Security Token Offerings: A Cautionary Tale of Reg D Offerings

In 2012 the Jumpstart Our Business Startups (JOBS) Act was signed into law by President Barack Obama. It required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements.

There were three main areas that the investment community took notice of:  Title II, Title III, and Title IV.

As an experienced Wall Street banker, I was excited about two of the three areas.  Title II was a change to Reg D, which now permitted the use of general solicitation (advertising or promotion) on private placements (a Reg D 506(c) offering), and Title IV, which is now known as Reg A+.

We have witnessed and continue to witness issuers and advisors promoting “SEC Approved Offerings which are Compliant under US Laws.”  But issuers and investors beware!  The SEC DOES NOT approve offerings, nor allow the use of their name in any offering materials or third-party websites.

Reg D has become the most popular exemption for Security Token Offerings (STOs).  This exemption allows the issuer to generally solicit investors for their offering, but limits investments to only accredited investors, defined as investors with at least $200,000 of annual income or $1 million in net worth.

Issuers must understand that there are additional requirements that must be met to qualify for this exemption, such as verifying the accreditation status of investors, understanding and complying with state blue sky filings, and determining whether the offering may integrate with other securities offerings conducted by the issuer.

In other words, compliance with the actual regulations.  Simply filing a Form D on Edgar does not mean that the offering is SEC approved.

Failure to understand the complexities of, and comply with, various securities laws can cause an issuer to fall out of compliance with applicable laws and regulations,  which may lead the regulators to fine the issuer or even force the issuer to rescind the offering and refund all investor money.

That is why it is essential that an issuer wishing to conduct a compliant offering consults licensed professionals such as an experienced securities attorney and a licensed broker-dealer.

When you are looking for service providers to assist in your STO, make sure that you do more than read their LinkedIn posts, blog posts, or other social media posts; ask for referrals!

Beware of STO Experts

Be aware of advisors that have become STO “experts” in the last 12 months but have not yet had any successful offerings.  Research your advisor or expert and make sure they truly can provide sound and compliant advice before you lose more than just the retainer you paid them.

I truly believe that STOs are the future of capital formation.  However, to get past this early stage of the lifecycle, licensed broker-dealers, attorneys, and advisors have a large role to play in making sure that these offerings protect both issuers and investors while complying with all securities laws.


Mark H. Elenowitz is CEO and Founder of BANQ, the electronic division of TriPoint Global Equities, LLC, an electronic investment banking platform that streamlines the matching of investors with quality growth companies and alternative investment opportunities.  BANQ is a leader in Regulation A+ IPOs which listed the first Reg A+ offering to list on the New York Stock Exchange. The BANQ team hopes to continue making history by combining its deep experience in the equity capital markets with its tech-focused platform to become the global leader in fully-compliant STOs. Elenowitz is also the President of GlobexUS Holdings Corp. a software R&D and licensing business specialized in blockchain technologies for digital securities. Elenowitz is a noted speaker at Small Cap and Reg A+ events, including the 2017 & 2018 SEC Small Business Forums and has been profiled in BusinessWeek and CNBC, as well as several other publications. He is a graduate of the University of Maryland School of Business and Management with a B.S. in Finance.  He holds Series 24, 62, 63, 79, 82 and 99 licenses.

Views expressed disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual.

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