Updates from June 6, 2019
It is exactly 6 months since my first article about STOs in EU. During this time, there has been several public STOs and private STOs in EU. This article will illustrate several cases with public STOs and analyse applicable law with regards to Security Token Offerings in EU.
According to European Securities and Markets Authority (ESMA) token is considered to be a security if it is classified as a “transferable security” according to Markets in Financial Instruments Directive (MiFID II) Article 4 (1) 44: ‘transferable securities’ means those classes of securities which are negotiable on capital market, with the exception of instruments of payment.
In statement to public which was published in January, 2019 ESMA states that classification of crypto-assets as a financial instrument is responsibility of an individual National Competent Authority (NCA – Financial Regulator of Member State – BaFin in Germany, FSA in Estonia, FCA in UK, etc.) and will depend on the specific national implementation of EU law and the information and evidence provided to that NCA. In reality this means that ESMA leaves the final interpretation to Member States and the most important aspect is that each STO should be evaluated independently. This means that in EU does not exist such a general approach like it is in US with Howey test – whenever person invests money and is expected to receive profits from efforts of someone else, it is considered to be an investment contract and securities regulations are applied.
In situations where offered tokens are classified as “transferable securities” national legal rules of public offers of Member States and EU legal rules are applied. New Prospectus Regulation (Regulation 2017/1129) stipulates that each Member State has a right to apply national law for public offers where raised amount is in range of EUR 1M and EUR 8M during period of 12 months. This means that it is necessary to look in to specific Member State in order to find out national legal rules for public offers up to EUR 8M. There are only several countries who have chosen to set up their national threshold for public offers at the maximum level of EUR 8M. These countries are UK, Germany (with some exception rules), France, Finland, Italy. The most of EU Member States have chosen to set their national thresholds for publishing prospectus at level of EUR 5M. There are some countries who have chosen to set the national threshold at the minimum level of EUR 1M – Latvia, Czech Republic, Cyprus, Hungary, Romania, Slovakia. Considering the costs of STO, we would not recommend to launch STO within national threshold in Member States where threshold for publishing prospectus is EUR 1M.
For all public offers above national threshold, Prospectus must be created and registered with NCA of the Member State. Prospectus is offering document which must contain detailed information about officers of the company, financial standing of the company, audit report, information about the rights attached to securities, etc. Prospectus can’t be published without approval of NCA. Organizer has to make prospectus publicly available at a ‘reasonable time’ in advance of, and at the latest at the beginning of the offer to the public by publishing prospectus on his website.
Prospectus threshold in Estonia is EUR 5M. Offers up to EUR 2,5M are not considered public offers and for offers in range of EUR 2,5M – EUR 5M organizer has to prepare simplified prospectus in accordance with rules set out by Minister of Finance. The rules request to provide information about responsible persons; information about the auditors; names of persons who are providing legal aid; specific information about issued securities; etc. For pubic offers above EUR 5M Prospectus Directive is applied and prospectus must be published.
Prospectus threshold in Lithuania is EUR 5M and for offers in range of EUR 100 000 – EUR 5M, organizer must publish “information document” which doesn’t have to be approved by Bank of Lithuania – NCA in Lithuania. This provision has been used in most recent STOs in Lithuania. In November 2018 Desico raised USD 1M in order to develop a platform which would create STOs for their future customers. STO was launched on basis of Crowdfunding law. The first customer of Desico was Paysera with goal to raise EUR 2,5M. Paysera launched STO in 07.05.2019. However, in public notice on 23.05.2019 Paysera announced that they have cancelled their STO because company failed to attract enough investors and did not reach the minimum target. It is worth to mention that Bank of Lithuania issued a warning to investors with regards to Paysera’s STO where Regulator illustrated that “information document” contains misleading information, because securities are sold by UAB “Paysera Investments”, but “information document” illustrates financial standing of UAB “Paysera LT” – the only licensed company of Paysera group. In Paysera’s defence, it is necessary to mention that throughout the “information document” it was outlined that securities are sold by company which does not have a license of financial institution and financial data of UAB “Paysera LT” were used to illustrate financial standing of the group as a whole.
Currently Kriptomat is organizing STO on Desico’s platform with the goal to raise EUR 1,8M by selling security tokens which contain right to 8% revenue sharing and right to 4% profit sharing via dividends. Since the public offering of Kriptomat is taking place at this moment, we will withhold any comments with regards to this STO and we won’t analyse issued securities from perspective of returns on investment rate.
With regards to Lithuania, it is important to mention that all above mentioned STOs are launched on basis of Crowdfunding Law which stipulates that Bank of Lithuania does not have to approve “Offering document”. The document must be approved by Operator of Crowdfunding Platform – in all above-mentioned cases it is UAB Finansu Bite Verslui – company which is part of Desico group. Also, it is important to mention that in cases of disputes, applicable law will be law of Lithuania with jurisdiction to Vilnius District Court.
One of the most significant examples of STOs in EU is Bitbond STO in Germany. This particular public offering is significant with the fact that they have approved Prospectus with NCA of Germany – BaFin. The goal of Bitbond STO is to raise EUR 100M until July 8, 2019. It is important to mention that Bitbond prior to STO had a license of financial institution due to their activities in the field of business loans. Prospectus document of Bitbond is not much different from standard Prospectus of company who is launching IPO. We will follow closely how Bitbond STO will develop in order to provide legal analysis to one of the first public STOs in EU.
In conclusion of this chapter, it is necessary to mention that currently in EU STOs are regulated like classical public offerings and the fact that organizer is issuing tokens does not really matter. However, there are several countries who are moving their stock registries to blockchain and this could facilitate development of STOs in the future as well. At the moment, for all public offerings above national thresholds, prospectus document is required. In one of the future posts we will analyse the main requirements of prospectus document in detail. Also, it is important to mention that national laws and EU legal rules with regards to public offerings are applied – such as AMLD5, Market Abuse Directive, MiFID II, Listing Directive, etc.
Please note that this article does not consist of legal advice and does not create customer – attorney relationships. I recommend to consult professional legal advisor in all situations prior to launch of STO / ICO.
 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance. Available: http://data.europa.eu/eli/dir/2014/65/oj
 European Securities and Markets Authority. Advice. Initial Coin Offerings and crypto-Assets. Available: https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf