SEC CATEGORY 1 MODEL B V8

SEC CATEGORY 1 MODEL B

LEGAL ARCHITECTURE FOR ST22 DIGITAL SECURITIES

VERSION 8.0 | MARCH 2026

GROOVY COMPANY, INC. DBA OTCM PROTOCOL

Wyoming Corporation | CIK: 1499275 | OTC: GROO

12 Daniel Rd East, Fairfield, NJ 07004

Release No. 33-11412 (Binding) | January 28, 2026 Joint Staff Statement | Five-Category Taxonomy

Executive Overview

The SEC Category 1 Model B Compliance Framework is OTCM Protocol’s legal architecture — a comprehensive regulatory compliance structure designed to operate ST22 Digital Securities within the clear boundaries established by SEC–CFTC Release No. 33-11412 (March 17, 2026, binding) and the SEC Joint Staff Statement on Tokenized Securities (January 28, 2026, substantially superseded).

Element	Description
Named After	SEC Category 1 Model B (Issuer-Sponsored Tokenized Securities)
Goal	Operate fully compliant ST22 Digital Securities infrastructure under federal securities laws
Approach	Embrace securities classification (Category 5 Digital Securities) for regulatory clarity and institutional legitimacy
Primary Authority	SEC–CFTC Release No. 33-11412 (March 17, 2026) — Binding
Secondary Authority	SEC Joint Staff Statement (January 28, 2026) — Persuasive, substantially superseded

Strategic Evolution: From Avoidance to Compliance

OTCM Protocol made a deliberate strategic decision to embrace SEC Category 1 Model B securities compliance rather than attempt to structure tokens to avoid securities classification:

Factor	Avoidance Approach (Rejected)	Compliance Approach (Adopted)
Regulatory Certainty	Uncertain, untested theories	Clear SEC framework under binding Release 33-11412
Institutional Access	Limited, compliance concerns	Institutional-ready infrastructure
Investor Protection	No federal protections	Full Securities Act + Exchange Act protections
Value Proposition	Speculative tokens without equity backing	True equity ownership via Common Class B Shares
Legal Standing	Subject to enforcement risk	Operating within established law
Market Credibility	Regulatory arbitrage perception	Securities market legitimacy
Target Market	Retail speculation	Serious investors seeking liquidity for trapped OTC equity

Core Principle: Rather than engineering around securities laws, OTCM Protocol operates within them — providing the regulatory clarity that enables institutional participation and long-term market sustainability.

The Seven Pillars: Category 1 Model B Compliance

Release No. 33-11412 incorporates the Category 1 framework into binding law. All seven requirements are satisfied:

Pillar 1: Direct Issuer Authorization

The issuer’s board of directors must formally authorize Common Class B Share creation and tokenization via board resolution. Tokenization is an official corporate act, not a third-party initiative. No tokenization proceeds without verified board approval. The resolution explicitly authorizes tokenization on the OTCM Protocol platform.

Pillar 2: Official Shareholder Register

A Certificate of Designation is filed with the issuer’s state of incorporation establishing Common Class B Shares. The Certificate defines issuer-designated rights including conversion, dividends, voting, and liquidation preferences. Empire Stock Transfer maintains the Master Securityholder File. Token holders are recognized as shareholders under UCC Article 8.

Pillar 3: Regulated Custody

Empire Stock Transfer (SEC-registered transfer agent under Exchange Act §17A and qualified custodian) holds all backing shares in irrevocable custody. Custody is verified every ~400ms via Ed25519 cryptographic oracle attestation from HSM-secured Empire systems. No ST22 token can exist without verified custody backing. Empire is the sole investor onboarding authority for all ST22 issuers.

Pillar 4: True Equity Backing

Every ST22 token represents exactly one Common Class B Share (third-party OTC issuers) or one Series “S” Preferred Share (OTCMS). Shares are real equity in the underlying company with issuer-designated shareholder rights. Conversion rights allow conversion to common stock per the Certificate of Designation. This is NOT a derivative, NOT a synthetic, NOT a contractual claim — it is true equity ownership.

Pillar 5: Clear Ownership Chain

Each Common Class B issue receives a CUSIP number for securities identification. The blockchain provides an immutable ownership record. The legal path is clear: Token → SPL Token-2022 → Transfer Hook → Empire Custody → Common B Shares → Underlying Company.

Pillar 6: Investor Protection

42 Transfer Hook controls execute mathematical security enforcement on every transaction inside the Solana runtime. Protective conversion triggers activate automatically on adverse issuer events (bankruptcy, SEC enforcement, criminal indictment, loss of Empire services, material breach). Circuit breakers halt trading on >10% price move in 5 minutes for 15-minute cool-down. Wallet limits prevent concentration (4.99% maximum). OFAC screening prevents sanctioned party transactions via three-layer architecture (Chainalysis KYT + TRM Labs).

