Security Token Offerings

Small Bus Econ (2022) 59:299–325
https://doi.org/10.1007/s11187-021-00539-9
Security token offerings

Thomas Lambert · Daniel Liebau ·
Peter Roosenboom
Accepted: 25 June 2021 / Published online: 12 September 2021

© The Author(s) 2021
Abstract This paper posits that distinguishing secu- development but shows promises in the entrepreneur-
rity token offerings (STOs) from initial coin offerings ial finance landscape. A security token is a digital
(ICOs) is important for the study of entrepreneurial representation of an investment product recorded on a
finance. We first provide a working definition of a blockchain, which comes under the purview of secu-
security token and present an overview of the STO rities laws. Therefore, STOs differ from initial coin
market using a unique STO sample. The STO activ- offerings (ICOs). After describing the STO process
ity developed after the end of the ICO market bubble. and the scope of the STO market, we explore what
The STO market is, however, still a nascent market. factors are associated with successful capital raising.
STOs are geographically dispersed but concentrated In particular, we find that attaching voting rights to
in jurisdictions with accommodating securities laws. security tokens increases the odds of success. Our
Next, we explore STO success factors. We show that study implies that entrepreneurs should carefully
various issuer and offering characteristics tradition- design their security tokens and run their offering
ally used in the ICO literature also matter for STO professionally because doing so may not just help
success. We also find that success is associated with them raise more capital, but it may also foster general
good governance practices, consistent with the corpo- awareness of the benefits of a well-developed STO
rate finance literature. We conclude by discussing the market.
implications of native digital securities, the next gen-
eration of security tokens, for entrepreneurial finance. Keywords Blockchain · Corporate governance ·
Entrepreneurial finance · Initial coin offering · Native
Plain English Summary The security token offer- digital securities · Securities laws · Security token
ing (STO) market is nascent and thus still under offering · Tokenization
JEL Classifications G11 · G32 · G34 · L26 · M13

T. Lambert (*) · D. Liebau · P. Roosenboom
Rotterdam School of Management, Erasmus University,
Burgemeester Oudlaan 50, 3062 PA Rotterdam,
1 Introduction
the Netherlands
e-mail: [email protected]
The sources of external capital that entrepreneurs can
D. Liebau
e-mail: [email protected] tap to finance their venture have considerably evolved
in only one decade. Perhaps the most striking devel-
P. Roosenboom
e-mail: [email protected] opment is the reliance on digital platforms. From
Vol.:(0123456789)
13
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
300 T. Lambert et al.
the 2010s, crowdfunding unfolded around the world, payment in a blockchain-based ecosystem. Therefore,
allowing entrepreneurs to raise capital online from taking these differences into account is important in
the public (Mollick, 2014; Vulkan et al., 2016). Later, entrepreneurial finance since startup financing and
the years 2017 and 2018 saw an influx of projects development are the outcomes under study.
raising substantial amounts of money from the pub- Second, we present an overview of the STO mar-
lic through initial coin offerings (ICOs) (Fisch, 2019; ket. We construct a unique data set of STOs primar-
Howell et al., 2020). Now that the ICO market bub- ily based on proprietary data supplemented with data
ble ebbed away, security token offerings (STOs) have from various STO aggregator websites. Our perusal
emerged, allowing investment in securities recorded of STOs reveals that one-third of them could not be
on a blockchain.1 These securities are typically sold considered as STOs in the strict sense. Instead, they
to accredited or experienced investors, making STOs either turned out to be stablecoins, or ICOs disguised
more akin to private placements than public security as STOs — that is, utility tokens sold as securities
offerings (Janney & Folta, 2006; Wruck & Wu, 2009; due to regulatory uncertainty. Our sample comprises
Wu, 2004). While the literature has succeeded in pro- 183 “true” STOs. We document that the STO market
viding many insights about the success and failure developed after the ICO market bubble concluded
in both crowdfunding and ICO markets, much less STO activity intensified end of 2018 onwards. We also
is known about the STO market. In this paper, we uncover that about 60% of issuers fail in their offer-
attempt to fill this gap by providing an exploratory ing efforts. Although STOs primarily originate from
analysis of STOs. the United States, we observe that other countries with
First, we explain why the STO market, still in its accommodating securities laws (e.g., Singapore and
infancy, is an integral part of entrepreneurial finance. Switzerland) also attract a large number of STOs.
Tokens — either security tokens, utility tokens, or Third, we explore STO success factors. We find that
payment tokens — are digital assets issued on a both issuer and offering characteristics matter for STO
blockchain. As their names suggest, these tokens do success and failure. In particular, voluntary information
not all serve the same purpose. The specificity of disclosed by issuers, such as source code available on
security tokens is that they are investment products a GitHub repository, is positively associated with the
(e.g., stocks and bonds) and thus usually confer cash- amount of capital raised. However, STOs are most often
flow rights to investors and, in some cases, also vot- restricted to accredited or experienced investors and
ing rights. Security tokens are issued through an STO not aimed at the public at large. Therefore, the amount
and, as investment products, represent an alternative raised through an STO is not affected by a Telegram
way for firms to raise external capital.2 Utility tokens presence (Telegram being the major mass-market
(issued through an ICO) are originally aimed at sup- communication channel that is often used in the ICO
porting and developing a community-based ecosys- context). Other offering characteristics, including the
tem by giving consumptive rights to users, while use of a softcap and the planned length of the duration
payment tokens (or cryptocurrencies) are means of of the STO, negatively correlate with amount of capital
raised. We also find some evidence that setting high
target amounts by issuers reduces the chance of success.
1 A key finding is that corporate governance matters in
Blockchain Capital paved the way with its sale of equity
tokens on a blockchain in the second quarter of 2017. In the STO context. Denying voting rights (control) to
August 2018, American company tZERO successfully com- investors negatively correlates with STO success (as
pleted the largest STO thus far, raising USD 134 million at a measured by amount of capital raised). This result
valuation of USD 1.5 billion.
2
is consistent with the notion that investors anticipate
Benefits of conducting an STO over other methods of financ-
the costs associated with concentrated control among
ing ventures may include the lower cost to offer securities to
a target audience; the possibility of fractional ownership made insiders (Burkart and Lee, 2008). Our findings are
possible by the divisibility feature of blockchain (hence, low- robust to the use of alternative STO success outcome
ering entry barriers); the possibility of peer-to-peer trading variables and model specifications.
between tokenholders; the auditability of transactions directly
Our paper is related to a rapidly growing literature
on an immutable distributed ledger; and real-time transac-
tion settlement. Liquidity is also a benefit commonly put forth on ICOs (see Li & Mann, 2019, for a survey). Important
(though liquidity in the secondary market is still limited). theoretical contributions include Chod and Lyandres
13
Security token offerings 301
(2018), Li and Mann (2018), Malinova and Park (2018), Our study does not focus on ICOs and our
Catalini and Gans (2019), Goldstein et al. (2019), contribution stands here. We argue that STOs are
Gryglewicz et al. (2020), and Shakhnov and Zaccaria not ICOs or a subset of it. What ICOs and STOs
(2020). Close to our line of inquiry, Gryglewicz et al. have in common is the distributed nature of the
(2020) develop a unified model of the issuance and design underlying ledger their tokens are recorded.
of tokens. They derive conditions under which an STO is a However, unlike an STO, the idea behind raising
preferred financing tool to an ICO and show that it crucially money via an ICO is the value creation for a
depends on developers’ ability to generate cashflows in community, and this community is part of the
addition to facilitating transactions among users. value creation process (Schückes & Gutmann,
Empirical studies largely focus on determinants of ICO 2020). This contrasts with an STO that aims
success using data from various specialized ICO listing to raise capital for startups using “traditional”
websites such as ICOBench and TokenData. Fisch (2019) investment products generally reserved for a small
studies 423 ICOs and reports that information voluntarily group of accredited or experienced investors. To
disclosed by issuers, such as whitepapers and source our knowledge, our paper is the first to consider
code, positively correlates with amount of funds raised. the STO market in its own right and empirically
Deng et al. (2018) further show that governance and assess STO success factors.4 In doing so, we follow
team quality are positively associated with amount raised. recent exploratory studies about new phenomena
Davydiuk et al. (2020) find that the fraction of tokens in entrepreneurial finance (Fisch, 2019; Howell
retained by insiders increases ICO success outcomes. et al., 2020; Mollick, 2014; Vulkan et al., 2016).
Lee et al. (2021) also document that favorable analyst This paper also builds on the empirical
ratings lead to funding success. Interestingly, Bourveau literature about the governance of entrepreneurial
et al. (2019) show that external disclosure channels, firms. Baker and Gompers (2003) and Hochberg
such as algorithmic and human ratings, better predict (2012) study corporate governance in companies
both ICO success and post-listing ICO performance backed by venture capital (VC). Cumming (2008)
than internal disclosure channels, such as whitepapers and Cumming and Johan (2008) examine VC
and shared source code. Their work resonates with control rights in relation to exit strategies. Janney
Momtaz (2020a), who finds that information disclosed and Folta (2006) study the signaling value of
in whitepapers is systematically exaggerated, inducing a private placements of equity for young startups.
moral hazard in signaling. Masiak et al. (2020) present Cumming et al. (2019) find that decoupling voting
evidence of cyclicality between cryptocurrency returns from cashflow rights reduces crowdfunding
and ICO volumes. Other studies also document post-ICO success, using a sample of 491 Crowdcube
patterns using data from various exchange aggregators campaigns. Fahlenbrach and Frattaroli (2021)
such as CoinMarketCap. These include Benedetti and describe how ICO contributors lack the protection
Kostovetsky (2021), Hu et al. (2019), and Momtaz traditionally afforded to investors in early-stage
(2020b), whose work examines returns for token buyers in financing. Our paper adds to this literature by
ICOs. Howell et al. (2020) explore various issuer and ICO showing empirical evidence on the importance of
characteristics on enterprise survival and employment
growth. Hornuf et al. (2021) investigate the extent of
fraud in the ICO market.3 4
A contemporaneous work is Ante and Fiedler (2020), which
studies the effect of cheap signals on STO success using a sam-
ple of STOs between April 2017 and October 2018. Our paper
3
The empirical ICO literature closely relates to the earlier complements this study along three important considerations.
empirical literature on crowdfunding. On determinants of First, we propose a definition of a security token based on its
crowdfunding success, see, e.g., Mollick (2014), Ahlers et al. purpose, which has important implications for the study of
(2015), Vulkan et al. (2016), Bapna (2019), Cascino et al. STOs in entrepreneurial finance. Second, we uncover from our
(2018), and Ralcheva and Roosenboom (2020). On post- unique data set that an STO wave started at the end of 2018 —
crowdfunding patterns, see, e.g., Mollick and Robb (2016), that is, in the aftermath of the ICO market bubble. Third, we
Sorenson et al. (2016), Signori and Vismara (2018), Blaseg show that good governance practices are significant factors of
et al. (2020), and Eldridge et al. (2021). STO success.
