What is a Security Token? SEC Issues Guidelines

So What is a Security Token?

The only difference is that security tokens derive their value from an external tradable asset. It could be part of a company or real estate, for example, but the ‘shares’ are blockchain based.

Security Tokens vs Utility Tokens

While businesses involved in issuing security tokens undertake Initial Coin Offering events, those that offer utility tokens prefer to label their undertakings as token distribution events (TDEs) or token generation events (TGEs).

SEC Guidelines Regarding Security Tokens

The frameworkAccording to a recent issued by Bill Hinman, the Director of Division of Corporation Finance, the just-released parameters should be viewed as an analysis tool designed to help investors, SEC staff, and market participants to better assess whether a token qualifies as a security or not. The procedures also offer insight on what types of tokens qualify for an exemption from this categorization.

The published SEC guidelines include applying the Howey test to determine whether a token qualifies as an investment contract or not. Factors underscored include whether the endeavor is a common enterprise, investment of money is involved and if there is an expectation of profits. If the three conditions are met, then the financing instrument automatically qualifies as a security token.