Do You Need An Escrow for Your Security Token Offering (STO)?

Financial Crimes Enforcement Network (FinCEN) made public a letter on March 6, 2018, that seems to have been overlooked by many entrepreneurs who intend to launch STOs in the US. Everyone by now understands that they must comply with Regulation D506c, Regulation S, Regulation A+ or Regulation CF exemption to launch their security token. But FinCEN laid out a reminder for every security token offering in the US. They made it very clear that issuers need to get registered as a money services business (MSB) and have a BSA (Bank Secrecy Act) compliance program in place.

(NOTE: This is in addition to doing a Bad Actor check for all covered people doing a Security token offering)

So, what does it mean to have a BSA program for your STO?

  1. Create a Bank Secrecy Act program
  2. Have a written Anti-Money Laundering (AML) compliance program
  3. Hire an experienced compliance officer
  4. Train all staff on AML and KYC procedures
  5. Get registered as an MSB
  6. Perform AML on all investors
  7. File SAR’s and CTR’s
  8. Retain compliance and reporting records
  9. Be prepared for an annual audit by FinCEN agents

Dizzy yet? Now get this: failure to comply with the Bank Secrecy Act (BSA) requirements can carry a 5-year prison sentence and or fines. It can get very ugly very quickly.

Not to add to the red tape, but you also have to register as a Money Services Business (MSB) in all 50 states plus any territories in which the business will operate.

How can an escrow enable compliance of your Securities Token Offering (STO)?

The easier way to complying with the Bank Secrecy Act is to hire a licensed escrow service that is associated with a bank that has a BSA program builtin. The escrow service/bank performs the AML/KYC checks in a compliant manner.

This will ensure KYC and AML are performed on EVERY investor by a regulated financial institution.

  1. PATRIOT Act compliant AML program
  2. File SAR’s and CTR’s;
  3. Retain compliance and reporting records
  4. And lastly, Bad Actor checks on all proprietors that own over 20% of the issuer’s equity.

You spend a little money now to avoid a lot of legal fees in the future, not to mention the legal fees you’d incur if you had to register as an MSB yourself. You would have to register as an MSB in every state and that could run $500K and take a very long time.

By engaging a licensed, reputable escrow and bank, your STO can comply with FinCEN’s objectives.

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