Equity tokens and security tokens represent the financial products blockchain firms sell to raise capital. They can sometimes be used just to cover startups costs, and other times they can raise operational funds. Be that as it may, the tokens are securities in that the firm has released the product as an investment.
But have in mind that security and equity tokens function very differently.
Equity tokens are, basically, 21st-century stocks.
An equity token is essentially a share in the underlying company. As it is the case with any stock purchase, holders own their given percent of the total enterprise. They have the right to a portion of the company’s profits.
’’The major difference between an equity token and a traditional stock is the method of recording ownership. A traditional stock is logged into a database and can be accompanied by a paper certificate. An equity token records corporate ownership on a blockchain.’’
Equity tokens can be divided up into Class A and Class B shares. The way that they are classified could change the voting rights of shares in the company. For instance, Class A equity token could entitle the holder to 10 votes per token, and a Class B could carry a 5-vote share and so forth. A company may create as many classes as it sees fit, and some of them may get o votes at all.
The SEC hasn’t yet determined as to how the equity tokens will be treated, and it also hasn’t yet settled precise corporate rights and responsibilities. However, the SEC has explicitly stated that equity tokens constitute a traded security under its jurisdiction.
There is a possibility that the SEC will require a full IPO procedure for a public equity token sale. Should this happen, it would drastically impact the rights and duties of investors.
A security token is an equity token’s opposite.
They represent blockchain investment products that don’t give any ownership in the company. However, they do take value from it. The way that it works is that investors buy a security token, hoping that its value will increase in order to sell it later and collect the profit.
But not every crypto is a security token, and most pure cryptos, like Bitcoin and Ethereum, aren’t. They would be classified as ’’assets’’, much like gold and silver. Ther value isn’t based on any underlying enterprise but is based instead on market movements.
A security token takes its value based on some metric related to corporate performance. For instance, the token could give the right to the bearer to a part of the profits, or could be designed to draw value based on the firm ecosystem.
In its case SEC vs. Howey, the SEC established a financial product can be classified as a security if it involves:
- A consumer investing money,
- In a common enterprise,
- With the expectation of profit derived primarily from the efforts of others.
The security token takes its value from the performance of an underlying business. This makes it a security.
The difference between an equity token and a security token is the fact that it doesn’t create an ownership stake in the company. As the company is becoming more and more successful, the token gains value and the investors can sell it.
It is imperative to comprehend that these are investment products subject to all the oversight and regulation of the SEC.
The government has highlighted that it is supervising the world of blockchain closely, and the enforcement actions will become a regular feature of token investing in the future.