By the end of April, BaFin announced via their website that they have reasons for suspecting that a well-known crypto exchange publicly offers securities in the form of so-called stock tokens in Germany without required security prospectuses. Stock tokens are one of the newest innovations in the crypto industry. The way that a stock token works is via a special-purpose entity, which acquires stocks and then tokenizes the value of the acquired portfolio. The hereby created tokens are then offered to interested investors on crypto exchanges, which in turn can participate at the price development of the underlying stocks. The specific legal design of a stock token is dependent on the respective provider and the tokenization options offered by the chosen jurisdiction. To date, it is strongly disputed, if stock tokens are securities pursuant to German regulatory law, as stated by BaFin.
ARE STOCK TOKENS STOCKS OR COMPARABLE SECURITIES PURSUANT TO THE EU-PROSPECTUS REGULATION?
Everyone that publicly offers securities in the sense of the EU-Prospectus regulation is required to create a comprehensive security prospectus and have it authorized by the competent supervisory authority. Subsequently, the authorized security prospectus has to be published by the issuer and a copy of it has to be deposited at the supervisory authority. That way, investors can obtain all the necessary information in order to make an informed investment decision. The EU-Prospectus regulation classifies stocks as securities. In light of the aforementioned design, which involves a special-purpose entity, it is obvious, that investors of stock tokens do not directly acquire stocks. However, the regulation also defines other products as securities, if they are comparable to stocks or company shares. Stock tokens on the other hand do not entitle their bearers to acquire shares of the special-purpose entity. The ownership of stock tokens entitles investors solely to participate at the price development of the underlying stocks.
ARE STOCK TOKENS SECURITIES IN THE FORM OF DERIVATIVE FINANCIAL PRODUCTS?
The EU-Prospectus regulation next to stocks and comparable securities is also applicable to financial products, which entitle investors to a cash compensation that is derived from indexes or other metrics. The market value of stocks is such a metric, meaning that stock tokens may be securities in the form of derivative financial products. In order to qualify a financial product as a security in the sense of the EU-Prospectus Regulation it is also a mandatory requirement for the respective financial product to be transferable.
ARE STOCK TOKENS TRANSFERABLE BETWEEN INVESTORS?
Judging by the current discussion, the transferability of stock tokens seems to be the decisive factor for the answer to the question, if stock tokens can be qualified as securities pursuant to the EU-Prospectus regulation. The abovementioned crypto exchange argues in this context that investors are only able to trade the tokens on their platform with a regulated German securities trading Bank and that the tokens are therefore not directly transferable. BaFin in contrast argues that the transferability of a token can be assumed, if the token can technically and legally be transferred to another user. The fact that stock tokens can be acquired and sold back to the securities trading bank at any time, if the token bearer decides to do so is a strong indicator in favor of the transferability of stock tokens. The EU-Prospectus regulation does not differentiate for the qualification of a product as a security, if the investor can only transfer the product with a multitude of intermediaries of a trading platform or merely with a single market maker such as a securities trading bank.
Attorney Lutz Auffenberg, LL.M. (London)
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