Security Tokens would be a hybrid between shares of a company and a cryptocurrency, with the advantage that they have a lower cost than stock shares and have the security and advantages of blockchain technology.
You already know what a token and that can be classified in three ways: utility token, equity tokens and security token.
Security tokens are a type of cryptographic token similar to any other, but linked to the traditional financial values, securities English.
A security or value, is a type of interchangeable financial asset such as Bonds, swaps, futures and others. There are many types of security, and one of the most common is traditional company shares. The technology blockchain It allows digitizing security by reducing costs, time and bureaucracy.
This is how Security Tokens arise.
At present it is already a very common practice and it is not uncommon to see this type of token as a form of action. That is to say, security tokens give owners rights and obligations (for example, voting rights and/or dividends) proportional to the number of tokens owned, which can be exchanged between peers or automatically very quickly thanks to the blockchain.
Like the rest of tokens, these can be offered through a ICO. What allows companies to raise capital by selling shares (in the form of a cryptographic token) at a lower cost than it is expected to have in the future.
With this, the regulations are trying to find the legal framework and requirements that this type of tokens must meet. This is especially important for investors, since the purchase and operation of these tokens is regulated by law that can change from one country to another.
Objective of a Security Token
The objective of the Security Token is to offer rights quite similar to traditional shares. Allowing to reach a wider public (as is the case of the tokenization of real estate assets, reserve tokenization, and even in the music) eliminating red tape and slowness, and at a much lower cost than stocks.
This type of assets allows the development of "Simple Agreement for Future Tokens (SAFT)" which allows accredited investors to purchase contracts during a symbolic offer in which they will obtain as a reward a token developed by the company in the form of a Utility Token, which can be a current asset for use on the platform.
Again, regulation is still searching the border for conceptually separate the Security Token and the Utility Token. Well, many regulations think that all tokens are Security Tokens, based on their behavior at the time of being listed, exchanged based on another currency or cryptocurrency.
An example of this is the United States Securities and Exchange Commission, also known as SEC. This body has repeatedly warned that launching this token implies complying with all the regulations for financial assets. It has even gone further, and has reported that any token that they detect in the market that can qualify as "Security" must necessarily comply with the regulations for financial assets, even if they do not consider it.
The SEC requires compliance with the precept that "you cannot do massive publicity of an ICO where any individual can acquire the financial asset" among other things. To accomplish this, the SEC is guided by the Howey Test, a method that lets you know if a token is a value or not.
Howey Test: values and security tokens
La Howey Test o Howey's Evidence, it is a method by which you can test whether a certain economic action is an investment contract or not. Its creation dates back to 1946, when the US Supreme Court handled a monumental case, known as SEC vs. Howey, which would lay the foundation for the now infamous Howey test.
In the case, it was about establishing a test of whether a particular agreement involves an investment contract or not.
The test consisted of a series of parameters that would define whether a transaction will be called an investment contract. Those parameters are:
- It is an investment of money.
- The investment is in a joint venture.
- There is an expectation of profit from the work of the promoters or the third party.
The term "joint undertaking" it is open to interpretation, as many federal courts have redefined the concept. Even though the original Howey Tests used the term "money", subsequent cases expanded it. With which they included other types of investments and assets that were not money.
Also, there is one other important thing to consider when determining values. The benefits that come from the investment, are they under the investor's control or are they completely out of it? If it is not under the investor's control, then the asset is generally declared a guarantee.
Then, How is this relevant for ICO and tokens? If the token meets the three criteria mentioned above, then it is considered as a security.
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