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The participation in economic life is steadily being digitalized and that even prior to the outbreak of the current pandemic. An increasing number of everyday contracts is entered into via the internet. Consumers that enter into contracts with entrepreneurs via the internet are generally entitled to a legal right of revocation versus the entrepreneur under German law. The effective exercise of such a legal right of revocation leads to the rescission of the revoked contract. However, the legally stipulated fourteen-day revocation period only starts, if and when the entrepreneur correctly informs the consumer about the right of revocation. Consumers may also have such a right of revocation for contracts concerning financial services which are entered into via the internet. But what about the distribution of security tokens via the internet? Who has an obligation to inform the consumer about the right of revocation when it comes to the public offering of tokenized investment products?
Legal Right of Revocation Only in Certain Constellations at the Capital Markets
To begin with, a legal right of revocation in accordance with German private law is only granted to investors that do not act as entrepreneurs. For the field of investment this means that a legal right of revocation is not granted to institutional investors that invest on a professional and commercial scope. The differentiation between a consumer and an entrepreneur with regards to the investment activities may be difficult when it comes to private, wealthy individuals who are experienced in the capital markets and also when it comes to smaller family offices. Regardless of the degree of professionalism of the respective investor, the features of the security token itself may determine the existence of a legal right of revocation. According to German law, consumers are not entitled to a legal right of revocation for contracts on the acquisition of goods and services of which the prices are dependent on fluctuations on the financial markets the entrepreneur has no influence on and which may occur during the revocation period. This may for example be the case with security tokens, which immediately show a market price because they are directly listed for trading on a crypto exchange. Tokenized investment products granting an unconditional repayment and interest claim to the investor and which are not tradable with a fluctuating market price are most likely not subject to this exemption.
Who is Subject to the Information Obligation During a Security Token Offering?
Subject to the obligation to inform the consumer about an existing legal right of revocation is the entrepreneur, who enters into a contract concerning the subscription of the respective tokenized investment product with the consumer. This may first of all obviously be the issuer of the tokens when selling them to the investor via the internet. Nevertheless, it is also possible that a professional interim owner, e.g. an issuing house, is the one that sells the product to the consumer. In these cases, the contract regarding the purchase of the respective security tokens is entered into by the consumer and the interim owner who now acts as a provider. Then, the obligation to inform the consumer lies with the provider. On the other hand, issuers or providers should refrain from informing investors of a right of revocation where a legal right of revocation does not exist – for example if the investor is not a consumer - because an unnecessary information about a right of revocation may be interpreted as a voluntary granting of a contractual right of revocation.
Attorney Lutz Auffenberg, LL.M. (London)
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