13
attaching voting rights to security tokens, despite (fixed) income generation.6 The (fixed) income-gen-
the enhanced transparency resulting from using a erating component of security tokens can include div-
blockchain. idends (equity tokens), fixed-interest payments (debt
tokens), and income-sharing payments (income-share
tokens and also fund tokens). However, the underly-
2 What it is (not) and how it works ing securities do not always include an income-gener-
ating component as it is the case for some fund units
To explore what determines STO success, one must (fund tokens) or derivatives (other security tokens).
first understand the features of an STO. In this sec- Moreover, investors in equity tokens can also have
tion, we begin by providing a working definition of control rights, such as voting similarly to ordinary
a security token and clarifying how it differentiates shares. Voting includes participating in decisions on
from both utility and payment tokens. We then out- the composition of the board of directors and struc-
line the STO process. tural corporate policy changes that would require
amendment of articles of association such as changes
2.1 Defining security tokens in registered capital, mergers and acquisitions, major
purchases or sales.7 Security tokens are fit for both
Digital assets are currently taking on so many differ- startup and mature firms. Their issuance can be con-
ent forms and (sometimes misleading) terminologies ducted early in the lifetime of the firm (usually in
that the task of defining them is not a simple one. the case of equity tokens) or later (often in the case
However, this task is important because it is where of debt tokens). However, as we show later, the vast
the contention may come from. We do not claim to be majority of STOs are issued by startup firms.
the first to offer a definition and taxonomy of digital A key feature of a security token is that its issu-
assets (see, e.g., Zetzsche et al., 2019, in the law lit- ance and subsequent transactions are recorded and
erature; and FINMA, 2018, for a financial regulator’s cryptographically secured on a distributed ledger. A
perspective). Our goal is instead to provide a work- distributed ledger embodies a database that is shared
ing definition in the entrepreneurial finance context.5 and synchronized across a network of independ-
A security token represents a distinct class of digital ent computers (referred to as nodes) that are con-
assets and its issuance process, the STO, represents a nected with one another without having to rely on a
unique method of financing ventures. Our definition central computer. A distributed ledger is less prone
is as follows: “A security token is a digital represen- to cyberattacks and fraud as the network of nodes
tation of an investment product, recorded on a dis- grows. Therefore, a distributed ledger contrasts with
tributed ledger, subject to regulation under securities a centralized database (used by traditional regulated
laws.” exchanges and central securities depositories). The
Against this background, a digital representa-
tion is an electronic record of an analog contract
between two or more parties. As an example, most 6
We group security tokens in five different categories: (i)
of the shares traded on the stock exchange today are equity tokens (e.g., stocks), (ii) debt tokens (e.g., bonds and
not recorded on a paper certificate but digitally repre- notes), (iii) fund tokens (e.g., fund units), (iv) income-share
tokens (e.g., profit-sharing agreements), and (v) other security
sented on centralized computer databases. tokens (e.g., derivatives). Derivatives can indeed be security
An investment product is bought by investors tokens as long as the tokenized derivative product is issued
with the expectation of a profit. Investment products by the company itself (e.g., warrants). It thus does not include
include a wide range of securities or group of secu- (derivative) products that are issued by exchanges (e.g., for-
ward and future contracts). Furthermore, we also observe that
rities which provide a (mix of) capital gains and/or many assets are nowadays tokenized, but in general, they are
not security tokens. They are security tokens only if the asset
(e.g., fine art and real estate) is first securitized (in the form of,
e.g., a bond and a fund unit) and then tokenized.
7
We refer here purely to control-type of voting rights, not vot-
5
See also Block et al. (2020) who offer complementary dis- ing in the context of blockchain protocols that often have the
cussions aimed at comparing ICOs (including STOs) and objective to decide on the features in a software update and
crowdfunding campaigns in entrepreneurial finance landscape. similar community decisions.
13
blockchain technology is one manifestation of the with ICOs and also equity- and reward-based crowd-
more general distributed ledger technology (DLT). funding campaigns that generally involve a wider
We mostly focus on blockchains for concreteness. audience. By extension, this is also a fundamental
However, our definition encompasses other DLTs difference with an initial public offering (IPO). Fur-
besides blockchains. thermore, retail buyers can acquire utility tokens in
Security tokens also come under the purview of a majority of jurisdictions as they are typically not
securities laws. This means that all security tokens, subject to securities laws contrary to security tokens.9
as investment products, have the status of regulated Utility tokens are meant to deliver products/services
securities. However, the converse is not necessar- that are thus subject, in theory, to ordinary consumer
ily true. In some jurisdictions, such as in the United protection and tax laws. The key element that secu-
States, utility tokens are also considered as “regulated rity tokens have in common with utility tokens is that
securities,” whereas they are another type of product both are issued on distributed ledgers.
than investment products. Therefore, our definition Being recorded on distributed ledgers is also
is not reciprocal since not all regulated securities are what security tokens have in common with payment
security tokens but all security tokens are regulated tokens (i.e., cryptocurrencies). However, the differ-
securities. ences between security tokens and payment tokens
According to our definition, a security token is dif- are many. As a cash equivalent, the primary function
ferent from a utility token or a payment token. Table 1 of a payment token is instead to facilitate blockchain-
provides a comparison of the different classes of digi- based payments. Payment tokens are issued early,
tal assets. Unlike security tokens, the main purpose of when the core team has conceptualized their com-
a utility token is to grant access to a community-based munity project. They are often issued, like utility
ecosystem by giving its holders a consumptive right tokens, by nonprofit foundations. Payment tokens are
on a product or service (Catalini & Gans, 2019; How- thus meant to be used by their respective members.
ell et al., 2020). It exists to be used/spent in the eco- Furthermore, payment tokens should be covered by
system and is more akin to a voucher. It is also impor- banking and payment services laws but should not be
tant to note that utility tokens are typically issued under the purview of securities laws. Payment tokens
by nonprofit foundations to the members of their can typically be bought and sold by anyone, unless a
ecosystem. The issuance of utility tokens (through country imposes a ban.
ICOs) often happens at a very early stage — that is, Our definitions of digital assets and, in particular,
before any product or service has been developed. security tokens do not contradict other definitions
This contrasts with security tokens that can be issued proposed earlier by academics (e.g., Zetzsche et al.,
(through STOs) regardless of the development stage 2019) or regulators (e.g., FINMA, 2018). However,
of the firm. STOs thus draw significant parallels with defining digital assets based on their purpose, as we
equity-based crowdfunding, whereas ICOs compare do, instead of their “blockchain” commonality, has
to reward-based crowdfunding (Block et al., 2020). the advantage of better identifying their respective
However, STOs are usually restricted (by law) to a contribution to the entrepreneurial finance area. Secu-
group of accredited or experienced investors and are rity tokens confer traditional investor rights, whereas
thus akin to private placements — that is, privately utility tokens primarily provide consumptive rights
negotiated investment products sold outside of a pub- and payment tokens ensure payment functions.
lic offering (Janney & Folta, 2006; Wruck & Wu, Making such distinction has implications when
2009; Wu, 2004).8 This aspect often goes unnoticed studying success in launching digital assets. Most
in the literature, while being an important difference studies on ICOs (cited at the outset) focus on suc-
cess outcomes traditionally used in the entrepre-
neurial finance literature, such as amount raised,
8
As for tZERO, to give one example, the offering document
was explicitly entitled “confidential private placement offering
memorandum” and USD 30 million of the offering was taken
9
up GSR Capital, a private equity firm based in Hong Kong. Blandin et al. (2019), Zetzsche et al. (2019), and Howell
The STO of tZERO was also offered under rule 506(c) of Reg- et al. (2020) discuss the legal status of utility tokens in various
ulation D that restricts the offering to accredited investors only. jurisdictions.
