An illustration of the issuance process for Security Tokens titled “WHAT IS A SECURITY TOKEN OFFERING?”. Starting on the left side of the image a paper stock certificate for Liberty Real Estate Fund is then fed into a machine labeled “Securitization Platform”. Dollar signs are being dropped into a hoper at the top of the machine and after combining the investment with the stock certificate, Liberty Token coins are rolling onto a conveyor belt off the right side of the machine. The subtitle at the bottom of the graphic says “Security Tokens Enable Tradable Private Real Estate”.


An illustration of the issuance process for Security Tokens titled “WHAT IS A SECURITY TOKEN OFFERING?”. Starting on the left side of the image a paper stock certificate for Liberty Real Estate Fund is then fed into a machine labeled “Securitization Platform”. Dollar signs are being dropped into a hoper at the top of the machine and after combining the investment with the stock certificate, Liberty Token coins are rolling onto a conveyor belt off the right side of the machine. The subtitle at the bottom of the graphic says “Security Tokens Enable Tradable Private Real Estate”.

Welcome to the What Is A Security Token? article. This is Part 1 of a three-article series that explains what security tokens are and are not, along with the benefits for issuers and investors in Security Tokens.

Before jumping into this content, will you take a moment to SUBSCRIBE to this awesome community by entering your name and email address in the box to the right side of this page?

Security Token Offerings. What Should You Know? 

First, you should evaluate Security Token Offerings like any potential investment.  You should ask lots of questions.  If any sponsor, company manager or salesperson won’t answer questions, then get away fast. 

These questions should include, but are not limited to:

  • Does the offering pay monthly cash flow in the form of dividends, distributions, interest or staking fees?
  • Are there other forms of profit sharing, and when or how do those get paid? Does it offer the potential for appreciation? 
  • Will the appreciation outpace inflation?
  • How is your investment taxed?
  • Are there any special tax benefits?
  • What is the expected duration of your investment?
  • If circumstances force you to exit the investment earlier than the planned holding period, can you get out?
  • Is there a penalty for exiting early?
  • Is the investment liquid, or is there a secondary market for your shares?
  • How is the profit allocated between the sponsor and you the investors during the investment holding period and at the end of your investment?
  • How much risk is associated with the projected returns?
  • Do the investment sponsors, company managers or executive team have experience in what they are proposing or similar experience running another company?

And there are many more to ask…

Security Tokens Are Digital Avatars Of Assets

Simply put, Security Tokens are digital representations of an asset on a blockchain.  Once Security Tokens (also known as Digital Securities) are issued to a blockchain, they are Digital Assets and no longer solely analog assets.  They exist in the real world and also have a digital avatar, or identification, on a blockchain (also known as Distributed Ledger Technology or DLT).  

Blockchain is a communications/database technology that allows you to move and exchange money, assets and value anywhere in the world in the same way that the internet allows for instantaneous communication

You do not need to fully understand how blockchain works to enjoy the benefits of this new technology.  Think of how most people really do not understand all that goes on in the electrical system when you turn on a light, or what happens with an email when you hit send.  

Security Tokens are Digital Assets that use the same technology as cryptocurrency but are not necessarily cryptocurrencies themselves. 

What does this have to do with Real Estate Investing?  Security Token Offerings enable tradable private real estate, reduce costs for issuers and give investors never-before-seen benefits.

Tokens Are Contractually Bound To An Asset

Security Tokens are legally binding contracts between the digital token and the underlying asset. The underlying asset can be real estate equity, ownership in a business or ownership in a specific real-world asset. But, it can also be rights to an asset in terms of rights to future revenue.  It could be a rights to a coupon (interest payment) of a bond; it could be rights to governance and other things that can be included in that investment package, as well. 

Security Tokens are asset-backed digital tokens similar to the paper stock certificates, bonds, shares of a partnership and other similar investment vehicles that are considered securities.


What Is A Security?

The main goal of this article is to explain how Security Token Offerings are almost exactly like normal private stock offerings, syndications, partnerships and other regulated securities offerings.  But what is a Security, you ask?  

