Security Token Offerings (STOs) are a relatively new way to procure capital from investors. In an STO, the issuer offers to interested investors "self-made" blockchain tokens associated with specific rights such as interest payments or particpations in the annual gains of the company. Security Token Offerings are not the only funding method on basis of the issuance of blockchain tokens. The different forms of appearance are commonly referred to as Initial Coin Offerings (ICO). Next to Security Token Offerings, the term ICO covers also the issuance of so called Utility Tokens and Currency Tokens, but all of those forms might cause regulatory duties for the issuer. Therefore, ICO projects need high quality, professional legal counselling. FIN LAW specializes in STO and ICO projects and does not only have the highest legal qualification when it comes to banking or capital market law but also has a fundamental understanding of the technical operation aspects of a blockchain token issuance as well as a profound understanding of the market.
The different forms of ICOs can generally be divided into three groups. A Utility Token is a blockchain token that grants its owner the use of services that is provided by the business which issued the token. Financial contributions towards the owner of the token like the payment of interest or the participation in the profits of the issuer's business cannot be connected to a utility token. If such rights are associated with a token, that token has to be qualified as a security token. This kind of token is regularly defined as a security or an asset investment by the BaFin which requires the issuer to draft a prospectus and have it approved by BaFin prior to the issuing of the tokens to investors. The third alternative is a currency token which does not grant its owners any of the aforementioned rights but is solely an alternative means of payment. While security tokens will in most cases cause regulatory obligations to the issuer, utility tokens can in certain cases be designed with no or very little regulatory obligations for the issuer. A generalized statement concerning the classification of a token from the view of banking or capital market law cannot be made. To classify the regulatory qualification of a token, it takes sound legal review and close coordination with BaFin.
The offering of a Security Token in a Token Sale Event as a modern and innovative way to procure funds from the capital market is very interesting for a lot of companies. In comparison to a traditional security offering, the blockchain based Security Token can save costs for the issuer in regard to the adminitration of interests to pay as well as regarding the fact that no depositary for paper based securities is required. Attention should be paid to the fact that Security Tokens are a digitalized form of securities or investment products and therefore German regulatory banking and capital market law is in effect with most STOs. If the issuer plans to emit the token not only in Germany but also in other EU countries the issued token should be designed as a security as defined by the EU Prospectus Directive. In these cases a BaFin approved prospectus can be used in every EU member state to emit the token without the need of a second prospectus in that country and therefore without another approval process. A challenging aspect in this regard is the legal design of the token so that it will have the capital market viability necessary to qualify as a security as defined in the directive. The German securities laws do not necessarily require a security to be embodied in a physical document, but if German property law is applicable, an unencumbered acquisition of the token would be possible. With a Blockchain token that only exists in digital form and therefore does not fall under German property law, this form of acquisition is not possible. Security Tokens therefore have to be legally designed in a different way than conventional securities. FIN LAW has the necessary experience and know how to draft the legal design of a Security Token so that it matches all the requirements of the EU Prospective Directive.
Attorney Lutz Auffenberg, LL.M.
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