13
304
13
Table 1 Digital assets. This table compares each class of digital assets (security token, utility token, and payment token) based on six dimensions
Security token Utility token Payment token
What A security token is a digital representation of an A utility token gives consumptive rights to access a A payment token (also called a cryptocurrency) is a
investment product product or service cash equivalent on a blockchain
Why The security token is bought by an investor with the The utility token is mainly issued to spend it in a The payment token is a means of payment in a commu-
expectation of a profit developed, community-based ecosystem. It has nity-based ecosystem
similar features to a voucher
Who The issuer usually is a for-profit entity, such as a pri- The original issuers were foundations, not for profit The prime example for a cryptocurrency is Bitcoin.
vate limited company. That company’s objective is entities, of which tokenholders became community Subsequently original issuers were foundations, not
to create value for investors by selling products and members. The product or service aims to create for profit entities, of which payment tokenholders
services to customers value for members became community members
How The issuance is usually launched through an STO and The issuance is usually launched through an ICO and The issuance is usually launched through an ICO and
recorded on a distributed ledger commonly using recorded on a distributed ledger commonly using recorded on a distributed ledger commonly using
blockchain technology blockchain technology blockchain technology
When Depending on the type of security, tokens can be Tokens are usually issued early, when the core team Tokens are usually issued early, when the core team has
issued when a start-up company can articulate infor- has conceptualized their community project and conceptualized their community project and described
mation required for a securities prospectus. The issu- described it in a whitepaper it in a whitepaper
ance can also be conducted later, i.e., by established
companies
Whose Security tokens fall under the purview of securities Utility tokens are, in most jurisdictions, not consid- Payment tokens are, in most jurisdictions, not under the
laws that is implemented by the respective financial ered as securities and, therefore, not governed by purview of securities laws. Since they are a means
regulator. It is very common to limit access to high- securities laws. This removes regulatory obstacles of payment, payment tokens are covered by banking
risk securities to accredited investors to access them for retail buyers. Since they are more and payment services laws. Except for countries that
akin to product vouchers, utility tokens are subject to banned digital assets, as cash equivalent, virtually
consumer protection and tax laws everyone can buy payment tokens

T. Lambert et al.
enterprise survival, and employment growth. These digital assets are under construction. Therefore, it is
success measures are especially suited to examine essential that our definition allows room for such evo-
STO success like we do. However, other outcomes lution, as in the case of hybrid tokens. Second, our
are surely equally (if not more) relevant to evaluate discussion above suggests that security tokens can
ICO success. Indeed, outcomes such as technological represent a wide range of securities, from stocks,
and community developments would better capture bonds, funds, to some types of derivatives. This also
success in a world of utility tokens, while the veloc- means that security tokens encompass the tokeniza-
ity of payment tokens (i.e., the number of times one tion of both existing and new securities. However, an
payment token is used to buy goods/services within STO largely relates to the tokenization of new securi-
a given period) would be a better measure of suc- ties since an STO is a primary market — that is, the
cess of payment tokens. To our knowledge, two nota- tokenization process is combined with a capital rais-
ble exceptions going in this direction are Deng et al. ing process.
(2018) and Davydiuk et al. (2020), who focus on ICO
success outcomes such as user base and technological 2.2 STO process
and product development rather than outcomes tradi-
tionally used in the entrepreneurial finance literature. The STO process typically consists of six phases
Two caveats are in order. First, our discussion (Fig. 1 provides details on an illustrative STO pro-
above considers each class of digital assets taken cess).12 Phase one entails the preparation for the
separately. However, we do not view these classes as capital raising. Once a team has decided to go ahead
mutually exclusive. On the one hand, some security with the primary offering of a security token, the
token issuers may also plan to issue a separate utility process begins with a rough articulation of the idea/
token to power their ecosystem.10 On the other hand, business case. This business case can evolve around a
true hybrids exist — that is, single tokens exhibiting new entrepreneurial venture or the tokenization of an
features of more than one class of digital assets.11 investment product aiming to raise new capital. It is
One can easily imagine a variety of different possi- at this stage that the team usually considers appoint-
ble hybrids. Their inclusion in one particular class of ing advisors to produce the whitepaper (equivalent
digital asset depends on which token feature predomi- to a prospectus, but technical) and provide inputs on
nates (security, utility, or payment). As in any emer- the selection criteria for technology service providers.
gent field, the industry and academic conceptions of Such selection criteria include not only blockchain
platform considerations (e.g., fork risk and developer
adoption) but also reputational and coverage issues
10
This is the case of Healthbank in our sample, which aimed for token issuance services and know your customer
to conduct its capital raising through the sale of a regulated (KYC), anti-money laundering (AML), and counter-
security token (HBE) but also planned to separately issue a terrorist financing (CFT) services. Advisors can also
utility token (HBC). HBC was thus not part of the STO.
11
help validate assumptions formulated in the business
This is the case of Binance Coin (BNB), launched through
an ICO by Binance. BNB is primarily a payment token, allow- case to assess economic viability of the initiative and
ing to make payments for exchange fees, withdrawal fees, and assist with the preparation of a first version of an
listing fees, among other things. At the same time, BNB dis- investor deck. On this basis, the team can establish
plays additional features of a utility token beyond payments: If financing requirements and identify the target inves-
platform users choose to pay their fees in BNB, a significant
discount is applied, for a period of up to 4 years. Utility is cre- tor base.
ated in the form of discounted fees. Moreover, BNB includes a During the second phase, the team appoints a cor-
feature of a security token, namely capital appreciation. This porate financial advisor and a lawyer to help with the
“security” feature is a coin burn; that is, every quarter, BNB design of the offering. The corporate financial advi-
tokens of the issuer’s reserve are destroyed, based on vol-
ume on the trading platform, until only 50% of BNB tokens sor is familiar with the STO process, similar to an
initially issued are left in circulation. The coin burn implies
capital appreciation since the reduction of central BNB sup-
ply increases the price of BNB owned by tokenholders. Due to
12
its launch through an unregulated ICO process and its primary What we describe here are six phases that entrepreneurs
feature being payments, BNB is currently not subject to securi- running an STO typically go through. This does not mean that
ties laws. Therefore, BNB is not in our sample. they always (or must) go (fully) through each of these phases.
13
306
13
Fig. 1 Illustrative STO process. This figure provides an illustrative outline of the STO process with details on the specific actions taken by security token issuers during each
phase of the process

T. Lambert et al.
investment bank that works on IPOs. The corporate custodian who will safe-keep the tokens once they are
financial advisor can help with selecting the type of created. Payment providers are also required to facili-
security, the security structuring (including confer- tate fiat payments related to the capital raising.
ring investors with specific rights), the duration of the Phase five is the capital raising activity. Ideally,
offering, the use of a softcap, and the valuation of the the team identifies a cornerstone investor as early
token issue. The lawyer is an expert in securities laws as possible for positive signaling to the wider mar-
and DLTs and can advise on various matters, includ- ket. Then, the team starts marketing the offering.
ing STO regulations, prospectus issuance, mandatory The broker organizes meetings with investors allow-
lockup periods, investor requirements, solicitation, ing the team to present its pitch. The team can then
and applicable exemptions. Together with its advi- share the offering documents with interested inves-
sors, the team finalizes the offering documents, which tors. Other marketing activities are also conducted to
typically include an investor deck, a whitepaper, a attract additional investors’ interest — that is, setting
term sheet, a prospectus, and purchase or subscription up a website, issuing press releases, using mass-mar-
agreements. ket communication channels (e.g., Telegram), listing
In phase three, technology (service provider) deci- the offering on STO aggregator websites, and creat-
sions are made. These decisions include selecting a ing a GitHub account to publicly share source code.
blockchain platform. Ethereum continues to be the After the marketing, the actual financing takes place,
most popular choice among issuers, but other plat- where interested investors sign the appropriate offer-
forms are also entering the arena (NEM, NEO, Stel- ing documents. Today, this often happens on paper or
lar, Swarm). Selecting an appropriate blockchain through digital signature platforms such as DocuSign
platform requires careful consideration. Although or Sign.net. Then, investors wire their money to the
demand-side adoption — that is, the ease of access issuer, who confirms receipt of the payment. While
to the platform for investors via wallets and custodi- some issuers mandate traditional fiat currency to be
ans — is critical, supply-side adoption — that is, the used for investment, others also accept the transfer
availability of software developers on the job market of bitcoin (BTC) or ether (ETH) to designated wal-
— plays an equally important role. Other considera- lets. To conclude the offering successfully, all clauses
tions include the platform’s ability to depict the entire in the offering documents must be met (e.g., the
lifecycle of securities (e.g., exercising voting, pay- achievement of a softcap, if defined). Tokens are then
ing interest, or dividend), the approach to settlement distributed into investors’ wallets.
finality, and the mitigation of fork risk. Technology The sixth and last phase can be the listing of the
service providers (e.g., Harbor and Polymath) have a security on (a) suitable exchange(s). Secondary mar-
multitude of deliveries in the STO process. One is the ketplaces for security tokens are often alternative mar-
creation of the security token according to the secu- kets — examples include InvestaX, MERJ Exchange,
rity structuring developed in the second phase. Other openfinance, tZERO, and 1exchange.13 The listing
services enable the issuer to vet prospect investors process also implies going through the trading venue’s
according to KYC, AML, and CTF regulations. A listing modalities, which often requires substantial
mechanism to distribute tokens to investors’ wallets is disclosures. It is accompanied by marketing activi-
also required. In addition, technology service provid- ties to attract additional interest in the security token.
ers customize a portal for issuers enabling their inves- In some jurisdictions, such as the United States and
tors to use their wallets. Singapore, the regulator imposes lockups on inves-
In phase four, the team selects financial service tors participating in the primary offering. While
providers, including brokers, transfer agents, custo-
dians, and payment providers. In many jurisdictions,
the sale of securities is a regulated activity carried 13
In the United States, these marketplaces are called Alterna-
out by licensed brokers. In some cases, regulators tive Trading System (ATS). In Europe, there is a similar licens-
grant exceptions to this “brokerage” requirement. The ing regime under the Markets in Financial Instruments Direc-
issuer may also work with transfer agents who over- tive (MiFID) called Multilateral Trading Facility (MTF). In
Singapore, running such an exchange requires a Recognized
see the issuance of the tokens and handle claims in Market Operator (RMO) license from the Monetary Authority
case tokens get stolen or lost. The team may engage a of Singapore (MAS).
