg A+ itself is being offered to buyers/investors, then this is my answer: Reg A+ allows companies to make their offerings with online platforms like Manhattan Street Capital (we have some Reg A+ ICOs coming soon), and with broker-dealers, and with their own website and with ICO type sites that adhere to the reg A+ rules. It is important (wherever a Reg A+ ICO is offered), that the offering follows all the rules in Reg A+. So for example, each investor must be checked using the Anti-Money Laundering List test, and there are strict rules regarding legal disclaimers and about prominent display of the Offering Circular to all prospective investors. And more. The rules are reasonable. Check our FAQ for more help. https://www.manhattanstreetcapital.com/manhattan-faq-page

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