Gu Yanxi: Some compliance considerations for the application of the general economic model in the US market

The application of blockchains and encrypted digital assets and the new business models derived from them are bringing fundamental changes to financial markets. The great value that this change can produce is well known. However, because the scope of such changes is too broad and the rate of change is very fast, the restrictions imposed by existing relevant regulatory systems are becoming increasingly apparent. This makes the participants in this process of change very embarrassing (see my article, the application of blockchain technology in the securities trading market , the SEC regulation of SEC ). On the one hand, the promoters of the application are very dissatisfied with the limitations of the existing regulations, but on the other hand, in practice, they are still trying to limit the relevant changes to the existing regulations to avoid compliance risks. The maintainers of existing systems are also obliged to ensure the implementation of existing regulations while accepting market demands to change pressure. At the same time, the scope and depth of the changes brought by the blockchain are too large and still in progress. In the meantime, regulators cannot now develop a complete regulatory system. Regulators in various countries are therefore faced with a dilemma. In the current market environment in the United States, there is another embarrassing situation that is the application of the general economic model.

In the past few years, the emergence of the CIS model has given the market a huge potential for its application. An emerging company can apply the CIS model to steal a large share of the market from existing industry leaders in a short period of time. Therefore, there has been an ongoing effort in the market to apply the CIS model to different scenarios. However, the application of this general economic model is difficult to implement within the current US SEC regulations. .

The main point of the general economic model is to encourage users to use their products as early as possible in the early stages of the company's development by assigning a portion of the company's certificates to its product users. But this distribution is rewarded to the user by the user purchasing their product. The proceeds from the pass are frequently returned to the user. This will motivate users to continually purchase their products, and the company's business can therefore develop.

According to the SEC's view on various current certificates in the market, it believes that except for Bitcoin and Ethernet, other tokens are securities-type certificates. If these passes are issued within their jurisdiction, they must be treated as securities and subject to relevant securities regulations. According to the current US regulations, the financing and application based on securities-based certificates is usually carried out by means of private placement, in accordance with the regulations Reg D, Reg S and Reg A+. But investors who can invest in this way are mainly qualified investors, that is, investors who have earned more than $200,000 in the past two years or have investable assets of more than $1 million. Investors meeting these conditions are minimal in the United States. However, the main service user groups of the general economic model are ordinary individuals and small and micro enterprises, and this group does not meet the qualification requirements of compliance investors. Therefore, in the US market, the application of the CIS model is also facing an embarrassing situation.

So, can the CIS model be applied in a compliant manner in the US market? The answer is possible. In terms of the factors related to securities regulations in the general economic model, as far as possible in accordance with the requirements of current regulatory policies, it is still possible to apply the CIS model in the US market.

1. Regulatory regulations based on the general economic model served by ordinary individual users. If an ordinary individual user is required to obtain a certificate, the current regulatory authority is Reg A+. According to this regulation, the financing party can raise funds from retail investors. However, if funds are raised in accordance with this regulation, the financier needs to have audited two years of financial data and also requires SEC approval. Since Reg A+'s regulatory requirements are similar to a public offering, Reg A+ is also known as a small IPO. For the application of the CIS model, the biggest benefit of Reg A+ is that it allows ordinary retail customers to obtain a pass. This gives the basis for compliance as one of the most fundamental elements of the CIS model. Although Reg A+ is rarely used in current US STO projects, Reg A+ is an option for some start-ups. Jor Law, a US corporate and securities attorney and a consultant to companies like Prime Trust, tZERO, and Polymath, said: "Companies can only use Reg A+ for securities financing after approval by the SEC. Although the SEC has not yet approved Any company that uses Reg A+ for financing, but I believe they will be approved soon. Reg A+ is a very useful exemption, especially if the maximum amount of financing increases from the current $50 million, such as $150 million. ""

2. Securities Properties of the Pass The current securities usually contain three rights: voting rights, ownership and dividends. That is to say, all three rights are included in one security product. The emergence of a pass provides more flexibility in the definition of equity in securities products. A securities pass can contain different proportions of different types of equity. In some of the current implementation cases, some projects have been flexibly designed. For example, tZERO uses the preferred stock method to design its certificate. In other words, this pass has only dividend rights and ownership, and no voting rights. EOS's certificate design is the most creative. The EOS Pass includes dividends and voting rights and no ownership. And an EOS certificate contains a dividend and 30 voting rights. In terms of the definition of securities properties of the certificate, different projects can design different rights into their certificates according to their different business nature and financing needs. However, in order to avoid regulatory troubles, the design of this aspect should be as close as possible to the existing types of securities, and it is best not to be too creative. In terms of the types of certificates included in a project, only the securities-type pass should be used to avoid the use of practical certificates and payment-type certificates. Although these two passes are recognized in other jurisdictions, if these passes are designed in the project, they will only cause unnecessary compliance problems in the jurisdiction under the SEC. In addition, from a practical point of view, since the emergence of the stable currency, the necessity of these two types of certificates has been greatly reduced, so there is no need to continue to use these two types of certificates.

3. Dividend Mechanism An important factor in the economic model of the pass is the expectation of the holder of the dividend. The current business model usually allocates a portion of the profit to the holder of the security after the business has generated a profit. Compared with the traditional dividend model, the general economic model requires dividends to be earlier and more frequent. Therefore, the basis and cycle of dividends need to change. On the basis of dividends, the Compulsory Economic Model, in order to motivate users to participate earlier, pays out part of the income, instead of waiting for the company to make a profit, based on the profit. In terms of the dividend cycle, the traditional dividend cycle is usually quarterly. However, the pass-through economy model uses a shorter cycle, with dividends on a monthly, bi-weekly, or even weekly cycle. This can motivate users to participate more frequently. In this respect, as long as the dividend mechanism is able to comply with accounting standards, there should be no problem with the compliance of securities laws. This is the company's own business decision-making. Companies can decide for themselves when to start the cycle of dividends and dividends. However, although this aspect does not have any problems in terms of compliance, it has a great impact on the business of the company. The wrong decision is likely to lead to the double-edged sword of the general economic model.

4. Model implementation start time As required by Reg A+, the financier is required to submit an audited two-year financial statement. This means that the financier must operate in the usual way for two years and the SEC approval before the pass-through economy model can be adopted. On the surface, there is a limit to the use of this model, but any product needs to be tested in a local market for a period of time before it can be fully promoted, so the requirement to operate a real startup for more than two years is not excessive. Most critically, once the SEC approves financing based on Reg A+, there is no compliance risk for the project side to implement the CIS model.

The above is some considerations for compliance with the application of the CIS model in the US market. Although the current securities regulatory system has some restrictions on the application of the CIS model, if the CV is properly designed and operated normally, it is still possible to apply the CIS model compliant after obtaining approval from the SEC for Reg A+ financing. of.

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