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Category: blog EN

Jun 17, 2024

WIB or BIB – When Must Which Documentation Be Provided?

The issue of financial products is regularly accompanied by the obligation of the issuer or provider to fulfill corresponding documentation and prospectus obligations. This is certainly the case if the financial product is to be offered to the public. As a rule, a sales prospectus and/or an investment information sheet (“VIB”) must be prepared for investments in accordance with the German Investment Act. The same applies to certain forms of investment assets under the German Capital Investment Code. The MiCAR Regulation will determine what type of crypto asset whitepaper must be prepared for the various types of crypto assets in the future. In the case of securities, which include many tokenized products as sui generis securities, the interaction of the European Prospectus Regulation (EU) 2017/1129 (“Prospectus Regulation”) and the German Securities Prospectus Act (“WpPG”) regulates the prospectus and documentation obligations of providers and issuers. In this respect, the German legislator has made use of an option in the Prospectus Regulation and stipulated that no securities prospectuses need to be published in Germany for public offers of securities with a total consideration of no more than EUR 8 million in the European Economic Area, calculated over a period of twelve months. Instead, a securities information sheet (“WIB”) can be prepared, filed with BaFin and published. But when is this also not the case and what obligations do issuers and providers have instead and can this even have advantages?

When Must a BIB Be Published Instead of a WIB?

However, there is no obligation to publish a WIB if a key information document (“KID”) already has to be published for the security in question in accordance with Regulation (EU) No. 1286/2014 (Packaged Retail and Insurance-based Investment Products (PRIIPs): “PRIIPs Regulation”). For its part, the PRIIPs Regulation stipulates that a key information document must be prepared and published by manufacturers of packaged retail investment products. The issuer or provider must therefore at least also address retail investors with the product in question. Furthermore, the security must be a packaged product within the meaning of the PRIIPs Regulation. It can be difficult to determine when this is the case in individual cases. In principle, however, the PRIIPs Regulation stipulates that packaged investment products are considered to be packaged if the amount to be repaid is subject to fluctuations due to the dependence on reference values or the performance of one or more assets that are not acquired directly by investors. BaFin specifies here that the amount to be repaid must be understood to include both the interest and the repayment of the product. In accordance with the European Securities and Markets Authority (“ESMA”), BaFin also states that the type of reference value is also important. For example, the dependence of the amount to be repaid on internal benchmarks or interest rate indices such as Euribor does not lead to the existence of a packaged product in the sense required here, but the dependence on external benchmarks does.

What are the Differences Between the Different Information Sheets?

In principle, a WIB can therefore be prepared, filed with BaFin and published in Germany for public offers of securities of up to EUR 8 million. The WIB has a maximum length of 3 A4 pages and 4 A4 pages for digital and non-securitized securities. Publication must be approved by BaFin, whereby BaFin only checks the completeness of all information, notes and attachments, but not their accuracy. In comparison, the BIB, which comprises a maximum of 3 A4 pages, does not require any filing or approval by BaFin. It only needs to be prepared and published on the website of the PRIIP manufacturer, usually the issuer. In this respect, the time-consuming and costly approval and filing process with BaFin can be avoided if the terms and conditions of the securities are carefully drafted by an experienced lawyer in securities prospectus law, provided that the design of a PRIIP for which a BIB would have to be prepared is desired.

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    Jun 10, 2024

    MiCAR vs MiFID II – Which Tokens Are Considered Crypto Assets and Which Are Financial Instruments?

    With the Markets in Crypto Assets Regulation (MiCAR), the European Union created an independent set of rules for the commercial handling of crypto assets that is directly applicable in all EU member states. The text of the regulation is already very extensive and detailed. Nevertheless, it is necessary in many places to ensure a uniform interpretation by the authorities in the member states. For this reason, the European Securities and Markets Authority (ESMA) is obliged in many provisions of MiCAR to draw up explanatory notes, consult with market participants and publish them. ESMA also has such an obligation in relation to the exemption clause which sets out the alternative relationship between MiCAR and MiFID2. The exemption stipulates that the provisions of MiCAR should not apply to a crypto asset that meets the requirements for a financial instrument within the meaning of MiFID2 regulation. In this respect, it is problematic that the member states developed and applied very different administrative practices in their interpretation of what constitutes a financial instrument under MiFID2 in the period prior to the adoption of MiCAR. The fundamental question of whether MiCAR or MiFID2 regulation should apply to a token in the future therefore requires a uniform interpretation, which is to be made possible by the guidelines to be drawn up by ESMA.

