KSTechLaw assists clients on every stage of launching a digital security offering (DSO) to be compliant with the Securities and Exchange Commission’s (SEC) regulations and other US laws.
Our team of attorneys have guided blockchain projects through DSOs in a variety of industries implementing different DSO structures depending on a particular project, whether it involves tokenized preferred shares, revenue participation rights, debt or tokenized assets, etc.
DSO is an offering and sale of securities that are issued and exist on a blockchain, which makes them digital securities. Accordingly, digital securities are issued, restricted, transferred and settled differently from traditional securities. Digital securities issued in a DSO are still securities and meet the circumstantial US test defining the securities (the Howey test).
DSOs are also commonly referred to as security token offerings (STOs) or token generating events, during which “security tokens” are issued to investors. DSOs may also be confused with ICOs but DSOs do not involve so-called “utility tokens,” as during DSOs issuers offer digital securities or security tokens, which are not designed to have functional, consumptive or utility value on the issuer’s platform.
Accordingly, the scope of DSOs is broad but limited to the scope of traditional equity and debt securities, including offerings of digital securities (digital tokens) representing:
DSOs provide an efficient tool for raising capital by:
At the same time, going through a DSO, blockchain startup projects avoid the problem associated with issuing “utility” tokens at the fundraising stage: this may mislead the investors (as “utility” tokens are treated as securities at the fundraising stage) and create an uncertainty about the non-security status of such “utility” tokens in the future (whether and when “utility” tokens become non-securities is an extremely fact-specific and complex analysis).
To utilize the outlined DSO benefits and smoothly launch a project, each DSO must be crafted diligently to account for numerous issues in advance, including:
Lawyers at KSTechLaw advise clients on the DSO-related issues in advance to come up with an elaborate DSO plan essential for a successful and well-timed project.
Issuers of digital securities offered at DSOs must register their digital tokens with the SEC (and comply with the ongoing reporting obligations) or claim one of the exemptions form the registration, just like all traditional securities. Most of the compliant DSO projects take advantage of one or several of the available exemptions from SEC registration saving a significant amount of time, as well as hundreds of thousands of dollars.
Exemptions from registration are contained in the Securities Act of 1933 (the “Act”) and most of the DSO projects utilize the exceptions provided in the Act’s Regulation D, Regulation S, as well as Regulation CF. Some projects applied for Regulation A+ exemption also known as mini-IPO for certain more extensive reporting requirements.
Without having to undergo a costly and lengthy registration process, DSO projects still have to meet strict qualifications for each of the exemptions from registration. Additional precautions should be taken when DSOs are conducted under different exceptions concurrently.
Our attorneys navigate US-based and foreign clients through all of the US regulatory requirements for a compliant DSO.
Our legal services cover the whole DSO process to make it work for the particular project, including:
