Security Token Offerings up to 8 Million Euro – Which Changes Does the German Federal Government Plan?

The German Federal Government published its draft version of the legislation for the introduction of the Electronic Securities Act (eWPG) shortly before the turn of the year. There are several changes to the first draft version that was published in the summer of 2020, mainly consisting of systematical clarifications and the rewording of certain parts. There is little change to the actual content of the previously published draft. Nevertheless, the legislative effort is not limited to the introduction of the eWPG. There are also changes intended to the Securities Prospectus Act (WpPG), which will be applicable to the yet to introduce electronic security and to the crypto security as well as to “traditional” security tokens to which the eWPG itself will not be applicable. The last-mentioned are tokens, which even though they are designed as securities will not have to be registered with an electronic securities registry according to the current draft provisions of the eWPG as according to the current version of the draft version the issuance of security tokens that are not registered in any registry shall still be possible. The eWPG therefore introduces optional and not mandatory regulations for the issuers of tokenized bearer bonds.

The WpPG offers the option for issuers of all kinds of securities to offer their securities within the European Economic Area (EEA) without the creation and publication of a full securities prospectus, if the volume of the issuance does not exceed 8 million euros and if instead of the aforementioned securities prospectus a three-pages long securities information sheet (WIB) that contains all the relevant investment information has been created and published. These securities information sheets also have to be approved by BaFin. Furthermore, the distribution of a security that is based on a WIB can legally only be carried out in Germany by a BaFin authorized investment brokerage company, which can ensure that retail investors will not exceed the legally defined maximum investment amounts. This exemption is applicable to all securities in the sense of the MiFID II regulation and therefore also to security tokens.

The current draft regulation intends for additional requirements on the contextual design of WIBs of purely digital securities. Affected by this, provided that the draft version comes into effect, would in any case be electronic securities and therefore also crypto securities as defined in the eWPG. The draft furthermore calls for those requirements to be applicable to WIBs of all other digital, unsecuritized securities that do not qualify as electronic securities in the sense of the eWPG. According to the draft, security information sheets of digital securities of all kinds shall now consist of up to four instead of three pages as it is the case for traditional securities. The German Federal Government justifies this with the argument that these WIBs will also have to include information regarding the transferability of the security, its tradability on the financial markets and the technology on which the security is based. These contextual requirements are congruent to the established administrative practice of BaFin which it currently applies to the approval process of security information sheets for tokenized securities. The expansion of WIBs to four pages for digital securities is therefore a sensible and helpful easement for token issuer. Should the offered security be an electronic security in the sense of the eWPG, the WIB will also have to contain information about the registry managing party and where and how investors can examine the registry.

Attorney Lutz Auffenberg, LL.M. (London)

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