Pillar 7: Token Standard Compliance

SPL Token-2022 standard provides Transfer Hook capability on Solana Mainnet-Beta. Transfer Hooks execute compliance logic on every transaction — controls are mathematically enforced, not policy-based. Major external DEXs (Raydium, Orca, Meteora) disable Transfer Hooks, making them incompatible with ST22 Digital Securities. CEDEX maintains all 42 controls by design.

The 42 Transfer Hook Controls

Unlike theoretical avoidance strategies, Category 1 Model B compliance uses mathematically enforced controls that execute automatically on every transaction inside the Solana runtime.

Control Categories

Category	Controls	Function
Custody Verification	Controls 1–6 (6 controls)	Verify 1:1 backing on every transaction via Empire Ed25519 oracle
Investor Verification	Controls 7–14 (8 controls)	KYC/KYB/KYW/AML/accreditation status checks via Empire
Position Limits	Controls 15–19 (5 controls)	Wallet concentration limits (4.99% max), velocity controls
Circuit Breakers	Controls 20–23 (4 controls)	>10% in 5 min halt, >2% single-trade price impact block, oracle failure halt
Holding Period Enforcement	Controls 24–29 (6 controls)	Rule 144 (6-month Reg D) and Reg S (12-month) holding periods
Sanctions Compliance	Controls 30–34 (5 controls)	Three-layer OFAC screening: exact wallet, fuzzy entity, 2-hop clustering
Protective Conversion	Controls 35–38 (4 controls)	Automatic conversion triggers on adverse events
Record Keeping / Governance	Controls 39–42 (4 controls)	Compliance audit trail, regulatory freeze (Control 42: 3-of-5 multi-sig)

Key Control Details

Custody Verification (Controls 1–6)

Control	Function
CV-01: Custody Balance	Verify Empire Stock Transfer custody account balance every ~400ms
CV-02: 1:1 Ratio	Validate token supply does not exceed custodied Common B shares — per transaction
CV-03: Empire Status	Confirm Empire Stock Transfer operational status — per transaction
CV-04: Oracle Health	Check Ed25519 custody oracle health and latency — continuous
CV-05: CUSIP Match	Validate CUSIP assignment matches custodied shares — per transaction
CV-06: Master Securityholder File	Confirm wallet registered in Empire MSF under UCC Article 8 — per transfer

Investor Verification (Controls 7–14)

Control	Function
IV-07: KYC Status	Block unverified wallets — Empire verification required
IV-08: Accreditation	Block non-accredited for ST22 — Reg D (U.S.) / Reg S (non-U.S.)
IV-09: AML Screening	Block flagged parties via Chainalysis KYT + TRM Labs risk scoring
IV-10: Identity Verification	Require verified identity linked to wallet
IV-11: Jurisdiction	Block prohibited jurisdictions (OFAC comprehensively sanctioned countries)
IV-12: Age Verification	Block minors from all trading
IV-13: Investor Classification	Track and enforce investor classification (accredited, institutional, non-U.S.)
IV-14: Verification Expiry	Require re-verification when KYC/accreditation expires

Circuit Breakers (Controls 20–23)

Control	Function
CB-20: Price Circuit Breaker	Halt all trading on >10% price move in 5 minutes for 15-minute cool-down
CB-21: Price Impact Limit	Block single transactions causing >2% price impact
CB-22: Velocity Limit	Block wallets exceeding 50 transactions/hour for 24-hour review hold
CB-23: Oracle Failure	Halt all trading if custody oracle fails or latency exceeds threshold

Protective Conversion (Controls 35–38)

Trigger Event	Action
PC-35: Bankruptcy Filing	Automatic conversion of Common B to common stock
PC-36: SEC Enforcement / Criminal Indictment	Automatic conversion of Common B to common stock
PC-37: Loss of Empire Services	Automatic conversion of Common B to common stock
PC-38: Material Breach	Automatic conversion of Common B to common stock

Mathematical Enforcement vs. Legal Theory

Legal Theory Approach	Mathematical Enforcement (OTCM)
Untested in court	Executes automatically inside Solana runtime
Subject to interpretation	Binary: compliant or blocked — no ambiguity
Depends on good faith	Cannot be circumvented — mathematically enforced
Enforcement after violation	Prevention before violation — transaction reverts
Requires litigation	Self-executing code — no legal process needed
Regulatory uncertainty	Clear, verifiable compliance status on-chain

Securities Law Compliance Framework

A. Howey Test: Embraced, Not Avoided

Unlike avoidance strategies that attempt to “fail” Howey prongs, Category 1 Model B compliance acknowledges and embraces securities classification. ST22 Digital Securities satisfy all four Howey prongs:

