With the ICO regulatory landscape slowly being shaped by the SEC, Augmate is looking to stay within full compliance with our raise and issue our MATE token as a security token.
Security Tokens vs Utility Tokens
The first definition that must be established is that of a token in the context of a security token versus a utility token. Both are minted off a parent chain — for the sake of example let’s say Ethereum — and function either as a form of traditional security, or provide a form of utility such as a membership or license. However, the problem currently revolves around how “utility” tokens are issued and sold, which is similar to how a securities offering is conducted where investors are betting on the success of a particular enterprise. Tokens that weren’t sold to investors avoid the “securities” definition, but those that were sold are typically being sold as an investment, whether or not the founders wrote the sale semantics as such.
To give clear cases of both a pure security token and utility token, a hypothetical company called “Acme Corp” issues a token that represents equity. The advantage is that these tokens have easy transactional settlement and can be audited with precision due to their basic habitat being a public blockchain. Middlemen are removed in the tracking of this equity, and efficiency is at the forefront of this new system, as copious amounts of liquidity are unlocked in their trading. This type of token is a pure security token, as it is not only an investment in the traditional sense but represents a financial bet on the success of an enterprise.
However, in the case of the hypothetical company “ArcadeChain,” an online videogame company, a consumptive-use token is distributed which allows recipients to relinquish it to play games on their website. The tokens are given away as a promotional item and aren’t sold in any form of capital raise. This would be an example of a pure utility token, as it has immediate utility on the platform, and isn’t issued through a form of investment.
What the SEC is currently working on is a framework that addresses utility tokens sold through a capital raise to help startups with funding. Although the tokens provide utility, they are securities due to their issuance through a capital raise that solicits investment. Utility tokens issued through capital raises have been subject to plenty of scrutiny, and the SEC recently issued dozens of subpoenas to both funds and ICOs as a warning to future deployed operations. Utility tokens can be considered securities even if they don’t fit the traditional definition of a “security” that offers a stake in a company.
Where do we sit?
ICOs over the years have been conducted in a multiplicity of ways, including sales that have no forms of identity-based compliance, those that solicit unaccredited investment in the United States, and those that simply have private rounds to groups of investors. As regulation continually took shape starting with the SEC’s report on the DAO, ICOs have begun to lean toward more compliant forms of fundraising in the United States, and those that are a bit rogue either tend to exist in a gray area or are outright scams.
Augmate’s token by its issuance is, in fact, a security token. Although the token is designed to have multiple forms of utility in the Augmate Connect ecosystem, it is being sold through both a Regulation D and Regulation S offering with the SEC. We will fall in line with existing guidelines and issue our token through a provider that complies with all required forms of KYC/AML processing for security tokens.
As for trading and secondary markets, we plan on opening discussions with all of the current security token exchanges being built for compliance. We expect these exchanges to launch relatively soon, and hope to be listed as soon as our token is distributed to investors.
What’s Next for our Token?
Although our token exists as a form of hybrid where no governance, dividends or equity are being offered but rather a software license, we will await further guidance from the SEC before we enter any territory pertaining to calling our token a “utility token.” The first feature of our token that will be operational upon issuance is its ability to provide a license to our software at a discounted rate, as mentioned in our white paper. Holders and purchasers of our MATE token will have the benefit of paying a discounted rate rather than the USD rate that we set for our flagship product.
The other token functions including authentication, protocol assets, data exchange, and more will be retooled to fit the current custody model of our security token it could possibly exist otherwise. We will also rework our rewards system to figure out how to manage the token’s custody element with any customers wishing to enter our future programs.
Not the End of the Line for Utility
At a recent event at Princeton University, SEC Chairman Jay Clayton introduced the idea that blockchain tokens exist on a spectrum rather than a simple binary. The range is measured against Bitcoin, a fair-launch cryptocurrency with distributed governance sitting on the side of non-security, and a pure, centrally issued tokenized security sitting at the other end of the spectrum.
Variable issuance models throughout time have been common, with some cryptocurrencies having an airdrop for their entire supply. However, ICO tokens are centrally issued and sold, which places their status somewhat closer to the tokenized security model.
The SEC understands that some token models could fall under a form of “utility token” such as those that offer forms of protocol governance or software licensing but will most likely need to conduct further evaluations to develop a robust framework before giving the green-light. Their stance currently has been somewhat strict but still gray, which is most likely in an effort to not stifle the innovation happening daily in the blockchain development space.
The more important takeaway was the fact that tokens could, in fact, start as a form of security but eventually lose their status as a security depending on their use and future guidelines that are issued. If the token being developed has utility that can be utilized upon issuance, then they can easily be used for their intended purpose with the unique forms of built-in incentives that they include.
However, to stay compliant, we are in fact issuing MATE as a security token, and if guidance is released that allows tokens sold in an ICO to have eased restrictions as a utility, we will definitely review the process. For now, we will keep our ears to the ground.