13
Table 2 STO Sample. Panel A: Sample construction

This table presents the All identified STOs 280
construction of the STO
- ICOs 86
sample used in this
study. Panel A shows - Stablecoins 9
the sample construction. - Traditional offerings 2
The main sample starts - Capital raising still ongoing after December 31, 2020 2
with 280 STOs from the - No data available 57
initial sources (see the Base sample 124
text), excluding ICOs and
stablecoins (i.e., tokens Panel B: Number of STOs over time
that do not match our
definition of an STO),
traditional offerings (i.e.,
funds investing in digital
assets and not digital
assets themselves), capital
raising still ongoing after
December 31, 2020, and
STOs with not enough data
available to construct key
variables (e.g., amount
raised, Github, and target
amount). Panel B shows
a bar chart of the number
of STOs that start in each
quarter between April 2017
and December 2019. Panel
B includes all the 183 STOs
identified as such in Panel
A (= 124 + 57 + 2). Panel
C shows the top 10 largest
STOs in the base sample.
The x-axis represents the
firm name, and the y-axis Panel C: Top 10 largest STOs
represents the amount of
funds raised in million USD
13
conceptually listing a token on a secondary market the reading of offering documents, whitepapers, and
enables buyers and sellers to transact, it does not mean press releases to determine if the purpose of the token
that demand for the token is immediately present after is in line with our definition. Our perusal of each of
exchange listing.14 Therefore, issuers can appoint a the STOs leads us to exclude 86 offerings which turn
market maker to provide liquidity for their token. They out to be ICOs disguised as STOs. Many ICOs were
should also regularly communicate with the market registered for sale as a security to avoid regulatory
and share information about firm developments. uncertainty while really being utility tokens.17 As an
Last, the duration of the STO process averages example, the Blockstack ICO was registered under
around 24 and 56 weeks (see Fig. 1). Regarding the Regulation D with the Securities and Exchange Com-
cost of an STO, it generally ranges between USD mission (SEC) even though the offering falls in the
180,000 and USD 750,000, excluding fees calcu- utility token class (see Ali et al., 2019, Sect. 2.4). The
lated as a percentage of the offering (e.g., corporate non-negligible number of ICOs (registered as STOs)
financial advisor and broker fees range between 1 indicates that security tokens considered as such in
and 8%). The budget includes fees for legal advis- many ICO studies should be interpreted with care.
ers (USD 50,000–350,000), technology providers We also exclude stablecoins (9 cases) and traditional
(USD 10,000–50,000), capital raising expenses (USD offerings (2 cases). We end up with 183 STOs.
10,000–50,000), financial service providers (USD Table 2, Panel B, shows the number of STOs by quar-
10,000–50,000), and listing fees charged by the trad- ter. The first STO was conducted by Blockchain Capital,
ing venue (USD 100,000–250,000).15 which successfully raised USD 10 million in the sec-
ond quarter of 2017. Only a handful of STOs were con-
ducted until the third quarter of 2018, while the STO mar-
3 Sample and data ket gained momentum from the fourth quarter of 2018
onwards. It is striking to see that the rise of the STO mar-
In this section, we first introduce our data set and give ket corresponds to the time when the ICO bubble burst.18
an overview of the STO market. Then, we describe all Table 2, Panel C, also shows the top 10 largest STOs in
our variables. our sample: They all raised at least USD 15 million, with
three of them raising USD 100 million or more, namely
3.1 Market overview Proxima Media, Société Générale, and tZERO.
For our empirical analysis, we further drop 2
We create a unique and comprehensive data set of STOs that did not complete their capital raising by
STOs, based on proprietary data obtained from Digi- December 31, 2020, as well as another 57 STOs
tal Asset Network (DAN) as of December 31, 2019. for which data on proceeds are not available (see
We augment this data set with additional STOs iden- Panel A). Our base sample therefore comprises
tified from various other aggregator websites.16 As 124 STOs for which we have sufficient information
shown in Table 2, Panel A, our initial sample includes on their success outcomes and both issuer and
280 offerings labeled as STOs. We manually col- offering characteristics. Together, these 124 issuers
lect additional information for each STO based on who launched their STO between April 2017 and
December 2019 raised a total of USD 762 million.
14
Thus far, we observe a limited liquidity in most exchanges.
At the time of the writing, the secondary market is even more 17
We acknowledge that there might also be STOs disguised
nascent than the primary counterpart with few offerings that as ICOs. Such disguise on the side of the issuer could result
trade freely: 6.4% (13.2%) of (successful) STOs in our sample. from ignorance or from active and fraudulent attempt to avoid
15
For cost estimates, we also refer the interested reader to, securities regulation in the respective jurisdiction. The regula-
e.g., Fitzner Blockchain Consulting (https://medium.com/fitzn tor can re-classify of course such disguise according to its defi-
er- b lock chain- c onsu l ting/a- g uide- t o- l aunc h ing-a- s ecur i ty- nition of a security token. However, we did not systematically
token-offering-e55f77be2874; last accessed: June 18, 2021). track and include STOs disguised as ICOs in our analysis.
16 18
The aggregator websites used are BlockState, Cointelli- Howell et al. (2020) report, among many others, aggregate
gence, Coinlist, Coinspeaker, Cryptodaily, Cryptoslate, DAS ICO market statistics indicating the beginning of the ICO mar-
Finance, STOAnalytics, STOCheck, STOWise, and TokenMar- ket bubble in the first half of 2017 and its end in the first half
ket. of 2018 (see their Fig. 2, p. 3937).
13
Table 3 Sample composition. This table summarizes the com- Therefore, the overall STO market is still relatively
position of the sample of STOs used in this study. Panel A reports small compared to the ICO market, which amounts
the frequency of STOs by country of origin of the issuer. Panel B
reports the frequency of STOs by their economic purpose
to USD 25 billion in 2014–2018 (Bourveau et al.,
2019).
Panel A: Sample composition by country
Furthermore, we observe in our sample of 124
Country Obs Freq. (%)
STOs that 60% did not successfully raise capital.
Australia 1 0.81
This statistic suggests that the STO market is
Austria 2 1.61
nascent and thus still under development. One
Bahamas 1 0.81
explanation might be that some entrepreneurs
British Virgin Islands 1 0.81
are insufficiently prepared to launch an STO
Canada 2 1.61
and underestimate the costs and complexity of
Cayman Islands 11 8.87
conducting an STO.
Croatia 1 0.81
Table 3 shows the composition of our STO sample.
Denmark 1 0.81
Panel A illustrates that issuers are incorporated in 34
Estonia 5 4.03
different countries.19 The country of incorporation is
Finland 1 0.81
where the token is issued, which may differ from the
France 1 0.81
countries where the token is registered for sale. The
Germany 5 4.03
United States leads (with 36 STOs), followed by the
Gibraltar 2 1.61
Cayman Islands and the United Kingdom (both with
Hong Kong 2 1.61
11 STOs), and Switzerland (10 STOs). These juris-
Ireland 1 0.81
dictions with significant STO activity have typically
Israel 1 0.81
developed guidance or enacted laws to provide regu-
Kyrgyzstan 1 0.81
latory certainty on STO matters (see Appendix for a
Liechtenstein 5 4.03
brief regulatory overview in these and other jurisdic-
Lithuania 3 2.42
tions). The geography of the STO market thus likely
Luxemburg 1 0.81
reflects regulatory considerations by issuers, albeit
Malta 2 1.61
that tax considerations may also play a role.20 Panel B
Mauritius 1 0.81
also shows the frequency of STOs by their economic
Netherlands 2 1.61
purpose. Equity tokens account for 44% of securities
New Zealand 1 0.81
in our sample, debt tokens 9%, income-share tokens
Panama 1 0.81
Paraguay 1 0.81
Puerto Rico 2 1.61
Seychelles 2 1.61
Singapore 5 4.03 19
To determine the country of incorporation, we use the offer-
Spain 1 0.81 ing documentation when available; otherwise, we use location
Sweden 1 0.81 data from aggregator websites.
20
Switzerland 10 8.06 Most countries listed in Table 3, Panel A, hold the first
United Kingdom 11 8.87 places of tax haven rankings, such as the Tax Justice Network
United States 36 29.03
(www.corporatetaxhavenindex.org). More than two-thirds of
the countries in our sample are listed in such rankings of tax
Total 124 100.00
havens for corporations, including seven countries within the
Panel B: Sample composition by economic purpose top ten (i.e., British Virgin Islands, Cayman Islands, Nether-
Economic purpose Obs Freq. (%) lands, Switzerland, Luxembourg, Hong Kong, Singapore). It is
Debt token 11 8.87
beyond the scope of our paper to study what are the specific
facilities that drive STO issuers to incorporating in these loca-
Equity token 54 43.55
tions. In particular, our empirical setting does not allow us to
Fund token 18 14.52 disentangle whether issuers value these locations because of
Income-share token 38 30.65 their “tax-haven” facilities — enabling to avoid or evade tax
Other security token 3 2.42
laws of other jurisdictions — or “regulatory-haven” facilities
— helping them to escape financial (and other) regulations of
Total 124 100.00
other jurisdictions.
13
Table 4 Description of variables.

Variables Descriptions
STO success
Amount raised Amount (in USD) raised in an STO
Amount raised to target The ratio of amount of capital raised in an STO to the target amount
Completion An indicator variable that equals 1 if the STO has raised capital exceeding the softcap require-
ment (if any) or the STO has raised any capital in the case no softcap requirement is specified,
and 0 otherwise
Investor rights
Voting rights An indicator variable that equals 1 if the STO issuer confers the investor rights to vote on matters
of corporate policy including the makeup of the board of directors, and 0 otherwise
No cashflow rights An indicator variable that equals 1 if the STO issuer does not confer the investor rights to receive
dividends, or payments resulting from income-sharing agreements, or interests (fixed income),
and 0 otherwise. This indicator variable can thus only equal 1 if the economic purpose is “fund
token” or an “other investment token.”