According to INVESTOPEDIA, “The term ‘security’ refers to a fungible, negotiable financial instrument that holds some type of monetary value.”  Securities are usually grouped into Equity and Debt but also include other asset classes.  Equity securities are Ownerships represented by Stocks or Shares. Debt securities are creditor relationships like owning Bonds or Commercial Mortgage Backed Securities (CMBS).  Securities can also be rights to ownership, such as Options. 

In the United States, the US Supreme Court (SCOTUS) defined a Security (or “investment contract”) as an investment of money in a common enterprise with an expectation of profits from the investment.  The name of the case in which they established this was the SEC vs W.J. Howey Co. ,which is where the term “Howey Test” originated.

The four components of the “Howey Test” are:

  1. There is an investment of money (can also mean ‘assets,’ such as cryptocurrency).
  2. There is an expectation of earning a profit.
  3. The investment of money is intended for a common enterprise.
  4. Any profit comes from the efforts of a promoter, Sponsor, General Partner or third party and not from the investors.

Security Token Offerings Are Similar To Traditional Investment Offerings

Security Token Offerings can be, but aren’t limited to, real estate syndications, oil & gas partnerships, venture capital funds, private equity, crypto hedge funds or issuance of stocks in private companies.  The key difference is Security Tokens give investors extra benefits not seen with old fashion paper shares.  

You can compare older offerings on paper shares versus Security Tokens (Digital Assets) to mailing a letter versus email or landline phones versus a smartphone.  Mailing a letter has multiple physical processes from writing to delivery compared with typing an email, pressing send and getting almost instantaneous delivery.  In the same way, the smartphone gives you much more functionality and makes life easier.  

The same type of improvements happen when you tokenize assets to make them digital.

Once the asset is tokenized (issued to a blockchain), the now Digital Asset can be tracked, traded, transferred, bought, sold, split, combined, used as collateral, create derivatives from and many other yet to be thought of manipulations and combinations in the world of Decentralized Finance (DeFi).

What is an IPO, ICO and STO?

Initial Public Offering (IPO)

IPO is an acronym or abbreviation for Initial Public Offering, which is typically shares or stocks of a private company sold to the public to raise capital for the company and offer investors an opportunity to share in the profits or potentially lose part of or all their investment.   If the company is successful, investors can make a gain on their investment through income and appreciation of the shares. If the company is not successful, investor shares can decrease in value.  Investor losses are limited to the extent of their investment in the shares.  The share price can go to zero but not below, so while investor equity may be wiped out in a bankruptcy situation, creditors have no claim on any money beyond the investor’s investment.                                   

Public Offerings must register with securities regulators and comply with reporting and disclosure rules.  These rules are costly and require knowledge to comply, which is why generally only larger companies go public.

In the United States companies must register with the SEC to issue Equity and/or Debt under an S-1 filing.  If the company is filing as a Real Estate Investment Trust (REIT), they would register an S-11 filing.

Initial Coin Offering (ICO)

ICO is an acronym or abbreviation for Initial Coin Offering, which is an Unregulated form of capital fund raising for crypto or blockchain-based projects.  ICOs were popular with the cryptocurrency community and crypto project developers because they were fast, inexpensive and could reach a worldwide audience of potential investors.  Some successful IPOs have built wonderful technology that has changed the world and rewarded investors with excellent returns, like the  Ethereum ICO.

Many ICOs were simply a website and a whitepaper outlining the idea or project.  Some were outright scams and unfortunately billions of dollars, euros and yuan were lost to fraud.

Security Token Offering (STO)

STO is an acronym or abbreviation for Security Token Offering, which is typically shares or stocks of a Regulated investment offering.  Security Tokens are different from ICOs in that they are regulated by the governing authorities where they are headquartered or the jurisdictions where they are offered to investors.  More on the regulations surrounding security tokens are below.

What Is The Difference Between An IPO and an ICO?

An Initial Public Offering (IPO) is the process of a private corporation offering investment shares to the public (individual and institutional investors) in a new stock issuance.  An IPO provides companies the opportunity to raise money from a wide spectrum of investors.  Companies must follow the regulations and meet the requirements of each country’s securities authorities, such as the US Securities and Exchange Commission in USA (SEC), European Securities and Markets Authority (ESMA) and the Japanese Financial Services Agency (金融庁, FSA).

