It will be possible to raise up to 8 million euros within any 12-month period from the general public, without the need for a prospectus.

The image shows the different amounts that each country will be able to raise before a prospectus is required.
This new regulation will be of great assistance to firms which intend to launch a Securities Token Offering (STO), in particular, those STOs that wish to raise a small amount of capital. STOs will also benefit as more Digital Exchanges are launched, which themselves will list these newly created securities.

Digital Asset Exchanges are where you can trade Digital Assets for others, or fiat currencies, such as £, US$, Yen CHF or Euros. If you need access to technical analysts’ tools, stop losses, profit targets, etc, then you are likely to have to open an account. However, if you just wish to make the occasional trade, there are Exchanges (often referred to as platforms) which you can use that do not require an account to be opened. There are typically three types of Digital Exchanges:

• Trading Platforms – connect buyers and sellers and take a fee from each transaction.
• Direct Trading – these platforms offer direct person to person trading where individuals from different countries can buy and sell. Direct trading exchanges don’t have a fixed market price, instead, each seller sets their own price that they wish to trade at.
• Brokers – anyone can use these to buy Digital Assets at a price set by the broker and are similar to foreign exchange brokers.

In the UK and many other jurisdictions, pension managers, mutual fund managers, and many private client portfolio managers are often restricted by their investment mandates and client agreements, to hold but only a small percentage of assets in securities that are not listed on a recognised exchange. There are many exchanges/platforms around the world that are able to trade Digital Assets - such as Coinbase, Kraken, Binance, Poloniex - and you can find a list here that gives a brief summary of ten of the better known Digital Exchanges.

It is not just new exchanges, but we are also seeing traditional exchanges entering this sector, such as the London Stock Exchange, which has recently listed UK’s first Digital Asset (2030) and has even licensed its technology to the Hong Kong Stock Exchange AAX. The world’s largest operator of Stock Exchanges, Intercontinental Exchange (ICE), is active in this space. ICE is a Fortune 500 company which owns the New York Stock Exchange (which is the world’s largest).

We have just seen new legislation being introduced in Europe, the 5th Money Laundering Directive (5MLD), which will bring it in line with the US. The 5MLD will impact Digital Assets which are involved in the provision of two different services:

• Digital Asset Exchanges – where one can buy and sell Digital Assets and traditional fiat currencies.
• Custodian Digital Wallets - firms which hold private keys

European members will now have 18 months to implement...

It took nearly three years for this capital-raising mechanism to really take off, which subsequently created over 5,000 tokens raising over $22 Billion on a global basis.

As regulators turned their attention to ICOs, arguing that many of them ought to be treated as securities attention has Increasingly focused on the development of Security Tokens (STOs).

STOs are often asset-backed and are subject to security regulations in the jurisdictions in which they are launched and marketed. Making global offerings onerous and practically impossible.

STOs are usually backed/pegged/linked to an asset, examples include private or publicly traded shares, bonds, property (residential and commercial), commodities (gold diamonds), foreign exchange ($, Yen, Euro, £) and even exotic investments like wine, violins, art and other collectables.

STOs, being Digital Assets, mean that they can be listed on Digital Exchanges, which in turn enables them to be traded 24//7 as well as enabling enables smaller investors to buy and sell these assets.

Historically some of these assets, such as real estate and collectables, have proved to be illiquid, and the preserve of the wealthy and institutional investors. However, STOs ought to be able to widen the number of investors who can gain exposure to these previously illiquid assets in the future.

More recently we have seen organisations that want to raise capital by issuing tokens using one of the 300 digital exchanges to launch Initial Exchange Offerings (IEOs). These IEOs are very similar to an ICO, but by being listed on an exchange hopefully have greater liquidity.

Potentially they offer investors a degree of comfort because a third-party (the exchange they are to be listed on), has carried out a degree of due diligence. If the token meets all the tests - including that the company that is creating the it is not intending to use any capital raised to build its infrastructure, IT, or platform etc. it may be classed as an exchange or utility token, so outside of the regulations that capture STOs.

Some exchanges have decided to call their IEOs Direct Premium Offerings (DPOs), usually designed to offer investors access to a cryptocurrency at a discount to the market price. In traditional stock exchanges these are called “rights issues”.

More recently we’re seeing Token Curated Registries (TCR), which are designed to replace centralised lists, eg. a list of the top ten hotels or restaurants in a City. TCR is like an incentivised voting game that creates lists which are maintained by the people who use them. Users collectively vote (using tokens) to decide which submissions are valid, which should be included in the list, and where they will be ranked.All of the above typically use Blockchain technology as part of the process of bringing a company to a wider audience, apart from Direct offers, which simply look at raising capital (much like an Initial Placing Offer (IPO)) but do so without the costly underwriting fees of investment banks.

As Slack have announced they are to launch a Direct Offer, will Pinterest, Zoom, Uber or AirBnb also use Direct...