In the summer of 2018 the German legislator decided to allow security emissions in Germany with a volume of up to 8 million Euro without a BaFin approved prospectus. This not only applies to traditional securities but of course and with no restrictions also to those Security Token Offerings that offer a token which BaFin qualifies as a security in accordance to the German Securities Prospectus Act (WpPG). This opens up an interesting possibility for startups and medium-sized companies to procure capital without the laborious procedure of creating a prospectus that would then also have to undergo the BaFin approval process while at the same time a dependency from VC-investors or banks can be avoided. So is it really that simple to procure 8 million Euro without a prospectus or are there other prerequisites that have to be fulfilled instead?
SECURITIES INFORMATION SHEET INSTEAD OF A SECURITIES PROSPECTUS
Obviously a Security Token Offering with a Hardcap of 8 million Euro is still subject to supervisory provisions. The legislator exempts emitters of said Security Tokens of the normally mandatory prospectus only if they instead create a Security Information Sheet (WIB) that has to be approved by BaFin prior to the public offering of the token. This Security Information Sheet (WIB) has to provide the essential information regarding the token offering and may not exceed 3 pages. It has to include information regarding the design of the Security Token and the rights that are associated with it as well as information about the issuer, the risks that are associated with the investment and the intended use of the procured capital. Compared with the creation of a comprehensive security prospectus the expenditure for the issuer seems manageable.
DISTRIBUTION ONLY VIA BAFIN APPROVED FINANCIAL SERVICE INSTITUTIONS
The Security Information Sheet contains less information than a comprehensive security prospectus. Therefore, the legislator decided that in order to utilize this issuing method the emitter of a security that falls under the aforementioned regulation has to partner with a BaFin licensed investment intermediary or advisor in order to sell the security to investors. STO emitters that want to offer security tokens on basis of a Security Information Sheet cannot distribute the tokens themselves e.g. via their website but instead have to hire a professional BaFin licensed financial distributer. The distributer is legally required to ensure that private investors do not exceed their individually determined maximum investment amount. This amount is determined by the potential investors individual financial situation but cannot exceed 10,000 euros.
IS IT POSSIBLE TO OFFER A SECURITY TOKEN WITH A SECURITY INFORMATION SHEET IN THE WHOLE EUROPEAN UNION?
Security Token Offerings that are based on a Security Information Sheet cannot be offered in other European countries via the EU-Passporting procedure. The notification procedure only applies to comprehensive prospectuses. Moreover, the German legislator defined that a security offering that is based on a Security Information Sheet cannot exceed a maximum of 8 million euros hard cap within the European Economic Area. The emitter is certainly free to undergo a comparable regulatory process in any other member state, provided that the target state offers a comparable exemption to its prospectus regulation. If an STO is supposed to address the entire EU a comprehensive prospectus that can be notified in other EU member states via EU-Passporting is most probably the cost and time efficient alternative.
WHAT OTHER DOCUMENTS HAVE TO BE CREATED FOR A SECURITY INFORMATION SHEET BASED STO?
The exemption from the obligation to create a comprehensive prospectus does not free the STO emitter from the other obligations that are necessary to successfully offer a security token. The token terms which define the legal design of the offered token as well as the terms of token sale which define the offer conditions of the STO have to be crafted with utmost diligence. Moreover, all other distribution material like e.g. the whitepaper and any advertising statements have to be legally reviewed to avoid pitfalls. Besides all of the legal documents that have to be created, the STO issuer needs to find a suited distribution partner with a BaFin license as well as developers for the programming the token. FIN LAW has access to a broad network of qualified blockchain developers with STO experience as well as BaFin licensed financial distributers and national and international legal and tax advisors to successfully support an STO project. In conclusion the Security Information Sheet based issuing of a security token can be a cost efficient alternative for STO emitters with a funding goal of 8 million euros or less.
Attorney Lutz Auffenberg, LL.M. (London)
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