Security Token Offering in Middle East
The Security Token Offerings (STO), which may bring convenience to the financial market by tokenizing the traditional securities, is gaining lots of attentions in recent years.
InWara, the research company, conducted the research in this field in the first quarter of 2019 has found that the number of STO has more than doubled compared to the fourth quarter of 2018. USA boasts No.1 in the number of STO, however, while USA accounts for only 2% in the amount of funds raised, United Arab Emirates accounts for 56%. This is a very interesting result.
In the recent years, Middle Eastern countries are very keen to adopt the blockchain technologies that is used in STO. The NEM Foundation has signed cooperation pact with the UAE Ministry of Community Development (MOCD) to provide blockchain consulting service. There is an increase in the number of startups of blockchain companies in Israel that has a wide range of knowledge in the finance and IT. The National Bank of Kuwait has confirmed information on cooperation with Ripple for cross border transactions.
UAE plans to approve new ICO security token regulations
Particularly UAE, an economic heavyweight in Middle East, is showing a positive attitude towards businesses related to cryptocurrencies. The Securities and Commodities Authority (SCA) in UAE has announced that they will introduce regulations for initial coin offering (ICO) in the country by the end of the first half of 2019. The new regulations will address various points with crypto-fundraising, including “ the type of issue (private/public), the companies that can make the issuing, the legislative requirements such as the minimum content of the prospectus in white paper (including registration and fees), blockchain operators and the targeted companies by issue type”.
Obaid Al Zaabi, the SCA chief executive said that ICOs are a very important source of capital for start-up businesses, which is the same way shares are issued in an initial public offering of a company’s equities.
UAE and Saudi Arabia announced cross-border cryptocurrency trial
The United Arab Emirates (UAE) and Saudi Arabia have announced in the beginning of this year that the countries will be collaborating to build a cryptocurrency “Aber”. The Saudi-Emirati Coordination Council revealed that the cross-border cryptocurrency would only be available to some banks during the experimental stage until the governments have a better understanding of how blockchain technology works. The banks will be limited to how they are able to use it during this period. If the banks do not face any technical difficulties, the economic and legal conditions will be reviewed for future use. The council is also considering that this project as an alternate system to be used if the central economic system within the countries collapse with any reasons.
Alliance of UAE and Saudi Arabia is one of the most powerful economic alliances. The total amount of the Sovereign Wealth Fund of these two countries is the second largest in the world. According to the World Bank data, the both countries are ranked 8th on the exports of goods and services in the world. Total market value of listing companies in these two countries is ranked 17th in the world and their oil stockpile accounts for 25% of global total.
Security token sales propelled in the UAE
While the regulation related to STO is now under consideration in UAE, the formal regulation has not announced yet. However, the country is becoming a global hotspot for security token sales.
In March 2019, SGH Global, a Jersey-based investment management firm, announced a $100 million STO sale targeting investors in the Middle East including UAE. Abu Dhabi investors Blue Rock Capital and Blue Stone Capital have agreed to become cornerstone investors, and intend to contribute US $10m each to the STO. SGH is planning that the remaining US $80m to be listed on the main market of the London Stock Exchange in 2020. However, David Sumner, the chairman and CEO of SGH Global said “investors have liked the digital nature of the investment. It’s been a bit of a surprise. If we get this right, I think we will close the transaction out all in the private placement”.
The company will purchase a 40 percent stake in a listed UAE mineral water bottling company using some of the fund raised with STO.
Around half of the US $100m raised will be allocated into the gold mining companies in Peru to optimize their operations. Summer said that investors need to believe the token offering to become a gold story over the next 3-10 years.
In the UAE, the company is working exclusively on private sale, targeting professional, sophisticated or institutional investors as the sale targeting retail investors need to be via regulated brokers in the UAE.
Looking towards the IPO, the regulators have not given any permission to direct swap of tokens for shares at this stage; therefore, the precise mechanism for token holders to participate is still uncertain. Nevertheless, they are planning to establish a mechanism that is satisfied by token holders as well as regulators. At this stage, token holder will receive a 10% dividend per annum and additional SGHX tokens every quarter if they hold the token for two years.
Israel’s Market Regulator makes recommendation to set STO regulation and Crypto platform
Israle Security Agency (ISA) has announced their policy to allow cryptocurrency trading and security token offerings (STOs) under their amended regulation in response to the technological innovation in the current capital markets.
ISA, established the committee in 2017, has been closely, promptly monitoring the market relation to STO and cryptocurrencies and it has made a recommendation on March 7th, 2019.
They recommended developing a platform to trade cryptocurrencies, so that firms can issue digital tokens to investors to raise money. The decisions of whether a cryptocurrency should be considered, as securities will be depends on the circumstance and features of each case. However, as a general rule, cryptocurrencies and tokens which is used solely for the purpose of consumption, such as in order to access services, will not be considered securities, but if any of them has the purpose of investment, they will be deemed securities.
The number of companies listed and the amount of money raised in Tel Aviv (Israel’s only public stock exchange) has fallen for the last 10 years. The government and ISA have been studying the field of cryptocurrencies and digital token in order to attract new investors and boost IPO. ISA chair Anat Guetta has commented “The excitement that defined the field in 2017 has cooled off, but the technology is here to stay”. She also said that while startups can raise their funds using digital tokens as a replacement of traditional equity, and technological innovation improves the efficiency of competition in the capital market and the market expands , it is important to find the balance with protecting investors.
Amid early stage of STO, regulations are still uncertain in many countries, Middle East particularly UAE and Israel give us an impression that they are willing to become leading countries in this field. It is possible that these countries put regulation in place and develop to the world model area for STO and attracts lots of projects.
A $100m STO sale by Sumner Group targeting Middle East investors could be a trigger a boom in STO.