The legal status of Security Tokens in Europe

This article describes the legal context in seven European countries regarding Security Token Offerings. Such offerings differ from Initial Coin Offerings (ICO’s). An Initial Coin Offering (ICO) is the cryptocurrency equivalent to an Initial Public Offering (offering shares of a private cooperation to the public for the first time, also known as IPO) in the traditional investment world.

ICO’s act as fundraisers. For example, a company looking to create a new coin or a new software application launches an ICO. Next, interested investors buy in to the offering, either with fiat currency or with preexisting digital tokens like Bitcoin. In exchange for their support, investors receive a new cryptocurrency token specific to the ICO. Investors hope that the cryptocurrency will perform very well into the future, providing them with a high return on investment. ICO’s are often used by startups to bypass the regulated capital-raising process required by venture capitalists or banks.

Unlike an ICO, a security token is essentially an investment contract into an underlying asset. It has all the attributes of a security in that it is a fungible, negotiable financial instrument that represents actual monetary value. STO’s are backed by real assets.

It is interesting to see to what extent Security Token Offerings are considered traditional security offerings from an international financial law perspective. In the table below, the most important legal characteristics are listed.

Country Are Security Token Offerings considered a security, from a legal perspective? Prospectus needed?
Austria Determined on a case-by-case basis. Yes, unless: > 100.000 EUR < 150 investors < 2 Mio. EUR total investment qualified investors
Belgium Yes, when they look and feel like securities. Yes, unless: > 100.000 EUR < 150 investors < 500.000 EUR total offer profesional investors
France Yes. Yes, unless: > 100.000 EUR < 150 investors < 8 Mio. EUR total investment qualified investors
Germany Yes, when they look and feel like securities. Yes, unless: > 100.000 < 150 investors < 8 Mio. EUR total investment qualified investors
Switzerland Yes, called “asset token”. No.
The Netherlands Yes, when they look and feel like securities. Yes, unless: > 100.000 EUR < 150 investors < 5 Mio. EUR total investment qualified investors
United Kingdom Yes, see Guidance on Cryptoassets Consultation Paper. Yes, unless: > 100.000 EUR < 150 investors < 8 Mio. GBP total investment qualified investors

Advice

Crypto law differs among jurisdictions and certain countries offer more possibilities than others. Running into legal issues is easy, considering the complexity of the new digital laws. Properly drafted and constructed documents are an important part of running a business or structuring any offering. It is crucial to have a specialised lawyer provide you with the documents you need for business operations and fundraising. This includes documents like a private placement memorandum, token sales documents, and miscellaneous offering documents. These documents help not only to ensure compliance with any cryptocurrency law and governmental regulations, but to instill credibility in your project and confidence that your investors are protected.

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