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On February 19th, 2020, Openfinance announced a security token listed on its Alternative Trading System (ATS) is now available to non-accredited investors. Openfinance Co-CEO Juan Hernandez sat down with The Tokenst to discuss the industry-wide milestone — and what it will take to see similar activity in the future.
The Struggle to Increase Investor Access to Security Tokens
One of the many anticipated benefits of security tokens includes increased investor access. Typically, private securities are restricted to a small group of investors, such as venture capital funds. Yet through the benefits of distributed ledger technology (DLT), companies can — theoretically at least — offer a small percentage of their company in a feasible, affordable, and compliant manner.
The compliance aspect has proven a bit difficult. In the US, most securities offerings are restricted to accredited investors. The SEC is considering a more inclusive change to its accredited investor definition however.
Further, since security tokens represent the integration of an emerging technology with an existing financial instrument, many believe the existing securities regulations lack clarity. The regulations were written prior to the emergence of DLT. Jay Clayton, Chairman of the SEC, tends to have a different opinion.
In the midst of such an atmosphere, the journey to bring security tokens to non-accredited investors hasn’t been an easy path. Openfinance is working to change that, however.
Yesterday, the company announced Lottery.com’s LDCC security token — listed on the Openfinance ATS — is now available to non-accredited investors. Lottery.com leverages sanctioned lottery games to raise funds for humanitarian efforts across the globe.
The Tokenist recently sat down with Openfinance Co-CEO Juan Hernandez. Topics of discussion included how the milestone was achieved and precisely what the industry needs for further progress in the future.
How the Lottery.com Security Token Reaches Non-Accredited Investors
The Tokenist: Congratulations on today’s announcement — and thanks for taking the time to speak with us. Openfinance has always promoted its mission of increasing investor access to security tokens. It’s great for the industry to see progress here.
Bringing security tokens to retail investors has clearly been a challenge for the industry as a whole. What led to today’s announcement, where non-accredited investors can now trade Lottery.com’s security token?
Juan Hernandez: The LDCC announcement today is the result of several important milestones. First, the LDCC token is no longer a restricted security as it has been held by initial offering investors for 12 months. This timing is important. Once passed, accredited investors may sell and non-accredited investors become eligible to buy. More important is the development work undertaken by our development team and that of Securitize. Successful integration at this level ensures shareholder limits are enforced across multiple jurisdictions in compliance with securities regulations.
The Tokenist: In the past, you’ve suggested the Reg A+ offering can bring tokenization to a wider audience. In 2019, we saw the first Reg A+ token offerings cleared by the SEC. Have you seen any movement across the industry where companies plan to leverage a Reg A+ token offering in the coming year?
Juan Hernandez: Unfortunately the path to a Reg A+ token offering is still a bit unclear and we have seen regulatory uncertainty around older offerings.Once there is clarity around this space, we believe we will see many more companies leverage the Reg A+ mechanism.
The Tokenist: In addition to the Reg A+, what else can be done to facilitate non-accredited investor participation in Security Token Offerings (STOs)?
Juan Hernandez: The current review of investor accreditation criteria could be a major boost to access. Many of the rules around accreditation are almost 100 years old and severely limit the ability for today’s non-accredited investors to diversify their portfolios and outperform.
The Tokenist: How many digital assets currently trade on the Openfinance ATS? Do you have any additional listings in the pipeline that you could tease us with?
Juan Hernandez: There are currently 5 assets listed on the platform today. We are working closely with issuers of private and public, non-listed securities on secondary market solutions. Expect more announcements soon.
The Tokenist: The security token industry experienced notable progress throughout 2019. As we look to 2020, what do you see as the primary factors needed to propel the industry forward?
Juan Hernandez: We need to see additional regulatory clarity around issues such as the custody of digital securities. Beyond that, we also need to see continued quality deal flow come through the funnel and reach the market.
What do you think about the Lottery.com LDCC security token becoming available to non-accredited investors? Will regulatory clarity arrive on scene to help further develop the security token industry? We’d like to know what you think in the comments section below.
Image courtesy of Openfinance.