Numerous capital markets authorities throughout Europe approved security token offerings by now and thereby allowed the public offering of blockchain-based securities. Even in Germany, where the securities law still heavily relies on documents in paper form, a number of securities prospectuses regarding blockchain-based securities have been approved by BaFin. At the same time, the German legislator announced the introduction of digital debenture bonds as part of its blockchain strategy and promised to publish a draft legislation by the end of the year. Blockchain technology is gaining ground in the area of public offerings of securities and has yet developed into a serious alternative to traditional, paper document-based securities emissions. STOs offer emitters numerous ways to reduce the costs of the emitting process e.g. by making security depositories for collective certificates unnecessary or by enabling automation for countless processes during the emission which can make the services of paying agents expendable. Is a security token offering suited for emitters that want to offer their product to investors in more than one EEA member state?
FULL-FLEDGED SECURITY PROSPECTUS FOR TOKENS QUALIFYING AS SECURITIES
If a security token meets all the requirements for a security in the sense of the EU Prospectus Directive according to the supervisory authority that would be responsible for the approval of the prospectus, the emitter, in order to publicly offer the token, must have approved a security prospectus for that token by the competent authority, get it published and deposited with the approving authority. Before that, the security tokens may not be offered publicly. Just as with traditional, paper-based securities, STO emitters must create and compile a comprehensive security prospectus for their product. This security prospectus, if approved by the competent authority, is a full-fledged security prospectus in the sense of the EU Prospectus Directive that triggers the same rights and obligations as a prospectus for traditional securities would do. STO prospectuses can therefore be passported within the EEA because they are subject to the same passporting regulations as traditional security prospectuses are. As a consequence, STO emitters can use an approved STO prospectus for a public offering in other EEA member states, too, as long as they apply for notification for the target member states with the competent authority.
HOW EXACTLY DOES THE NOTIFICATION PROCEDURE FOR STO PROSPECTUSES WORK?
An STO emitter wanting to use his approved security prospectus in other EEA member states for the public offering of his security token can simply apply for notification with the competent authority that approved the prospectus. The competent approval authority will then inform the competent authority in the target member state and ESMA within a working day that the STO emitter created an EU Prospectus Directive compliant securities prospectus that has been approved. Furthermore, a copy of the prospectus will be sent to the competent authority in the target member state. The competent authority of the target member state is bound by the assessment of the competent approval authority. If e.g. BaFin approves a security prospectus for a security token offering and the emitter also wants to offer his token to Austrian investors, the Austrian FMA has no way to prohibit the public offering of the tokens in Austria if the emitter prior to the offering notified BaFin of offering the security tokens in Austria as well. Of course, the FMA could also not request from the emitter to draw up and have approved another security prospectus for the offering of the tokens to Austrian investors with the FMA. As to the prospectus language, all European capital markets authorities must accept prospectuses in a language that is commonly used in the sphere of international finance. Therefore, English is the sensible choice for prospectuses for European STOs.
Attorney Lutz Auffenberg, LL.M. (London)