Issuer and offering characteristics
Github An indicator variable that equals 1 if the STO issuer setup a GitHub presence to share its source
code publicly, and 0 otherwise
Softcap use An indicator variable that equals 1 if the STO issuer discloses a softcap requirement that needs to
be met for the capital raising to be complete, and 0 otherwise
Target amount Target amount (in USD) to be raised in an STO
Country indicators A set of indicator variables that equal 1 if the STO issuer is registered in either of the following
“popular” jurisdictions (i.e., more than 10 STOs): Cayman Islands, Switzerland, United King-
dom, or the United States, and otherwise 0
Planned duration Number of days set by the STO issuer for its offering
Age Age in years of the company at the time the STO is launched
Telegram An indicator variable that equals 1 if the STO issuer setup a Telegram presence to communicate
with investors, and 0 otherwise
Team size Number of executive team members of the STO issuer (excluding advisers)
Insider holdings Percentage of security tokens planned to be held by founding team members (can include advi-
sors)
31%, and fund tokens 15%. Other security tokens Tables 5 and 6 provide descriptive statistics and pair-
make up the remaining 2% of our sample. wise correlations, respectively. The mean amount
raised is approximately USD 6.1 million, with a sig-
3.2 Variables and descriptive statistics nificant dispersion (standard deviation of USD 19.5
million). The median amount raised is USD 13,000,
In our analysis, we employ three dependent variables while many STOs did not raise any capital.21 The
measuring STO success: (i) amount raised, (ii) per- maximum amount raised in our sample is the STO
centage of target amount raised, and (iii) completion conducted by tZERO, with USD 134 million. These
status. The variable, Amount raised, measures the statistics reflect a highly skewed distribution of
USD amount of capital raised by the STO. The vari- STO proceeds. The amount raised through an STO
able, Amount raised to target, is the ratio of amount
raised to the target amount. The indicator variable,
Completion, identifies STOs that have successfully 21
In some cases, entrepreneurs did raise some capital, but not
raised capital exceeding the minimum threshold enough and withdrew from the STO process. In such cases, the
(i.e., the softcap) stipulated by the token issuer (if amount reported can be zero, which partly explains the number
of zeros. In our empirical analysis, we use several STO suc-
any) or have raised any capital in the case no thresh- cess variables to verify whether our results are affected by such
old is defined. Table 4 describes all variables, while cases.
13
Table 5 Descriptive Variables Mean Min Median Max Std. dev Obs
statistics. This table reports
descriptive statistics for the STO success
variables used in the study.
Amount raised (million USD) 6.146 0.000 0.013 134.000 19.500 124
All variables are described
in Table 4 Amount raised to target 0.207 0.000 0.000 1.817 0.359 124
Completion 0.427 0.000 0.000 1.000 0.497 124
Investor rights
Voting rights 0.147 0.000 0.000 1.000 0.356 102
No cashflow rights 0.081 0.000 0.000 1.000 0.273 124
Github 0.355 0.000 0.000 1.000 0.480 124
Softcap use 0.419 0.000 0.000 1.000 0.495 124
Target amount (million USD) 61.600 0.168 20.000 1,000.000 137.000 124
Planned duration 144.204 0.000 97.000 731.000 140.575 98
Age 5.471 0.000 2.000 155.000 15.303 119
Telegram 0.637 0.000 1.000 1.000 0.483 124
Team size 7.231 1.000 6.000 23.000 4.855 117
Insider holdings 0.084 0.000 0.036 0.950 0.141 76
averages at 21% of the target amount, again with a We regress the above dependent variables on issuer
high standard deviation of 36%. Within our sample, and offering characteristics. Voluntary disclosures by
43% of STOs successfully completed their capital issuers may be an important source of information for
raising. potential investors. A key disclosure choice is whether
or not STO issuers decide to share their source code
Table 6 Correlation matrix. The table reports the correla- the variables on investor rights, and Panel C the variables on
tion matrix for the variables used in the study. Panel A presents issuer and offering characteristics. All variables are described
the correlation between the STO success variables, Panel B in Table 4
Panel A: STO success

(1) (2) (3)
(1) Amount raised (ln) 1.000
(2) Amount raised to target 0.637 1.000
(3) Completion 0.858 0.627 1.000
Panel B: Investor rights
(1) (2)
(1) Voting rights 1.000
(2) No cashflow rights − 0.104 1.000
Panel C: Issuer and offering characteristics
(1) (2) (3) (4) (5) (6) (7) (8)
(1) Github 1.000
(2) Softcap use 0.019 1.000
(3) Target amount (ln) − 0.025 − 0.114 1.000
(4) Planned duration − 0.083 − 0.036 0.217 1.000
(5) Age − 0.128 − 0.131 0.105 0.040 1.000
(6) Telegram 0.314 0.064 − 0.103 − 0.145 − 0.128 1.000
(7) Team size 0.189 0.190 − 0.190 − 0.212 0.060 0.228 1.000
(8) Insider holdings 0.196 − 0.005 0.251 0.199 − 0.152 0.137 − 0.080 1.000
13
on GitHub, the dominant online code repository. Our project startup as well as the level of involvement and
indicator variable, GitHub, captures this. Another dis- commitment of insiders. We measure team size as the
closure choice is whether or not to have a presence in number of executive team members associated with
mass-market communication channels through which an STO. Team size ranges from 1 to 23 in our sam-
issuers can disseminate timely information to inves- ple. In addition, we collect information on whether
tors. We use an indicator variable to identify those issuers disclose the fraction of tokens allocated to
STOs that have a Telegram presence. Telegram is a insiders since they may use token retention to allevi-
major platform commonly used by ICOs (and STOs) ate information asymmetries (Davydiuk et al., 2020).
to communicate with investors.22 Table 5 reports that This variable, Insider holdings, captures the extent
36% of STOs use GitHub, while 64% are present on of incentive alignment between insiders and outside
Telegram. investors. On average, insiders retain 8% of security
We supplement these issuer-supplied disclosures tokens in our sample.
with other STO attributes that may be useful for We hand-collect variables on investor rights that
investors. The indicator variable, Softcap use, cap- capture the ownership and control features attached
tures whether the STO has a stated softcap that needs to security tokens. The indicator variable, Voting
to be achieved. Forty-two percent of STOs in our rights, captures the “control” dimension by identify-
sample makes use of a softcap. Another potentially ing whether voting rights are attached to the secu-
important factor is whether the STO states a specific rity token. Voting rights include participating in key
goal to raise. The variable, Target amount, is defined corporate policy matters and director elections. Not
as the target amount to be raised. All STOs disclose a granting voting rights to investors, therefore, implies
target amount, which on average stands at USD 61.6 that issuers separate control and ownership. Descrip-
million (median of USD 20 million). We also use tive statistics reveal that investors are granted voting
indicator variables identifying the issuer location, of rights in 15% of STOs, representing 28% of equity
which statistics were discussed in the previous sec- tokens in our sample. This suggests that STO issu-
tion. Furthermore, we define a variable, Planned ers tend to insulate themselves from outside control,
duration, capturing the planned duration in days of consistent with recent trends in IPOs (Aggarwal et al.,
the capital raising campaign as published in the offer- 2021). Although most security tokens are entitled to
ing document (if available) or reported by aggrega- receive cashflows (i.e., dividends for equity tokens,
tor websites and/or DAN. On average, STOs plan to fixed-interest payments for debt tokens, and income-
take 144 days to raise capital. We also include the sharing payments for income-share tokens and fund
variable, Age, which confirms that young companies tokens), this may not necessarily be the case for all
primarily launch STOs. The average (median) com- fund and other security tokens; some of which are
pany in our sample being 5 (2) years old at the time of only considered for capital gains by investors. We
the launch of the STO). Following the ICO literature, account for this by constructing an indicator variable,
we collect information on the size of the team since a No cashflow rights. Only 8% of security tokens do not
larger team may be indicative of the maturity of the assign cashflow rights to investors.
22
4 Analysis of STO success factors
Whitepaper-based variables are traditionally used in the
ICO literature. Whitepapers usually describe how utility
tokens work. However, it is worth mentioning that for an STO, In this section, we provide initial empirical evidence
the whitepaper is not necessarily the key document (and may about the STO market. We explore what factors are
even not be produced by the entrepreneur). STOs are securi- associated with success and failure among STOs in
ties and, therefore, the complete offering documentation is
usually required. We are not able to construct an offering doc- a multivariate setting. We focus on three measures
umentation-based variable because disclosure requirements of success of the STO in raising capital: amount
vary across jurisdictions. Moreover, issuers are not obligated to raised (Sect. 4.1), percentage of target amount raised
publish these documents and in fact have an incentive to only (Sect. 4.2), and completion status (Sect. 4.2).
show them to KYC’ed prospect investors. Sharing such docu-
mentation with the public is considered as illegal advertising
of the STO according to securities law in many jurisdictions.
