United States Property Coin (USP) helps qualified investors get exposure to an income-producing real estate portfolio that can hedge against inflation and generate consistent returns. But is it cryptocurrency or security? Let’s start by defining what a security is and explain why USP is a security token, and why offerings of USP must be in total compliance with all applicable federal securities laws and regulations.
What Is a Security?
Security is a broad term that refers to fungible financial instruments that hold value and can be bought and sold on primary and secondary markets. A security may represent ownership in a public company in the form of stock or a corporate or government bond, among others.
Securities are used by companies, governments, or other entities to raise capital in public and private markets.
When it comes to public sales of securities in the US, these have to be registered and regulated by the Securities and Exchange Commission (SEC). Besides this, other regulatory agencies, such as the National Association of Securities Dealers (NASD), the Financial Industry Regulatory Authority (FINRA), and the National Futures Association (NFA), can also take part in the oversight of certain types of securities.
Securities registered in the US are regulated mainly based on the Securities Act of 1933, although there are subsequent laws that also touch upon these financial instruments. The purpose of regulation is to require issuers to inform investors on a regular basis as well as prevent any form of fraud and deceit in the sale of securities both on primary and secondary markets.
There are five types of securities, with the first two being the most important ones:
- Equity – these securities give investors ownership rights over an entity, most often a company. For example, all company shares traded on the New York Stock Exchange (NYSE) or NASDAQ, including Tesla, Apple, Amazon, Microsoft, etc., are treated as securities.
- Debt – these securities represent loans. Government and corporate bonds are the most popular debt securities, which provide investors with regular interest payments.
- Hybrid – this group of securities combines the attributes of both equity and debt assets. For example, a convertible bond acts as a debt instrument because it involves regular payments, but it can also be converted into a predetermined number of shares.
- Derivatives – these are financial instruments giving investors exposure to a wide range of assets without actually owning them. Because of this, derivatives are sometimes called secondary securities. Futures and options are some of the most popular derivatives.
- Asset-backed securities – these financial instruments are backed by a pool of income-generating assets, most often debt-related ones, such as mortgages, auto loans, student loans, etc.
What Is a Security Token?
To understand what a security token or a digital security is, you have to consider all of the above and transpose it on blockchain. The result? A blockchain-based token that acts as a security from a legal perspective.
Security tokens are digital representations of ownership of an underlying asset, such as company stock, bond, or real estate. Some of the most popular examples of digital securities represent corporate shares, although debt security tokens and asset-backed tokens have also gained traction in recent years.
Digital securities share similarities to digital currencies like Bitcoin and Ethereum thanks to their underlying blockchain infrastructure, although they act as traditional securities and thus are in the purview of SEC regulations.
In the US, digital securities, like all other securities, have to be registered with the SEC prior to public sale. The US financial watchdog has already launched dozens of enforcement actions against entities offering unregistered digital tokens that share aspects of securities.
Currently, there are three main types of digital securities: equity tokens, asset-backed tokens, and debt tokens. They share similarities with their traditional counterparts. You can learn more details about each type in our dedicated article.
How Is USP a Digital Security?
To begin with, USP is a security token representing fractional ownership of an income-producing real estate portfolio. Specifically, it is an asset-backed token since it is backed by a portfolio of properties.
Technically, it is a digital token, as it resides on Ethereum, the largest blockchain ecosystem by the number of applications and use cases. While most tokens on Ethereum use the ERC-20 standard, USP leverages the ERC 1400 standard, which was created to meet the specific needs of security tokens, including compliance, documentation, controls and permissions, etc.
Therefore, USP is technically similar to any other digital currency, but legally, it acts as a security.
The SEC relies on the so-called Howey Test to determine whether a financial instrument is a security. Previously, securities were mainly associated with stocks and bonds, but for the US Supreme Court, the term has implied a broader range of assets. In 1946, the case of Howey vs. SEC showed that the court considered the plaintiff’s sale of land as a security given that it constituted an “investment contract.”
In short, the Howey Test implies four criteria to determine whether a transaction is an investment contract and, therefore, a security: (1) there is an investment of money (2) in a common enterprise (3) with expectations of a profit (4) to be derived from the effort of others.
USP is a security because it enables you to invest money in a token backed by a real-estate portfolio (USP acts as a third-party and thus is a common enterprise) with expectations of profit that derives from the professional allocation and management based on the acquisition strategy (USP management’s effort).
While the SEC intends to regulate most utility tokens as securities, USP already self-identifies as a digital security, and we fully intend to operate well within Regulations D Rule 506(c) and Regulation S.
Benefits of a Digital Security
Digital securities are no different from regular securities from a legal perspective, but they come with several advantages thanks to the use of blockchain, including but not limited to:
- Liquidity – digital tokens can make any asset more liquid, and this benefit is even more evident when it comes to real estate. Thanks to the fractional ownership feature, USP is open to a wide range of investors who get exposure to a portfolio of several properties.
- Programmability – compliance can be easily integrated into digital securities thanks to a blockchain’s smart contract feature. This helps automate the management of the rights of holders.
- Security – blockchain networks that spread across multiple nodes have no single points of failure, providing unmatched security of transactions and value storage.
- Global reach – security tokens are borderless due to the nature of blockchain. Companies can use digital securities to raise money from around the world, providing that they comply with the rules.
- Convenience – companies can raise funds easily through Security Token Offerings (STOs) – a fundraising mechanism resembling Initial Public Offerings (IPOs) – although it doesn’t require them to become public.
USP is revolutionizing the real estate industry with its unique approach to offering a reliable and regulated investment product on blockchain.