IPOs are very expensive for the issuer and usually require investment banks, like Goldman Sachs, Morgan Stanley, UBS, Credit Suisse, Deutsche Bank or others, to organize, market, set the initial share prices and calculate the total amount to be raised.

An Initial Coin Offering (ICO) is the way cryptocurrency companies and organizations raise funds to create a new currency, coin, token, application (app) or service.  Investors can invest in the project or offering and receive a cryptocurrency token, similar to receiving a share of stock in an IPO.  Unique to Coin Offerings is that the token that investors receive can be an investment and act like a stock, but they can also be used as currency to buy, trade, acquire and sell.  In addition, the token can also have utility to use the particular services of a company/organization or can impart benefits to token holders similar to airline miles, credit card points or hotel rewards programs.

ICOs, unlike IPOs, are unregulated and trade worldwide.  So, investors should use caution in researching an investment into an ICO or cryptocurrency.

What Could Go Wrong With An ICO?

ICOs are not regulated by government securities regulators.  If regulators find that the offering is actually a security, the company/project could be fined, put out of business or the promoters could be sentenced to jail time.  The SEC can intervene. For example, the creator of the popular communications app Telegram raised $1.7 Billion in an ICO in 2018 and 2019.  The US SEC filed charges against the company which eventually had to return the investor money and pay a fine of $18.5 million.

What Is The Difference Between An ICO And STO?

Whereas an Initial Coin Offering is most of the time an unregulated offering, a Security Token Offering is regulated by the governing authorities where it is headquartered or sold. 

A Security Token Offering issued or promoted to United States investors must comply with the Securities Exchange Commission (SEC) regulations.  In addition, these offerings must also comply with the “Blue Sky” laws of individual states they are marketed in or where their investors live.  The same is true outside the United States for each legal jurisdiction.

Real Estate Security Token Offering Syndications

What is a syndication? A syndication is the pooling of investor money.  Syndications are already known as Private Placements since they are not publically traded.

Syndications will have a General Partner (also called GP, Syndicator or Sponsor) who is the manager of the deal (or fund), and Limited Partners who are passive investors.  

The Sponsor is the active partner that puts the deal together and manages the business plan.  The objective of the plan is to provide a return for the benefit of all investors.  The Sponsor should have knowledge and experience working with the asset class.

The Limited Partners are Passive Investors who have a limited say in the execution of the business plan for the investment.  Limited Partners also typically have limited liability for losses, loans and lawsuits.  Their risk is limited to the amount they invest in the deal, no more.  Limited Partners have no liability to repay any loans and are not accountable for the active performance of the investment.


Regulations Regarding Investors

The Securities Exchange Act of 1933 was passed to regulate the offering, selling and trading of securities in the United States of America and created the Securities Exchange Commission (SEC).   The SEC has split up investors into three general categories of Accredited, Sophisticated and Non-Accredited.

What Is An Accredited Investor?

Accredited Investors are investors considered financially sophisticated enough or have sufficient resources in the event of a loss to invest in exempt offerings. The term Accredited Investor is defined in Regulation 501 of the Securities Act.  Under US Federal securities laws, only Accredited Investors can participate in exempt or non-registered securities offerings. 

The SEC cautions that you can lose all of your investment in these offerings; however, the same can be said for a fully disclosed public offering, REIT, mutual fund or even your 529 college savings plan.  Investing carries risks and it is encumbent on the individual investor to educate themselves about those risks.

Who Is An Accredited Investor?

  • Individuals – (natural persons) must have a net worth of over $1 Million (exclusive of residence) alone or with a spouse, or…
  • Individuals – earned income in excess of $200,000 individually or $300,000 jointly with a spouse in each of the prior two years and expects to earn the same amount in the current year, or
  • Individuals – who hold Financial Professional licenses issued by the Financial Industry Regulatory Authority (FINRA) General Securities Representative license known as Series 7, Licensed Investment Adviser Representative known as Series 65 or Private Securities Offering Representative license known as Series 82 license in good standing.

What Is A Sophisticated Investor?

A Sophisticated Investor is harder to, define but they can be someone who has business experience in the industry of the company, an attorney, accountant, real estate broker or financial professional.

What Is A Non-Accredited Investor?

