Until recently, the funding model of initial coin offerings (“ICOs”) was utilized by many startup blockchain companies to raise funds to build their blockchain networks. ICOs operated within a regulatory gray area and this resulted in the exuberance in the ICO marketplace and some token purchasers being the targets of scams and large cyber-thefts. As ICOs faced these multiple challenges, startups and companies sought to find more satisfactory means of funding where there is more security to potential investors, less uncertainty and less fraud. Security token offerings (“STOs”) have been regarded as providing a more secure path to blockchain companies seeking to raise funds.
From ICOs to STOs
An ICO raises funds through a mechanism such as a simple agreement for future tokens (“SAFT”) which offers to purchasers the right to acquire, in the future, units in certain tokens; or a public offering of coin or digital token. In an ICO, a proprietary coin or token is issued in exchange for cryptocurrency for a specific investment project. There is a general view that tokens may be classified as either utility or security tokens. Where a token amounts to a security as defined under the national laws of a country, the token will be held to be a security. On the contrary, where the predominant feature of the token is the right to use a particular platform/application or it does not amount to a security it has been viewed as a utility token.
In Barbados, there are no specific regulations relating to coin offerings and where a person is interested in making an ICO from Barbados, a legal analysis has to be undertaken on a case by case basis to determine whether the security laws are applicable.
STOs are the regulated versions of ICOs. They allow a company to offer revenue such as annual income from the operations of the company, or other periodical income, percentage on profits, equity, debt or dividends and are backed by real assets. STOs are built to operate within the confines of the security laws and regulations and therefore unlike ICOs, STOs are treated as securities from the beginning.
Securities Law/Regulatory Framework for STOs
There is no current regulation, guideline or circular which has been issued by the Financial Services Commission (“FSC”) or any other regulator in Barbados on digital assets such as tokens.
Since the security token is one which would constitute a security, it would be dealt with under the existing security law framework. So long as the security token being offered comes within the definition of security under the Securities Act, the company can proceed with a STO.
In order to issue the security token in Barbados, the Company will be required to: (a) register as a reporting issuer with the FSC; (b) register the securities with the FSC; and (c) file a prospectus with the FSC before it distributes the security token unless (i) there are any applicable exemptions from the prospectus filing requirements under the Securities Act, or (ii) the distribution falls under the private placement regime in Barbados.
Exemptions to Prospectus Requirement
The requirement to publish a prospectus shall not apply to a STO which comes within any of the exemptions listed in the Securities Act including the following types of offering:
- distributions by an issuer where the purchaser is an issuer acting as principal;
- where the distribution is by or for the issuer or owner by means of an isolated sale that is not made in the course of continued or successive sales of the same security;
- a distribution made to fewer than 50 purchasers each of whom is a “sophisticated purchaser”; or
- a distribution by way of a “limited offering”.
Under the private placement regime in Barbados, certain offers/distributions of securities are not treated as offers to the public for the purposes of the Securities Act. These offers do not trigger registration of the issuer as a reporting issuer or registration of the security. The issuer is however required to file a report with the FSC within 10 days of the completion of the sale.
Listing of the security token on an Exchange
Issuers of security tokens are able to list their security tokens on the International Securities Market of The Barbados Stock Exchange Inc. (“BSE”). They will however be required to have a Listing Sponsor to assist them with the process. Listing Sponsors such as our affiliated entity, ListAssist Services (Barbados) Ltd. are available to assist with such listings. The BSE is also in the process of putting the mechanisms in place that will facilitate the trading of security tokens.
STOs benefit the end-users and projects themselves. Private and/or public offerings of security tokens enable access to a pool of investors without sacrificing regulatory oversight. Barbados has a regulatory framework that facilitates the issuance of security tokens and therefore investors can consider Barbados in the structuring of their STOs.
 A blockchain is a distributed ledger which can record and verify transactions on a computer network without the help of centralized institution such as an exchange or clearing house. The blockchain is said to be ideal for reducing transaction costs by decentralizing the maintenance of the ledger and delegating the task to users on its network. It secures finality of a transaction by making a record of the transaction extremely difficult to be altered when its verification process is completed. (Andrew Henderson and James Burnie, “Blockchain: mitigating or aggravating regulatory risk?”, Butterworths Journal of International Banking and Financial Law, May 2016 at p. 293).
 A token is a unit of value issued by a technology or crypto start-up, intended to be a piece in the ecosystem of their technology platform or project. Tokens are supported by blockchains. They only physically exist in the form of registry entries on the said blockchain. They are generally sold for fiat or cryptocurrency in order to fund the start-up’s technology project. https://en.bitcoinwiki.org/wiki/Token
 The definition of ‘securities’ set out in the Securities Act, Cap. 318A of the laws of Barbados (“Securities Act”) does not expressly refer to digital assets however, the question of how a token is considered a security would be likely examined on the basis of whether the token is an “investment contract”, that is to say, an investment by a person in a common enterprise with a reasonable expectation of profits derived substantially from the entrepreneurial or managerial effort of other persons.
 As defined in the Securities Act.
 As defined in the Securities Act.