In 2019 BaFin allowed the first security token offerings in Germany and approved the corresponding and necessary security prospectuses. Blockchain-based capital markets issuances are therefore possible in Germany and a viable alternative for issuers seeking to acquire capital. However, the approval of the necessary prospectus is just the first step to a successful emission. The economic success of a capital markets emission depends heavily on the placement of the product with financially strong investors. The planed volume of STO emitters usually ranges between 50 and 500 Million euros. Amounts that are hard to reach with investors hailing from the IT and blockchain communities that are still shaken from the 2017 and 2018 ICO-hype. For blockchain-based capital markets emissions to reach these numbers, professional and reputable sales partners with access to wealthy individuals and institutional investors are needed.
IS A TOKEN SALE UNDER THE ISSUERS OWN DIRECTION POSSIBLE?
It is of course still possible for STO emitters to sell and market their security tokens to interested investors. Emitters do not need a BaFin license to distribute their own security tokens as long as they do not also offer other banking, financial or payment services. Emitters wanting to take the sale of their tokens into their own hands can still employ the services of external agencies to help them with the organization of the sales distribution. These external agencies are however not allowed to directly sell or establish any contact to investors. Their services are restricted to marketing advice during the token sale.
WHICH FINANCIAL SERVICE PROVIDERS ARE ALLOWED TO HELP WITH THE DISTRIBUTION OF SECURITY TOKENS?
In order to legally offer security tokens to investors in Germany, the service provider must be BaFin authorized as an investment intermediary or investment broker. If the service provider also advises the investors and provides customized investment recommendations that are tailored to the financial capabilities of the respective investor a BaFin authorization for the provision of investment advisory is additionally required. Besides these authorized service providers, numerous tied agents operate in Germany, offering their services under the liability umbrella of authorized financial institutions. They are allowed to distribute financial instruments of all kinds including security tokens. Therefore in Germany, there is a sufficient number of service providers that can legally offer the distribution of security tokens. Nevertheless, still only very few financial service providers dare the inclusion of security tokens in their distribution portfolio, may it be due to fear of rookie mistakes, blockchain related IT risks or simply because their customers do not yet demand tokenized securities as an investment option. If security token offerings establish themselves as a more commonly accepted alternative to traditional capital markets emissions, the distribution providers will most probably follow suit and expand their services accordingly.
CAN A DISTRIBUTION OF SECURITY TOKENS ALSO BE OFFERED BY FINANCIAL INVESTMENT AGENTS IN THE SENSE OF THE TRADE AND INDUSTRIAL CODE?
The distribution of financial instruments as defined by the German Banking Act (KWG) generally requires a BaFin authorization. Certain financial instruments, precisely investment assets as defined in the German Investment Asset Act (Vermögensanlagengesetz) and open-end and closed-end investment funds as defined by the German Capital Investment Code (KAGB), can be distributed without a BaFin authorization as long as the distributer is licensed as a financial investment agent in accordance to sec. 34f of the German Trade and Industrial Code (GewO). Of course, the distribution of tokenized versions of the aforementioned financial instruments is also possible. Tokenized securities as e.g. bonds and shares are not included in this exemption and can therefore only be distributed by a BaFin authorized distributer. A token that can also be distributed by financial investment agents being licensed in accordance with the German Trade and Industrial Code must therefore be designed as an investment asset or as a share of an investment fund.
Attorney Lutz Auffenberg, LL.M. (London)