Reg D / Reg S (Securities Exemptions)

Understanding Reg D and Reg S requires first understanding 'what is a Security' and 'why does the SEC need to regulate them.' The US Howey Test (established by 1946 Supreme Court case) is the legal standard for determining whether an instrument is a 'security': Is there an investment of money? Is it invested in a common enterprise? Is there an expectation of profits? Do profits come primarily from the efforts of others? If all four questions are 'yes,' the instrument is a security requiring SEC registration (unless exempt). Does Tokenized Treasury (OUSG) satisfy the Howey Test? Investors pay USDC to buy OUSG (money invested); OUSG is a fund unit managed by Ondo Finance (common enterprise); holders expect Treasury interest yield (expectation of profits); profits mainly come from Ondo Finance managing the underlying ETF (efforts of others). All four conditions satisfied — OUSG almost certainly is a security, requiring SEC registration or use of exemptions (Reg D / Reg S).

Reg D's specific rules and practical impact on tokenized asset investors. Reg D has several different rules (Rule 504, 506(a), 506(b), 506(c)); tokenized assets most commonly use 506(c): allows 'general solicitation' — issuers can publicly advertise (on websites, advertisements), but only issue to 'accredited investors'; must 'reasonably verify' each investor indeed meets accredited investor standards (can't self-certify; document verification required); no maximum fundraising amount limit (traditional 506(b) has 35 non-accredited investor limit; 506(c) completely excludes non-accredited investors). Accredited investor standards (post-2020 SEC update): Individuals: net worth exceeding $1M (excluding primary residence); or annual income exceeding $200K (joint $300K for couples) for past two years and expected to continue; or holders of specific financial licenses (Series 7, 65, 82, etc.). Institutions: institutions managing over $5M in assets. Ondo Finance's OUSG uses 506(c) — therefore can publicly advertise OUSG on websites (attracting accredited investors), but Securitize's KYC ensures each holder has passed accredited investor qualification verification.

Reg S's design logic and why it enables non-US investors to hold tokenized Treasuries. Reg S's core logic: US securities law (Securities Act of 1933) is US domestic law with no jurisdiction over 'transactions occurring offshore to non-US persons.' If a tokenized asset's issuance: occurs entirely outside the US (offshore transaction); buyer is not a US person (and doesn't buy for US person's benefit); issuer takes reasonable measures to prevent tokens from flowing into US markets (usually through ERC-3643 whitelist blocking US IP access). Then this offering is covered by Reg S exemption, requiring no SEC registration. USDY's Reg S design: Ondo Finance specially designed USDY to serve 'non-US investors': USDY's KYC on Securitize explicitly excludes 'US residents and US citizens' (regardless of where they reside globally); Taiwan investors meet Reg S's definition of non-US persons (Taiwan is accepted in USDY's KYC whitelist); USDY's minimum investment ($500) is far below OUSG ($100K) because Reg S doesn't have Reg D's 'accredited investor' asset threshold. This makes USDY the lowest-barrier entry point for global non-US retail investors into Tokenized Treasury markets.

Reg D and Reg S restrictions are one of the fundamental reasons tokenized securities have poor liquidity. Reg D circulation restrictions: securities issued under Reg D typically have 'holding periods' after purchase — Rule 144 specifies that unregistered Reg D securities can only be freely resold in public markets after being held for 1 year (1 year for non-reporting companies, 6 months for reporting companies). This means: theoretically, OUSG purchased under Reg D exemption needs to be held 1 year before freely reselling in secondary markets. Practical operation: ERC-3643's whitelist mechanism limiting 'transfers only between whitelisted addresses' restricts the secondary market buyer pool that can purchase OUSG, indirectly enforcing the spirit of the holding period. Reg S resale restrictions: tokens issued under Reg S cannot be resold to US persons or back to US markets during the 'Distribution Compliance Period' (typically 40 days). This is why USDY's whitelist explicitly excludes US addresses — ensuring Reg S compliance (preventing USDY from flowing back to US markets). Long-term impact: Reg D + Reg S exemption structure enables tokenized securities to compliantly exist, but also means their liquidity can never approach fully SEC-registered public market securities (like listed ETFs) — because accredited investor and non-US person restrictions substantially shrink the potential buyer pool.