With the introduction of the European Market Abuse Regulation (MAR), which is directly applicable in the member states without transposition, in July of 2016 the regulations for securities trading with regards to insider trading, market manipulation and the publication of insider information are harmonized within the EU. The national capital markets regulations of the member states now only define the competent authority and the specific sanctions for violations of the MAR. Even though there had been a couple of economically successful ICOs prior to the summer of 2016 almost no one thought of the possibility to publicly offer a regulated, blockchain based security, in other words a security token. The goal of almost all ICO issuers until the end of the ICO-hype in spring 2018 was to issue a basically unregulated so-called utility token to avoid all forms of regulation in the form of prospectus and authorization obligations. Nowadays this trend has shifted in favor of regulated STOs. and issuers are exposed to the question to what extend the MAR regulations are applicable to security tokens.
WHAT EXACTLY DOES THE MAR REGULATE?
The MAR provides standardized regulations within the EU capital markets for financial instruments in order to prevent market manipulations. The strict rules and regulations are supposed to ensure that market price of securities will not be manipulated by e.g. the publication of important but delayed, misleading or even false information about the issuer and his business. The MAR obligates the issuer of securities to publish all information that have the potential to influence the market price of the issued financial product. This kind of information has to be published immediately, the so-called ad-hoc publication. Furthermore, the MAR regulates if and how employees, advisors and other associates that possess intimate or sensitive information about the issuer or the business are allowed to take part in the trading of the issued financial products. Insider trading by one of the aforementioned is obviously also suited to affect the trade rates of the financial product in question. In addition, issuers of MAR regulated financial products as well as operators of authorized trading facilities have to inform the competent authorities of any request regarding the listing or delisting of the financial product with the trading facility in question. The provisions of the MAR are very complex and to a great extent subject to interpretation, which is why the European and national supervising authorities provide extensive interpretive notes regarding the MAR.
IS THE MAR APPLICABLE TO SECURITY TOKENS?
The application of the MAR to security tokens is generally possible. However only financial instruments that are actually traded at the secondary markets are subject to the MAR regulations. Therefore, only financial instruments that are already traded or that are in the process of being listed at authorized exchanges, multilateral trading facilities or other organized trading systems are subject to the MAR. Security tokens that are solely and directly sold by the emitter to the investor and which are not afterwards traded at exchanges or other public trading places are not subject to the MAR regulations with its extensive publication obligations, restrictions and prohibitions. If an STO emitter wants his tokens to be listed at a public trading venue such as e.g. a crypto exchange, the MAR with its strict obligations can potentially be applicable.
Attorney Lutz Auffenberg, LL.M. (London)