13
4.1 Amount raised in turn positively affecting STO success. The coun-

try indicator, United Kingdom, enters negatively and
We examine the relation between the amount raised significantly in the regression. One possible inter-
and a variety of factors relating to issuer and offering pretation, in line with the findings of Hornuf and
characteristics and investor rights. Our specification Schwienbacher (2017) in the crowdfunding context,
is may be that jurisdictions with tighter investor protec-
tion (such as the United Kingdom) may harm capital
AmountRaisedi = 𝛼 + 𝛽Xi + 𝛾InvestorRightsi + 𝛿t + 𝜀i , (1) raising campaigns of small startup firms. The other
in which the dependent variable, AmountRaisedi , country indicators are not significantly associated
is the amount raised by STO i (in natural log scale) with amount raised.
and 𝛼 is a constant term. The vector of variables, Xi , In column 2, we augment the specification in col-
always includes GitHub, Softcap use, Target Amount umn 1 with variables capturing additional issuer
(in natural log scale), and country indicators. We and offering characteristics (Planned duration, Age,
select these variables to account for important Telegram, and Team size). The results confirmed
characteristics of STO i, while maximizing sam- the ones of column 1, except that the coefficient on
ple size. In some specifications, this vector consid- United Kingdom turns out to be insignificant. How-
ers further characteristics of STO i: Planned dura- ever, we do not find significant coefficients for these
tion, Age, Equity token, Telegram, and Team size. additional variables. This includes the indicator vari-
InvestorRightsi contains the variables Voting rights able, Telegram, which captures information about the
and No cashflow rights. 𝛿t denotes time fixed effects STO disseminated to potential investors. At the same
based on the year in which an STO is launched. 𝜀i is time, this may indicate that, unlike in the ICO con-
the error term. In all regressions, the standard errors text, a mass-market communication channel, such as
are robust to heteroscedasticity. Telegram, is less important for an STO as it generally
Table 7 reports the coefficients of tobit models involves accredited or experienced investors.
derived from specification (1). Our variable, Amount We now turn to investigate the rights granted to inves-
raised, is left-censored as a failing STO is generally tors in STOs. A large body of research in corporate
observed as zero in our sample and thus justifies the finance documents the effect of separating voting rights
use of tobit models.23 Column 1 is the most parsi- (control) from cashflow rights (ownership) on firm value.
monious specification regressing Amount raised on It shows that firm value falls when the voting rights of
GitHub, Softcap use, Target amount, and the country insiders exceed their cashflow rights, consistent with an
indicators. Notably, we find that GitHub is positively entrenchment effect (Claessens et al., 2002; Gompers
and significantly associated with amount raised. et al., 2010; Lins, 2003). The more concentrated control
This suggests that voluntary disclosing source code in the hands of insiders (i.e., managers and controlling
on GitHub may enable potential investors to better shareholders) is, the more entrenched they are and the
assess the underlying quality of security tokens and better able they can extract value — at the expense of the
their potential financial payoff in the future. The coef- firm’s value to outside investors (i.e., minority sharehold-
ficients on Softcap use and Target amount are nega- ers and creditors). The agency problem of entrenchment
tive, though they fail to be statistically significant at will be less pronounced when there is less divergence
conventional levels. We also observe that the coeffi- between voting rights and cashflow rights because insid-
cient on Cayman Islands is positive and significant, ers’ willingness to extract value is more restrained by their
which may suggest that investors prefer tax havens cashflow stake (Burkhart & Lee, 2008).
(such as the Cayman Islands) to deploy their capital, Firms undergoing STOs also face governance
issues arising from the separation of ownership and
control. In the case of STOs, these firms sell tokens
23
A potential concern is that the large share of zeros on our with cashflow rights to outside investors that, at the
dependent variable (see descriptive statistics displayed in same time, may or may not allow these investors to
Table 5) may attenuate our estimations. The main results pre- exert voting rights. Investors in an STO may be reluc-
sented in this section do not change qualitatively if we exclude
from the sample STOs with an amount raised nil. These results tant to invest in tokens without voting rights because
are available upon request from the authors. they anticipate the potentially large entrenchment
13
Table 7 STO success Dependent variable Amount raised (ln)

factors. This table reports
coefficient estimates from (1) (2) (3) (4) (5) (6)
tobit regressions of ln
Amount raised on variables Investor rights
on investor rights and Voting rights 10.475*** 11.047*** 10.363*** 10.912***
various variables on issuer (3.483) (3.422) (3.477) (3.408)
and offering characteristics.
All variables are described No cashflow rights − 4.089 − 1.883
in Table 4. Sample sizes (4.933) (5.175)
vary based on available Issuer and offering characteristics
data. All models include a Github 6.973*** 6.932** 5.562** 4.684 5.644** 4.683
constant, whose coefficient
is not reported. Numbers (2.395) (2.677) (2.529) (2.909) (2.518) (2.909)
in parentheses are robust Softcap use − 4.270 − 3.617 − 4.384 − 5.034* − 4.303 − 4.997*
standard errors. *, **, and (2.577) (2.555) (2.951) (2.752) (2.933) (2.737)
*** indicate significance at Target amount (ln) − 1.044 − 0.970 − 0.606 − 0.977 − 0.493 − 0.904
the 10%, 5%, and 1% levels,
respectively (0.634) (0.749) (0.869) (0.969) (0.882) (0.981)
Cayman Islands 5.921* 7.743** 6.987** 6.612* 6.749* 6.421*
(3.560) (3.530) (3.394) (3.395) (3.575) (3.578)
Switzerland − 0.052 − 0.465 − 5.790 − 7.592 − 6.168 − 7.712
(5.061) (4.560) (6.107) (5.325) (6.088) (5.325)
United Kingdom − 9.628* − 5.685 − 13.942*** − 9.618** − 13.986*** − 9.607**
(5.408) (6.221) (4.930) (4.608) (4.925) (4.627)
United States − 3.135 1.293 − 5.324* − 1.133 − 5.488* − 1.186
(2.985) (3.360) (3.151) (3.280) (3.140) (3.265)
Planned duration 0.007 0.019** 0.018**
(0.008) (0.009) (0.009)
Age 0.289 0.200 0.188
(0.249) (0.230) (0.233)
Telegram − 0.452 2.227 2.258
(3.004) (3.603) (3.592)
Team size 0.290 0.083 0.077
(0.280) (0.297) (0.296)
Fixed effects
Year Yes Yes Yes Yes Yes Yes
Observations 124 92 102 79 102 79
Pseudo R-squared 0.039 0.053 0.058 0.072 0.059 0.073
costs associated with concentrated control among potential to mitigate the agency problem between
insiders. Prior work in both the IPO (Smart & Zut- insiders and outsiders (Catalini & Gans, 2016).24
ter, 2003; Smart et al., 2008; Taylor & Whittred,
1998) and crowdfunding (Cumming et al., 2019) lit- 24
Of course, the implications of blockchains on the govern-
erature supports this entrenchment hypothesis. How- ance of the firm are broader (see Yermack, 2017; Blémus &
ever, the negative impact of denying voting rights to Guegan, 2019, for discussions). For example, governing a
blockchain amounts to having the authority to update its code,
investors is less evident in the STO context since the which requires in-depth mathematical know-how and experi-
issuance of securities and subsequent transactions ence in programming. Not everyone can take on this role. Core
are recorded on a blockchain. Specifically, using the developers of a public blockchain platform therefore become
blockchain may reduce the cost of accessing (and ver- agents having the ability to manipulate governance features
themselves. They can also influence others through their
ifying) information for outside investors and increase “thought leader” status, leading to power concentration and
transparency on the firm governance. This has the new agency problems (Shermin, 2017).
13
We explore this hypothesis in the STO context. sample, our results are qualitatively the same. Last,
In column 3, we include the indicator variable, Vot- in columns 5 and 6, we estimate our models by OLS
ing rights, to the specification of column 1. We find instead of tobit. We can observe that the estimation
that attaching voting rights to security tokens is posi- method does not materially affect our results.
tively and significantly associated with the amount
raised by issuers. Column 4 adds the indicator vari- 4.2 Alternative STO success variables
able, Voting rights, to the specification of column 2.
The coefficient on Voting rights is again positive and One important concern about the results in the pre-
highly significant. Our findings for the other issuer vious section is that they can be heavily influenced
and offering characteristics remain as before except by a very small number of STOs having raised large
for the variables Softcap use and Planned duration. amounts. In this section, we study alternative STO
The results in column 4 now show that Softcap use success variables to ensure that our results capture
is negatively and significantly associated with amount broad patterns in the data. We focus on the ability of
raised, which is consistent with the notion that issu- issuers to meet a threshold, either stated as a target
ers need to convince enough investors to reach the amount or as a softcap (if defined). We adapt specifi-
softcap and successfully raise money. As for the dura- cation (1) by changing the dependent variable accord-
tion of an STO, we can also see that it is positively ingly. The results are shown in Table 9.
and significantly correlated with amount raised, likely In columns 1–4, we use Amount raised to target
because a longer duration gives more time for issuers as the dependent variable and estimate tobit models
to identify and convince investors. In columns 5 and because the dependent variable is left-censored. We
6, we further include the indicator variable, No cash- observe that the results are largely consistent with
flow rights. As can be seen, estimation results reveal the ones reported in Table 7. The indicator variable,
that the indicator variable on no-cashflow rights is GitHub, enters again positively but fails to be sig-
not significantly associated with amount raised. How- nificant in two out of four models. This is likely due
ever, the importance of entitling investors with vot- to variation in (small) sample size. The coefficient
ing rights is confirmed, which is consistent with the on Softcap use loads negatively and highly signifi-
notion that denying voting rights negatively affects cantly across all models. Target amount is negative
investors’ willingness to invest. As for the reported and turns out to be statistically significant, meaning
coefficients on the other variables in the last two col- that the higher the stated goal, the lower the ability
umns, they corroborate the results from the other col- of issuers to succeed by raising their target amount.
umns discussed previously. Setting an unrealistically high target amount may
In Table 8, we check the robustness of our results, indeed send a negative signal and discourage inves-
especially on investor rights. For brevity, we focus tors. The negative effect of high target amount is
on the specifications of columns 5 and 6 of Table 7. also well-documented in the crowdfunding literature
First, one could argue that STO issuers granting (Mollick, 2014; Vulkan et al., 2016). Our results on
voting rights to investors are more likely to retain a country indicators remain broadly similar, except that
higher fraction of security tokens to compensate for the country indicator, Cayman Islands, loses statisti-
the loss of control. In columns 1 and 2, we test for cal significance. The coefficients on Planned duration
this possibility by running a horse race between the are now insignificant, while we continue to observe
variable, Insider holdings, and the indicator variable, insignificant effects for the variables Age, Telegram,
Voting rights. Although the number of observations and Team size. However, our earlier results on voting
drops compared to before, our results for the variable rights are confirmed across models: attaching voting
Voting rights remain unchanged. Second, since voting rights to security tokens corresponds to an expected
rights are only associated with equity tokens in our increase in the ratio of amount raised to target of 43
sample, in columns 3 and 4, we check whether our to 51%.25 The coefficient on the indicator variable,
results on investor rights hold in a sample consisting No cashflow rights, remains insignificant.
of equity tokens only. Again, despite the very small
25
That is, e0.361 ≈ 43 (column 3) and e0.409 ≈ 51 (column 2).