A non-accredited investor is everyone else in the United States who is not an accredited investor, therefore anyone who is making less than $200,000 annually (less than $300,000 including a spouse) and/or has a total net worth of less than $1 Million when their primary residence is excluded.

A recent report by an SEC subcommittee recommended allowing more access to private equity and private real estate funds, noting that all investors can benefit from the higher returns offered.

US Security Token Offering Compliance

US Security Tokens can be issued as a public offering with all the compliance necessary to issue a public stock offering.  Or, an STO it can be issued under several exemptions for private placements including: Regulation A/A+ (Reg. A); Regulation Crowdfunding (Reg. CF); Regulation D (Reg. D) both 506 (b) and 506 (c); Regulation S (Reg S).

The 2012 Jumpstart Our Business Startups Act, better known as the JOBS Act, made productive changes to both Regulation D (c) and Regulation A offerings that have greatly increased small and medium-sized businesses’ ability and flexibility to attract investor capital.  The JOBS Act also created a legal framework for Crowdfunding under Regulation CF rules. 

Security Token Offerings will be able to take advantage of and combine Crowdfunding portals with Reg A, Reg. CF and D offerings. All of these offerings should comply with “Know Your Customer (KYC) and Anti Money Laundering laws (AML) in most jurisdictions.

Regulation A (Reg. A) Offerings

Regulation A/A+ offerings are also known as “Mini IPOs” and receive an exemption from registration requirements that would normally apply to public securities offerings.  In 2015, Regulation A was updated to include two tiers with maximum offering sizes:

  • Tier 1 – Companies can raise a maximum of $20 Million in any 12-month period and are exempt from certain reporting and financial audit requirements, except for filing with state regulators where securities are sold.
  • Tier 2 – Companies can raise up to $75 Million in any 12-month period but do not have to be qualified by state securities regulators. Tier 2 companies must provide audited financial statements and file semi-annual (Form 1-SA), annual reports (Form 1-K), in addition to filing change-in-status reports (Form U-1).

Regulation CF (Reg. CF) Offerings

Regulation Crowdfunding allows eligible companies to offer and sell securities through Crowdfunding. Crowdfunding is raising money online through many people (the crowd) making smaller investments.

  • Regulation CF offerings must be placed by an SEC-registered broker-dealer or crowdfunding portal (an online website);
  • Raise a maximum amount of $5 Million in any 12-month period;
  • Individual non-accredited investors are limited on Crowdfunding investments;
  • Disclosures required to SEC, investors and portal/broker-dealer facilitating the offering;
  • One year lock-up period for trading or re-selling of Reg. CF securities;
  • Issuers are subject to “Bad Actor

Regulation S (Reg. S) Offerings

Regulation S allows US and Non-US (International) companies to raise capital from non-US investors.  A Reg. S offering can issue equity or debt securities for US and non-US companies and projects.

There is no accreditation test for Reg. S investors who are non-US citizens living outside of the US.  Therefore, Reg. S investors can be of any wealth or income level.

Regulation D (Reg. D) Offerings

Under US federal securities laws, any offering of a security must either be registered with the SEC or comply with an exemption.  The most common exemptions from registering real estate and private equity funds with the SEC are either 506 (b) or 506 (c) of Regulation D (Reg. D).  Companies and offerings that fall under Regulation D must file a Form D with the SEC after they initiate sales of securities.  Form D lists the company’s name and address, along with the names and addresses of the company’s officers, executives and sponsors.  Even though the company is exempt from the full filing requirements, they are prohibited from providing false and misleading statements or committing fraud.

Regulation D 506(b) (Reg. D) Offerings

With Regulation D 506(b) offerings, you can have an unlimited number of Accredited investors and up to 35 non-accredited investors who must meet the Sophisticated investor requirements.  The issuer must have a preexisting relationship with the investors.  No advertising or public promoting of the offering is allowed.

Regulation D 506(c) (Reg. D) Offerings

With Regulation D 506(c) offerings, you can have an unlimited number of Accredited investors and no non-accredited investors are allowed.  The issuer does need to have a preexisting relationship with the investors and the offering can be advertised and promoted to the public, subject to false claims and fraud. 

