According to the requirements of the EU-prospectus directive, companies intending to procure funds from the European capital markets by offering securities to investors need to compile and publish a comprehensive security prospectus that must be approved by the competent capital markets supervisory authority. The same rules apply to the public offering of security tokens, that qualify as securities. Often, these prospectuses consist of more than 100 pages. These prospectuses have to contain not only comprehensive information regarding the financial situation, the history and the corporate structure of the emitting company but also details regarding the business model, the managing directors as well as the market situation of the issuer and competitors. Furthermore, these prospectuses have to explain the functionality of the offered security token as well as the rights and obligations of the issuer and the investor associated with the token and display the risks associated with the investment. Compiling and creating a security prospectus is therefore an expansive and complex project that may often be not cost efficient in case of smaller emission volumes. In order to give medium-size businesses and even start ups the opportunity to procure funds at the capital markets through capital markets issues, the European legislator allowed the member states to permit the public offering of securities respectively security tokens with a total equivalent of 8 million euros without the prior approval and publication of a prospectus within the European Economic Area (EEA). The EEA member states made use of this option but with varying requirements and maximums. In Germany for example, the exemption from the prospectus obligation is applicable to emissions with a total equivalent of up to 8 million euros. In Austria on the other hand these emissions are caped at less than 2 million euros.
WHAT ARE THE REQUIREMENTS FOR GERMAN STO ISUUERS IN ORDER TO BE EXEMPTED?
For the public offering of security tokens with a maximum equivalent value of up to 8 million euros the issuer is required to create a three-page Security Information Sheet (WIB) that contains all the base information regarding the emitter, the offered security token, the associated rights and obligations and the relevant risks of the investment. This WIB then must be approved by BaFin, just like a comprehensive security prospectus, for publication by BaFin. Naturally, the costs for creating a three-page WIB are substantially lower than those of a comprehensive security prospectus with 100 pages or more. In addition to the WIB, the German exemption requires that the security tokens are distributed only via a professional financial distributor that is licensed for investment advisory or investment brokerage. According to the exemption regulation, the financial distributor has to ensure that private investors adhere to certain maximum investment amounts. Issuers therefore cannot directly sell WIB regulated security tokens to private investors, e.g. via an own website. Institutional investors on the other hand are not subject to the aforementioned restriction of the exemption regulation.
CAN WIB BASED STOS THEREFORE ONLY BE NATIONAL CAPITAL MARKETS PROJECTS?
Since the EEA member states implemented the requirements of the EU Prospectus Directive differently from one another, a harmonized exemption regulation for all of Europe does not exist. This means that a WIB that has been approved by BaFin cannot be passported via a simple notification procedure in order to utilize it in another EEA country for the sale of the security tokens as it would be possible with a full prospectus. However, this does not mean that a specific security token cannot be offered simultaneously in more than one member state of the EEA at the same time. According to the EU Prospectus Directive it only has to be ensured that the total equivalent value of the offer within the EEA does not exceed 8 million euros over a 12-month period. It would therefore be possible to procure e.g. 1.5 million euros in Austria, 5 million euros in Germany and further 1.5 million euros in the Netherlands, as long as the respective requirements for the exemptions in each of these jurisdictions are fulfilled.
Attorney Lutz Auffenberg, LL.M. (London)