Prong	Traditional Avoidance	Category 1 Model B Approach
1. Investment of Money	Claim “format change” not investment	Acknowledge: Investors pay USD/stablecoin for equity
2. Common Enterprise	Claim “separation”	Acknowledge: Investors share in underlying company
3. Expectation of Profits	Claim “entertainment”	Acknowledge: Equity investment implies profit expectation
4. Efforts of Others	Claim “community driven”	Acknowledge: Company management drives value

B. Reg D and Reg S Compliance

All ST22 Digital Securities offerings are conducted under Reg D (U.S. accredited investors) and Reg S (non-U.S. investors). Empire Stock Transfer is the sole investor onboarding authority.

Requirement	Implementation
Accredited Investors Only (U.S.)	All U.S. purchasers verified as accredited by Empire under SEC Rule 501
Non-U.S. Investors	Verified as non-U.S. persons by Empire under Reg S
General Solicitation Permitted	May publicly advertise offering under Reg D
Form D Filing	Filed with SEC within 15 days of first sale
Bad Actor Check	Disqualification verification required for all issuers
Holding Period (Reg D)	6 months under Rule 144 — enforced by Transfer Hook Control 24
Distribution Compliance (Reg S)	12 months — enforced by Transfer Hook Control 24

C. Additional Compliance Requirements

• Bank Secrecy Act: Full AML program, SAR/CTR filing obligations

• OFAC Sanctions: Three-layer real-time screening via Transfer Hook Controls 30–34 (Chainalysis KYT + TRM Labs)

• Record Keeping: 7-year transaction record retention (immutable on-chain + compliance database)

• Transfer Agent: Empire Stock Transfer coordination under Exchange Act §17A

• Form D Maintenance: Annual amendments as required

Implementation Framework

Phase 1: Issuer Onboarding

Step	Compliance Function
1. Board Resolution	Direct issuer authorization (Pillar 1) — authorizes Common B creation
2. Certificate of Designation	Filed with issuer’s state of incorporation (Pillar 2) — establishes Common B terms
3. Legal Review	Securities compliance verification by Legal Counsel
4. Due Diligence	Enhanced KYB on issuer, officers, directors, beneficial owners
5. Tripartite Agreement	Issuer + OTCM Protocol + Empire Stock Transfer agreement execution

Step	Compliance Function
1. CUSIP Assignment	Clear ownership chain (Pillar 5) — unique securities identifier for Common B class
2. Share Deposit	Empire Stock Transfer irrevocable custody (Pillar 3)
3. Oracle Integration	Ed25519 real-time custody verification (every ~400ms)
4. Verification Confirmation	1:1 backing confirmed before any tokens are minted

Phase 3: Token Minting

Step	Compliance Function
1. Smart Contract Deployment	SPL Token-2022 with all 42 Transfer Hook controls active
2. Token Minting	1:1 with custodied Common B shares (Pillar 4) — managed via Ledger Enterprise
3. Control Verification	All 42 Transfer Hook controls tested and verified operational
4. CEDEX Listing	Trading venue activation on cedex.otcm.io
5. Global Pool Seeding	Global Unified CEDEX Liquidity Pool seeded — LP tokens burned at initialization

Phase 4: Ongoing Compliance

Requirement	Frequency	Implementation
Custody Verification	Continuous (~400ms)	Transfer Hook oracle — Empire Ed25519
Accreditation Check	Per transaction	Transfer Hook Control 8 — Empire KYC integration
OFAC Screening	Per transaction	Transfer Hook Controls 30–34 — Chainalysis + TRM Labs
Wallet Limits	Per transaction	Transfer Hook Control 19 — 4.99% maximum
Circuit Breakers	As triggered	Transfer Hook Controls 20–23
Holding Period	Per transaction	Transfer Hook Control 24 — Rule 144 / Reg S
Record Keeping	Continuous / 7 years	Immutable on-chain + compliance database
Form D Updates	As required / annual	Legal Counsel

Investor Protection Architecture

What Category 1 Model B Protects Against

Risk	Protection Mechanism
Fraud	Securities anti-fraud provisions (Rule 10b-5) + 42 Transfer Hook controls
Misappropriation	Regulated irrevocable custody at Empire Stock Transfer (qualified custodian)
Market Manipulation	Circuit breakers (>10%/5min) + wallet limits (4.99%) + velocity controls + Jito MEV protection
Rug Pulls	1:1 Common B backing + protective conversion + Global Pool LP tokens burned
Whale Concentration	4.99% wallet concentration limit per ST22 token
Sanctions Evasion	Three-layer OFAC screening on every transaction (Chainalysis KYT + TRM Labs)
Information Asymmetry	Securities disclosure requirements under Reg D / Reg S

Category 1 Model B compliance provides regulatory protections and compliance infrastructure — it does NOT guarantee investment returns, protect against market losses, issuer failure, liquidity risk, volatility, or smart contract vulnerabilities.