13
Table 8 Robustness checks. This table reports coefficient cator, Cayman Islands, is dropped as an equity token offering
estimates from regressions of ln Amount raised on variables is only observed once for this country in our sample). Col-
on investor rights and various variables of issuer and offering umns 5 and 6 are estimated using OLS models. All variables
characteristics. All models are similar to columns 5 and 6 of are described in Table 4. Sample sizes vary based on available
Table 7. Columns 1 and 2 further include the variable Insider data. All models include a constant, whose coefficient is not
holdings. Columns 3 and 4 restrict the sample to equity tokens reported. Numbers in parentheses are robust standard errors. *,
(the indicator variable, No cashflow rights, is dropped as all **, and *** indicate significance at the 10%, 5%, and 1% lev-
equity tokens include cashflow rights, while the country indi- els, respectively
Dependent variable Amount raised (ln)
(1) (2) (3) (4) (5) (6)
Investor rights
Voting rights 21.535*** 27.901*** 6.980* 7.283* 5.380** 6.508***
(6.799) (8.326) (3.818) (3.917) (2.117) (2.270)
No cashflow rights − 4.141 6.451 - - − 2.531 − 1.279
(8.432) (7.304) (2.524) (3.105)
Github 8.985* 6.531 5.496 5.479 3.087** 3.063
(5.050) (4.697) (3.541) (4.036) (1.444) (1.896)
Softcap use 2.865 − 4.759 2.778 − 1.904 − 2.654* − 3.144*
(5.443) (4.457) (4.130) (4.641) (1.583) (1.713)
Target amount (ln) − 1.304 − 7.609*** − 0.338 − 0.710 − 0.125 − 0.405
(2.124) (2.741) (1.195) (1.499) (0.489) (0.632)
Cayman Islands 22.662*** 30.314*** - - 3.803* 3.915
(7.735) (7.648) (2.263) (2.407)
Switzerland 4.769 − 0.272 − 10.497 − 14.907* − 3.059 − 3.934
(9.238) (6.846) (6.242) (7.373) (3.059) (2.951)
United Kingdom − 1.643 − 2.464 4.698 4.391 − 6.327*** − 5.108**
(7.404) (8.776) (4.485) (4.408) (1.928) (2.341)
United States − 7.087 5.482 0.709 1.254 − 2.918* − 0.959
(8.349) (9.523) (4.266) (4.498) (1.714) (2.218)
Planned duration 0.042*** 0.001 0.010*
(0.012) (0.014) (0.006)
Age 1.204* 0.802** 0.145
(0.625) (0.354) (0.136)
Telegram 24.179** 0.615 1.183
(9.634) (5.407) (2.272)
Team size 0.715 − 0.115 0.056
(0.641) (0.336) (0.191)
Insider holdings 10.462 21.041
(15.615) (33.132)
Fixed effects
Year Yes Yes Yes Yes Yes Yes
Description Controlling for insider holdings Equity token subsample OLS estimations
Observations 65 47 40 33 102 79
Pseudo R-squared 0.150 0.240 0.071 0.090 - -
R-squared - - - - 0.253 0.317
13
Table 9 Alternative STO success variables. This table models. All variables are described in Table 4. Sample sizes
reports coefficient estimates from regressions of alternative vary based on available data. All models include a constant,
STO success variables on variables on investor rights and vari- whose coefficient is not reported. Numbers in parentheses are
ous variables on issuer and offering characteristics. Columns robust standard errors. *, **, and *** indicate significance at
1–4 are estimated using tobit models (left-censoring limit), the 10%, 5%, and 1% levels, respectively
while columns 5–8 report average marginal effects of probit
Dependent variables Amount raised to target Completion
(1) (2) (3) (4) (5) (6) (7) (8)
Investor rights
Voting rights 0.363** 0.409** 0.361** 0.407** 0.332** 0.365*** 0.330** 0.362***
(0.163) (0.169) (0.163) (0.169) (0.140) (0.132) (0.140) (0.132)
No cashflow rights − 0.098 − 0.023 − 0.072 − 0.046
(0.164) (0.157) (0.162) (0.180)
Github 0.189* 0.116 0.190* 0.115 0.099 0.061 0.102 0.062
(0.099) (0.121) (0.099) (0.121) (0.090) (0.106) (0.090) (0.106)
Softcap use − 0.308*** − 0.347*** − 0.307*** − 0.347*** − 0.301*** − 0.349*** − 0.300*** − 0.348***
(0.116) (0.113) (0.116) (0.113) (0.090) (0.102) (0.091) (0.102)
Target amount (ln) − 0.079** − 0.089** − 0.076** − 0.089** − 0.053* − 0.064* − 0.051 − 0.062
(0.037) (0.042) (0.038) (0.042) (0.032) (0.037) (0.033) (0.038)
Cayman Islands 0.113 0.193 0.108 0.191 0.069 0.031 0.064 0.026
(0.135) (0.133) (0.137) (0.132) (0.142) (0.150) (0.142) (0.151)
Switzerland − 0.149 − 0.134 − 0.157 − 0.135 − 0.107 − 0.179 − 0.114 − 0.182
(0.200) (0.172) (0.202) (0.173) (0.178) (0.166) (0.176) (0.166)
United Kingdom − 0.668*** − 0.466*** − 0.669*** − 0.466*** − 0.409*** − 0.416*** − 0.409*** − 0.416***
(0.184) (0.164) (0.184) (0.164) (0.068) (0.091) (0.069) (0.092)
United States − 0.196 0.021 − 0.200 0.020 − 0.140 − 0.066 − 0.142 − 0.066
(0.127) (0.139) (0.127) (0.138) (0.098) (0.120) (0.098) (0.120)
Planned duration 0.000 0.000 0.001 0.001*
(0.000) (0.000) (0.000) (0.000)
Age 0.005 0.005 0.002 0.002
(0.008) (0.008) (0.009) (0.009)
Telegram 0.083 0.084 0.036 0.037
(0.161) (0.161) (0.126) (0.126)
Team size 0.014 0.014 0.006 0.006
(0.010) (0.010) (0.011) (0.011)
Fixed effects
Year Yes Yes Yes Yes Yes Yes Yes Yes
Observations 102 79 102 79 100 77 100 77
Pseudo R-squared 0.197 0.315 0.198 0.315 0.173 0.214 0.174 0.214
Next, in columns 5–8, we estimate specification (1) to those reported and discussed previously. Notably,
using Completion as the dependent variable. We use Softcap use, Target amount, and United Kingdom
probit models to fit the binary nature of this depend- exhibit negative and significant coefficients, mean-
ent variable and report average marginal effects for all ing that they are associated with a lower likelihood
variables. Again, the results are qualitatively similar of successfully completing the capital raising. We
13
find weak evidence on the positive effect played by of digital assets (security, utility, and payment tokens)
planned duration. Regarding GitHub presence, it does in the entrepreneurial finance context and presenting
not seem to appear as a significant factor for complet- an early empirical assessment of STO success.
ing the capital raising. Importantly, we find that the
indicator variable, Voting rights, enters positively 5.2 Entrepreneurial finance and the future of security
and significantly in the regression models. We can tokens
see that the average marginal effects of voting rights
range from 33 to 37 percentage points. That is, eve- Although the start of the year 2020 saw a slowdown
rything else equal, one would expect a 33–37 per- in overall STO market activity, some market seg-
centage points increase in the likelihood to complete ments experienced a significant boost. This is espe-
the capital raising when investors have voting rights, cially the case of real estate STOs (Chang, 2020). The
which is economically meaningful. year 2020 also gave rise to important developments
To sum up, our findings point out that issuer and in terms of both tokenization and trading of security
offering characteristics do affect STO success and tokens with the appearance of tokenization provid-
failure. Important STO attributes include Github ers, such as Vertalo in the United States, and market
presence, softcap use, target amount, planned dura- infrastructure providers, such as Archax in the United
tion, and the jurisdiction of the country of incorpo- Kingdom and INX in the United States.
ration. In addition, our results indicate that granting Security tokens continue to evolve to address sev-
voting rights to investors is positively associated eral challenges faced by entrepreneurial firms and
with STO success. Of course, these results have to their stakeholders. First, as per our definition, a secu-
be interpreted with care given the small sample size. rity token is a “digital representation” of an invest-
However, their consistency across STO success vari- ment product; it is not the product itself. Therefore,
ables and model specifications gives us confidence in legally, the primary record in many jurisdictions is
their soundness. still paper-based or stored in a government-owned,
centralized database. This makes any amendments
to records (such as the capitalization table) ineffi-
5 Conclusion cient and costly for issuers and investors alike. For
example, STO issuers and exchanges setup a compli-
In this section, we summarize our findings and dis- cated and dedicated trust structure off-chain (i.e., not
cuss their implications for entrepreneurial finance. natively on the blockchain) to enable the transfer of
legal ownership of underlying securities, while the
5.1 Summary technical transfer of the token is simple.
Second, the widely used ERC-20 protocol to issue
In this paper, we present an overview of the STO mar- security tokens on a blockchain has limitations: it
ket: (i) It started in the second half of 2018 when the only supports the issuance of tokens, the fixing of
ICO bubble ebbed away, (ii) it is still nascent and thus the token supply, the verification of token balances,
under development, and (iii) it is dispersed across the and the transfer of tokens from one wallet to another.
