STOs have been gaining more recognition and their adoption has increased. However, issuers should be mindful of Section 12(g) of the Securities Exchange Act of 1934, croudfundinsider writes, or risk being subjected to a lot more scrutiny.
If triggered, Section 12(g) may inadvertently require issuers to become public reporting companies, despite their attempts to avoid doing so. If that happens, a company has to register with the SEC and report to it periodically.
In order to fall under Section 12(g), a token must be an “equity security”—signifying the issuer has more than $10 million of total assets, and more than 2,000 accredited investors or 500 unregistered investors.
Depending on whether STO-issued securities are equity securities, this might be a serious problem for the issuers. Tokens might lack some characteristics of traditional equity securities. Moreover, issuers may also design their tokens so as to further differentiate them from equity securities—shareholders might receive a share of the revenue or the royalties might fluctuate depending on the company’s performance.
However, according to crowdfundinsider, for legislative purposes when interpreting Section 12(g) all securities fall into two categories: debt securities or equity securities. Therefore, if a shareholder has the right to a share of the revenue or receives a performance-based royalty, the STO is likely to be deemed an equity security.