Investment products can be offered by companies seeking capital in many different legal forms. In addition to the most common form of transferable securities within the meaning of MiFID2 regulation, such as shares and debt instruments, issuers can also issue investment products as shares in investment funds or, on the basis of national regulation, as asset investments. Through the Asset Investment Act, the German legislator originally intended in particular to regulate the so-called gray capital market, on which investment products were offered that did not qualify as securities and were therefore not subject to the prospectus requirements for securities issuances. Such products include uncertificated profit participation rights, subordinated loans, profit-participating loans or participations as a silent partner. They generally lack the inherent tradability of securities on the capital markets, which distinguishes them from securities. Nevertheless, the German Investment Act obliges issuers and providers of investments in Germany to prepare and publish sales prospectuses prior to the first public offering, which must be approved by BaFin. For investments offered in the form of crypto tokens, BaFin is of the opinion that the increase in tradability achieved through tokenization means that tokenized investments are to be classified as securities of their own kind for regulatory purposes and are therefore subject to the EU Prospectus Regulation and the German Securities Prospectus Act rather than the German Asset Investment Act with regard to prospectus obligations.
Either Crypto Whitepaper According to MiCAR or Securities Prospectus According to EU Prospectus Regulation?
MiCAR clearly stipulates that tokenized investment products, which constitute financial instruments within the meaning of MiFID2, do not fall within the scope of MiCAR. In this respect, the legislator has ensured a clear competitive relationship between MiFID2 and MiCAR. The first public offering of a tokenized stock therefore obliges its issuer to prepare and publish a securities prospectus to be approved by BaFin in accordance with the EU Prospectus Regulation or the German Securities Prospectus Act. In contrast, the preparation of a crypto whitepaper is not required, as the share as such is already a financial instrument pursuant to MiFID2 and therefore cannot also be a crypto asset pursuant to MiCAR. However, this clear either-or logic does not apply to tokenized investments under the German Asset Investment Act. This is because asset investments do not constitute financial instruments within the meaning of MiFID2, but are a purely nationally regulated type of investment product. In this context, the exemption for financial instruments under MiFID2 cannot be applied to asset investments. BaFin’s administrative practice of applying the EU Prospectus Regulation to initial public offerings of tokenized investments does not help either, as securities of their own kind are not included in the MiFID2 catalog of financial instruments.
Public Offer of Securities of its Own Kind in Accordance with BaFin’s Administrative Practice Requires Securities Prospectus and Crypto Whitepaper
For tokenized asset investments, therefore, both a securities prospectus and a crypto whitepaper must be prepared and published prior to their public offering in the EU. While the securities prospectus must be approved by BaFin and subsequently published, the crypto whitepaper only needs to be published. Approval or authorization by BaFin is not required. The crypto whitepaper and securities prospectus also differ in terms of content and presentation, which is why issuers and providers of tokenized asset investments will have to pay close attention to ensuring that the information provided in the two documents is congruent. Of course, issuers of tokenized asset investments will check whether an exemption from the prospectus obligation or crypto whitepaper obligation may apply to their issuance in order to only have to prepare one document. As a rule, however, both documents will have to be prepared. Issuers should therefore check on a case-by-case basis whether their investment product can also be designed in such a way that it qualifies as a financial instrument under MiFID2. In most cases, only a securities prospectus would then have to be prepared and the obligation to publish a crypto whitepaper would not apply.
Attorney Lutz Auffenberg, LL.M. (London)
The competent lawyer for advice on the legal classification of tokens according to MiCAR in our law firm is Attorney Lutz Auffenberg, LL.M. (London).
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