globe but concentrated in jurisdictions with accom- A language to comprehensively describe investment
modating securities and tax laws. We also show that products does not exist yet, which results in two main
various issuer and offering characteristics traditionally obstacles for entrepreneurs. The first is that the full
used in the ICO literature (especially, Github presence, lifecycle of a security — including corporate actions
softcap use, target amount, planned duration) matter as such as dividend payments, stock splits, mergers and
well for STO success. In addition, we find that granting acquisitions, rights issues, and spin-offs — cannot
voting rights to investors is positively associated with be depicted off the shelf. This increases complexity
STO success, in line with the corporate finance litera- and costs as corporate actions are either documented
ture. Our work contributes to the literature by discuss- off-chain or involve substantial and customized soft-
ing the importance of distinguishing between classes ware development efforts. The second obstacle is
13
that comprehensive financial-product term sheets centralized world but not (yet) on a blockchain (Eber
— that is, the description of features concerned with et al., 2000). If migrated to a distributed ledger, this
the securities’ maturity/expiration date, denomina- description language would enable the digital crea-
tion, (floating) rates, and payoff schedule — cannot tion of investment products with any combination
be represented. In this case, an off-chain record needs of corporate actions and securities product features.
to document agreements on specific terms between Third, by opting for a protocol that is fork resistant
entrepreneurs and investors. These agreements are when issuing NDS, related risks can be managed for
costly to maintain as modifications often require wet the benefit of all stakeholders.26
signatures and third party involvement (e.g., corporate The advent of NDS thus opens up new possibili-
secretarial firms). ties for entrepreneurs not only in their capital raising,
Third, another important (technical) challenge for but also in the governance of their venture (Blémus
entrepreneurial firms relates to fork risk (e.g., adopt- & Guegan, 2019; Yermack, 2017). Understanding the
ing novel rules that nodes work by on a blockchain). interlinkages between entrepreneurial finance, cor-
Forks represent a risk to security issuances because porate governance, and tokenization assuredly repre-
versions of a blockchain that are “abandoned” by sents an important and fruitful area of future research.
nodes can become vulnerable to malicious hacker
attacks or even cease to be operational (Webb, 2018). Acknowledgements We are grateful to two anonymous refer-
ees, Douglas Arner, Daniele Bianchi, Dion Bongaerts, Thomas
The next generation of securities is unlikely to be Bourveau, Di Luo, Paul Momtaz, Armin Schwienbacher,
mere digital representations of existing paper secu- Simon Trimborn, Silvio Vismara, David Yermack, as well as
rities. They are likely to come as digital natives on virtual conference and seminar participants at the 2020 Euro-
the blockchain, that is, programmable securities. pean Alternative Finance Research Conference, 2020 UWA
Blockchain, Cryptocurrency and FinTech Conference, 2021
We call them native digital securities or in short, CUHK Machine Lawyering Conference, 2021 SFiC Confer-
NDS. We define NDS as a legally accepted primary ence on Developments in Financial Technology, Erasmus Uni-
record of securities created as a smart contract on a versity, University of Hong Kong, and University of Rennes
distributed ledger. A jurisdiction that would support for their comments and suggestions. We are also grateful to
Alice Chen (InvestaX, Singapore), Nizam Ismail (Ethikom
NDS is therefore Liechtenstein with the Blockchain Consultancy, Singapore), James Gaden (Walkers, Hong Kong),
Act that came into force in January 2020. Indeed, Thomas Naegele (Naegele Attorneys at Law, Liechtenstein),
the law considers that primary records on a distrib- Aurelia Nick (MME, Switzerland), and Alireza Siadat (Anner-
uted ledger supersede those stored elsewhere. As ton, Germany) for their helpful feedback. We thank Digital
Asset Network for provision of an initial STO data set. The
such, all features of the security can be depicted and authors alone are responsible for the work and any errors or
executed on-chain. NDS have the potential to over- omissions.
come the challenges discussed above. First, on-chain
amendments (e.g., to the capitalization table) can Open Access This article is licensed under a Creative Com-
easily and cheaply be executed and viewed by stake- mons Attribution 4.0 International License, which permits
use, sharing, adaptation, distribution and reproduction in any
holders, increasing in turn transparency. Second, a medium or format, as long as you give appropriate credit to the
flexible description language depicting all possible original author(s) and the source, provide a link to the Crea-
features and variants of an investment product is in tive Commons licence, and indicate if changes were made. The
sight. Such contract description language exists in the images or other third party material in this article are included
in the article’s Creative Commons licence, unless indicated
otherwise in a credit line to the material. If material is not
included in the article’s Creative Commons licence and your
26
The Tezos whitepaper proposes “a procedure for stakehold- intended use is not permitted by statutory regulation or exceeds
ers to approve amendments to the protocol, including amend- the permitted use, you will need to obtain permission directly
ments to the voting procedure itself” to manage fork risk on from the copyright holder. To view a copy of this licence, visit
the platform (Goodman, 2014, p.1). http://creativecommons.org/licenses/by/4.0/.
13
Appendix. A brief note on STO regulatory

framework
Table 10 Regulatory framework applying to security United States. The numbering from 1 to 6 always refers to the
tokens in the United States. This table provides a brief over- corresponding regulation mentioned in “Specific regulations
view of the regulatory framework for security tokens in the applying to STOs.”
Jurisdiction The United States
Relevant regulator SEC (www.sec.gov)

Specific regulations applying to STOs There are no specific regulations implemented just for security tokens in the United
States. If the token is a security, any offering of securities (whether in token form
or not) is subject to existing securities laws, specifically the Securities Act of 1933.
Other regulations applicable:
1) Regulation Crowdfunding (CF)
2) Regulation A + Tier 1
3) Regulation A + Tier 2
4) Rule 506(b) of Regulation D
5) Rule 506(c) of Regulation D
6) Rule 504 of Regulation D
Amount that can be raised without prospectus 1) USD 1.07 million
2) Annual offer of USD 20 million
3) Annual offer of USD 50 million
4) Unlimited
5) Unlimited
6) Annual offer of no more than USD 5 million
Lockup period 1) 12 months unless transfer/resale to accredited investor
2) No restrictions on resale
3) No restrictions on resale
4) Restricted resale either 6 months or 12 months
Filing requirements 1) The JOBS Act raises the record holder threshold for registration for all exempt
offerings from 500 to either: (i) 2,000 persons, or (ii) 500 non-accredited persons.
Issuers must file Form C with SEC electronically through intermediary
2) Issuers must file Form 1-A with SEC including an “offering circular” and are also
required to include audited financial statements in their offering documents and
to file annual, semiannual, and current reports with the SEC on an ongoing basis.
However, they are exempt from State Blue Sky laws: State filings are not required
3) Issuers must file Form 1-A with SEC including an “offering circular” and are also
required to include audited financial statements in their offering documents and
to file annual, semiannual, and current reports with the SEC on an ongoing basis.
However, they are exempt from State Blue Sky laws: State filings are not required
4) There is no registration required but issuers must file Form D electronically with
SEC after the first sale of the securities. There is no requirement to comply with
State Blue Sky laws: There is no need to file in each state where the offer is made
SEC after the first sale of the securities. There is no requirement to comply with
State Blue Sky laws: There is no need to file in each state where the offer is made
SEC after the first sale of the securities. There is no federal preemption which
means that state filing in each state where the offer is made is required under State
Blue Sky laws
13
Table 10 (continued)
Jurisdiction The United States
Investor requirements 1) All investors but investor amounts subject to limits: (i) If either an investor’s
annual income or net worth is less than $107,000, then the investor’s investment
limit is the greater of: $2,200 or 5% of the lesser of the investor’s annual income
or net worth. (ii) If both annual income and net worth are equal to or more than
$107,000, then the investor’s limit is 10% of the lesser of their annual income or
net worth. (iii) During the 12-month period, the aggregate amount of securities
sold to an investor through all Regulation Crowdfunding offerings may not exceed
$107,000, regardless of the investor’s annual income or net worth
2) Accredited and non-accredited investors
3) Accredited and non-accredited investors (subject to cap on amount of investment:
no more than: (i) 10% of the greater of annual income or net worth (for natural
persons); or (ii) 10% of the greater of annual revenue or net assets at fiscal year-end
(for non-natural persons)
4) Accredited and non-accredited investors (up to 35 participants)
5) Accredited investors only
6) Accredited investors and unlimited number of non-accredited investors
General solicitation allowed? 1) No
2) Issuers are allowed to “test the waters” by conducting a publicity campaign and to
solicit indications of interest from the public to assess the level of interest in invest-
ing in the company
3) Issuers are allowed to “test the waters” by conducting a publicity campaign and to
solicit indications of interest from the public to assess the level of interest in invest-
ing in the company
4) No
5) Yes
6) Yes
Additional information 1) All transactions must take place through a SEC-registered intermediary, either a
broker-dealer or a funding portal. This has been amended recently to increase the
amount to USD 5 million. However, this is still under 60-day commentary period
in the Federal Registry
2) For offering of USD 20 million or less, issuers can proceed under Regulations
A + Tier 1 or Tier 2
3) For offerings of over USD 20 million and less than USD 50 million, issuers can
proceed with A + Tier 2
4) 35 non-accredited investors must be “sophisticated” and have sufficient financial
and business knowledge
5) The company must take reasonable steps to verify that the investors are accred-
ited investors, which could include reviewing documentation, such as W-2 s, tax
returns, bank and brokerage statements, and credit reports. As a balance to allow-
ing general solicitation to the public and investor protection, this regulation only
allows general solicitation of accredited investors
6) N/A
In this appendix, we provide a brief overview of the comprehensive overview of regulatory frameworks
most important regulatory frameworks. The regula- applying to digital assets in several jurisdictions
tory framework is likely to influence the choice of around the world.
location of STO issuers (see Table 3, Panel A, for In most jurisdictions, existing securities laws
our sample composition by country of origin of the apply to STOs (e.g., in Germany, Singapore, Swit-
issuer). We recommend Blandin et al. (2019) for a zerland, United Kingdom, and the United States).
13
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Small Bus Econ (2022) 59:299–325