See the chart below for a more complete comparison of 506(b) and 506(c) offerings:

Permitted Investors


Unlimited number of accredited investors

Up to 35 non-accredited investors, who must meet sophisticated requirements


Unlimited number of accredited investors only

Accredited Verification


Issuer can accept self-certification by each individual investor


Issuer must take reasonable steps to verify the accredited status of each investor

Third party verification is both recommended and common

Advertising Restrictions


Offering can only be presented by the issuer to prospective investors with whom the issuer has a substantive pre-existing relationship

Issuer may not advertised the offering


Issuer may advertise in any way that they want

No substantive pre-existing relationship with prospective investors required

Raise/Investment Limits


No limit on either the amount the issuer can raise nor the amount each investor can invest


No limit on either the amount the issuer can raise nor the amount each investor can invest

Disclosure Requirements


Issuer decides what information to provide to accredited investors, so long as said information does not violate antifraud prohibitions

Issuer must be available to answer questions from prospective investors

Issuer must make available to non-accredited investors the same information that they have provided to accredited investors


Issuer decides what information to provide to accredited investors, so long as said information does not violate antifraud prohibitions

Issuer must be available to answer questions from prospective investors

Filing Requirements


Issuer is not required to register with the SEC

Issuer must file a Form D to the SEC


Issuer is not required to register with the SEC

Issuer must file a Form D to the SEC

Know Your Customer/KYC


Best practices issuer should perform KYC on all investors


Industry standard is that issuer should perform KYC on all investors

Anti-Money Laundering/AML


Not required unless regulated issuer.  Best practices issuer should perform AML on all investors


Industry standard is that issuer should perform KYC on all investors

Regulated issuers must perform KYC before accepting investor money

To Be Continued With … 

  • What Are The Benefits Of Security Token Offerings For Issuers
  • What Are The Benefits Of Security Token Offerings For Investors?

*Note: Liberty Fund/Concordia Equity Partners (Concordia) have made every attempt to ensure the accuracy and reliability of the information provided. Concordia cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein considered legally-binding legal advice, tax guidance, or financial counsel.

For more information contact: 

About the author

Picture of Michael Flight, CEO of Liberty Real Estate.

Michael Flight

CEO & Co-Founder of Liberty Real Estate Fund

Co-Founder Blockchain Real Estate Summit

Michael J. Flight is a real estate entrepreneur who is an expert in commercial real estate, especially shopping center investment and NNN retail real estate. Michael has been active in commercial real estate for the past 35 years and has handled more than $700 million worth of real estate transactions. Michael Flight is a founding principal of Concordia Realty Corporation, Concordia Equity Partners LLC and more recently Liberty Global Real Estate Fund, the World’s First Net Lease Security Token fund using blockchain to provide Stable and Tradable Private Real Estate. 

Michael has been featured on many business podcasts, served on numerous non-profit boards, held elected office, and shared as a featured speaker on real estate investment, poverty alleviation, and free markets. He is also an Amazon #1 Best Selling author with the book DESIRE, DISCIPLINE & DETERMINATION: LESSONS FROM BOLD THOUGHT LEADERS.

Michael Flight co-founded the Blockchain Real Estate Summit conferences and Blockchain Real Estate Meetup because he recognized the need for education and opportunities to exchange ideas about the revolutionary impact of  blockchain on real estate and all assets.  Blockchain is the rails of the new financial system in that it allows the instant acquisition or transfer of money and assets.

DISCLOSURES, LEGAL AND TAX COUNSEL: Liberty Real Estate Fund and Concordia Equity Partners LLC. (collectively “LibertyFund”) and their affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction or undertaking. LibertyFund highly encourages individuals and investors to seek the counsel of a qualified attorney as well as seek the counsel of a tax professional or Certified Public Accountant (CPA) to determine if there are any potential tax liabilities or consequences as the result of anything contained herein.  NO GUARANTEE: All users of this website should understand there are NO GUARANTEES of any success, outcome or profitability of any transaction or undertaking, expressed or implied by LibertyFund or any of its members, shareholders, officers or affiliates and will NOT be liable for any financial or other losses or damages incurred as a result of any undertaking. Go HERE to view complete DISCLOSURES.

Get Our Content For Free Via Email