OTCM Utility Token: Separate Classification

The OTCM Utility Token is a completely separate instrument from ST22 Digital Securities. Under Release No. 33-11412, it is classified as either Category 1 (Digital Commodity) or Category 3 (Digital Tool) — formal counsel determination required.

Factor	ST22 Digital Securities	OTCM Utility Token
Classification	Category 5: Digital Securities (SECURITIES)	Category 1 or 3: Non-Security (TBD)
Framework	SEC Category 1 Model B — Release 33-11412	Five-category taxonomy — Release 33-11412
Backing	1:1 Common Class B Shares or Series “S”	None — explicitly no asset backing
Custody	Empire Stock Transfer (SEC-registered, qualified custodian)	User wallets
Restrictions	Accredited investors only (Reg D/S)	None
Function	True equity ownership	Protocol Governance, fee discounts, staking
Regulatory Authority	SEC	CFTC (if Category 1) / Neither (if Category 3)

The OTCM Utility Token is NOT a security and is NOT covered by the Category 1 Model B framework. It has no asset backing and must not be confused with ST22 Digital Securities.

Strategic Advantages of Category 1 Model B

Advantage	Description
Regulatory Clarity	Operating within binding Release 33-11412 — not testing untested theories
Institutional Access	Binding taxonomy removes classification uncertainty for institutional counterparties
Investor Protection	Full Securities Act + Exchange Act protections — strongest model in the market
Market Credibility	Securities market legitimacy — not “regulatory arbitrage” perception
Target Market Fit	Serves 5M+ shareholders trapped in illiquid OTC equity — not speculators
Competitive Moat	Only OTC microcap platform with architecture conforming to all five categories correctly
Sustainable Model	Long-term viability within established federal securities framework

Conclusion

The SEC Category 1 Model B framework represents OTCM Protocol’s fundamental strategic position: operating compliant ST22 Digital Securities infrastructure under binding federal interpretation (Release No. 33-11412), providing regulatory clarity, institutional credibility, and investor protection through established securities law rather than untested legal theories.

Deprecated Approach	Adopted Approach (V8)
Engineer around Howey Test	Satisfy Howey Test, embrace Category 5 Digital Securities status
Untested legal theories	Binding Release No. 33-11412 framework
Speculative token positioning	ST22 Digital Securities — true equity ownership
Regulatory arbitrage	Regulatory compliance — Category 1 Model B
Institutional exclusion	Institutional participation enabled
Enforcement risk	Compliance certainty — 42 Transfer Hook controls

Regulatory References

Ref	Citation	Legal Weight
[1]	SEC–CFTC Release No. 33-11412 (March 17, 2026)	BINDING — Primary Authority
[2]	SEC Joint Staff Statement — Tokenized Securities (January 28, 2026)	Persuasive — superseded by [1]
[3]	SEC v. W.J. Howey Co., 328 U.S. 293 (1946)	BINDING — SCOTUS
[4]	Regulation D, Rules 501–506 (17 CFR §§ 230.501–506)	BINDING
[5]	Regulation S (17 CFR §§ 230.901–905)	BINDING
[6]	SEC Rule 10b-5 — Anti-fraud provisions	BINDING
[7]	Bank Secrecy Act (31 U.S.C. § 5311 et seq.)	BINDING
[8]	OFAC Sanctions Regulations (31 CFR §§ 500–598)	BINDING

Disclaimers

• This document does not constitute legal advice — consult qualified securities counsel

• Regulatory framework may evolve — monitor Release 33-11412 implementation

• Compliance does not guarantee investment returns

• Securities law requires case-specific individualized analysis

• ST22 Digital Securities are securities involving substantial risk including possible total loss

Document Information

Field	Value
Document Title	SEC Category 1 Model B Legal Architecture for ST22 Digital Securities
Version	8.0
Effective Date	March 2026
Legal Entity	Groovy Company, Inc. dba OTCM Protocol
Entity Jurisdiction	Wyoming Corporation
Governing Law	Federal Securities Law and New Jersey State Law
Primary Authority	SEC–CFTC Release No. 33-11412 (March 17, 2026) — Binding
Supersedes	V3.0 (January 2026) and all prior framework descriptions

ST22 Digital Securities are Category 5 Digital Securities under SEC–CFTC Release No. 33-11412 and are offered only to verified accredited investors under Reg D and non-U.S. persons under Reg S. Groovy Company, Inc. dba OTCM Protocol is a Wyoming Corporation (CIK: 1499275).