A Regulated Token Offering is a type of Initial Coin Offering (ICO) for a cryptocurrency which has been qualified by the US Securities and Exchange Commission under Regulation A+ framework. Regulation A+ is an alternative to traditional initial public offerings with more lenient disclosure obligations that is made specifically to help early-stage startups raise money.
Regulation A+ is an exemption to federal securities laws that enables companies to offer and sell up to US $50 million worth of a security in a 12-month time period. There are two tiers of offerings:
- Tier 1: Security offerings of up to $20 million in a 12-month period
- Tier 2: Security offerings of up to $50 million in a 12-month period
This regulation also provides for the preemption of state securities law registration and qualification requirements for securities offered or sold to "qualified purchasers" in Tier 2 offerings. However, Tier 1 offerings are subject to federal and state registration requirements.
Under Rule 501 of Regulation D of US federal securities laws, a company must register their security with the SEC or find an exemption from registration requirements in order to offer the security to US non-accredited investors. In order for an individual to qualify as an accredited investor, they must have an individual net worth or joint net worth with their spouse that exceeds $1 million, excluding the person or couple's primary residence. Alternatively, an individual can qualify if their individual income exceeds $200,000 in each of the two most recent years, or if their joint income with their spouse exceeds $300,000 in the same time period, so long as they have a reasonable expectation of reaching the same income level in the current year.
Blockstack announced that it had filed for a Tier 1 Regulated Token Offering with the SEC in April, 2019. The company later became the first blockchain startup to receive SEC approval in July, 2019. This made Blockstack's token offering the first ever legally-compliant token offering that was open to both accredited and non-accredited investors in the United States.
The company ran their public token offering under regulation A+ and raised $28 million. According to the founders of Blockstack, Muneeb Ali and Ryan Shea, they spent approximately $2 million and spent 10 months of their time to gain approval from the SEC to go ahead with their regulation A+ regulated token offering. Muneed Ali commented on Blockstack's time gaining approval from the SEC by saying:
This can potentially set a precedent for others in the industry, not just for public offering, but also as a path to launch new public blockchain and establish a path to bootstrapping decentralized ecosystems.
Prior to the approval of Blockstack's token offering, US non-accredited investors had been unable to participate in any legally-compliant cryptocurrency token offerings. However, numerous ICOs took place between 2013 - 2017 that were open to all investors regardless of qualification, as the SEC and other global regulatory bodies had yet to clarify how they would treat cryptocurrencies and token offerings. Beginning in late 2017 up until the Blockstack case, US citizens were widely excluded from participating in token sales once it became clear that projects who accepted funds from US investors may face future legal consequences. The SEC has since published a Spotlight on Initial Coin Offerings which provides some clarity.
Following Blockstack's approval, the SEC also approved an Ethereum-based token called Props, which is integrated into streaming platforms including YouNow and XSplit.