    Technology- Neutral Approach and “Substance or Form” Principle for Determining the Relevant Regulatory Regime

    ESMA had already published a draft of the guidelines to be drawn up in this regard in January 2024. ESMA had given market participants the opportunity to comment on its draft by the end of April. The final guidelines must be published by ESMA by December 30, 2024, i.e. by the date of full applicability of MiCAR. For the interpretation, ESMA first clarifies in its draft consultation that the question of the classification of a token as a financial instrument should in any case be technology-neutral. The method of tokenization and the technical design are therefore of secondary importance. Instead, the characteristics, design and rights associated with the token should be decisive. This “substance over form” approach, which is also reflected in recital 14 of MiCAR, makes it clear in ESMA’s view that the determination of the legal nature of a token as a MiCAR or MiFID2 product must not be based on the technical shell of the product. However, the technical design will still be relevant for legal applications. This is because it will still be relevant when assessing whether a product constitutes a crypto asset within the meaning of MiCAR. Only then it can be examined in the second step whether this crypto asset constitutes a MiFID2 product in terms of its substance.

    When May Tokens Be Classified as Transferable Securities under MiFID2?

    Financial instruments within the meaning of MiFID2 regulation are, in particular, transferable securities. The term primarily refers to bonds, shares and other securities, for example for embedding derivatives. To define a transferable security, MiFID2 itself sets out three criteria that a product must meet in order to be classified as a transferable security. Firstly, the product must be part of a “category”. This means that the product must be part of an overall issue, which ultimately establishes its exchangeability and thus also its tradability on the capital market. The latter is the second prerequisite for the existence of a transferable security. ESMA understands this to mean not only traditional stock exchanges and regulated markets, but also all trading venues on which corresponding products can be traded, just as BaFin does in Germany. Finally, according to the definition contained in MiFID2, the product must not be a payment instrument. If these requirements are met, tokens are to be classified as transferable securities according to ESMA and are therefore subject to MIFID2 regulation. The provisions of MiCAR are thus not applicable to such tokens, even though they also meet the definition of a crypto asset under MiCAR.

    Attorney Lutz Auffenberg, LL.M. (London)

    I.  https://fin-law.de

    E. info@fin-law.de

    The competent lawyer for advice on the legal design and classification of tokens in our law firm is Attorney Lutz Auffenberg, LL.M. (London).

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      Jun 03, 2024

      Crowdfunding – Which Options Exist?

      The phenomenon of crowdfunding has become an indispensable way of raising capital on the financial markets. Crowdfunding is enjoying unbroken popularity, particularly in the area of financing real estate projects. Put simply, this involves a large group of people raising money, often small amounts, for projects or companies via an internet platform. It is not only the actual fundraising that is of interest to companies seeking financing through crowdfunding, but also the media attention that individual projects that are implemented with the help of crowdfunding repeatedly attract. In Germany, crowdfunding is regulated at national level in the German Investment Act (VermAnlG). At the European level, this has been regulated by the European Crowdfunding Service Provider Regulation (ECSPR) (EU) 2020/1503 since 10th of November 2021. But when is which regulatory regime applicable and which products may be distributed and how?

      In Principle the ECSPR Takes Precedence Over the VermAnlG

      Within the VermAnlG, the German legislator has established the priority of the ECSPR for offers that do not exceed an equivalent value of EUR 5,000,000, calculated over 12 months. The ECSPR therefore always takes precedence when an offer of products covered by the Regulation is made via a crowdfunding platform authorized under the ECSPR. These products include, in particular, financial products that are predominantly not classified as asset investments. In particular, these are securities and non-subordinated loans. Subordinated loans in particular, which are popular in Germany, lack the unconditionality of the repayment claim required by the ECSPR and are therefore not suitable products for distribution under the ECSPR. This is certainly not the case for loans with a qualified subordination. These subordinated loans therefore continue to fall under the scope of application of the VermAnlG if they are to be issued by way of crowdfunding in Germany and therefore also benefit from the simplifications that the VermAnlG provides for such issues.

      What Documentation Requirements Must Be Met for the Issuance of a Crowdfunding Product?

      In terms of content, the ECSPR obliges the crowdfunding service provider, i.e. the operator of the internet platform through which the issue is carried out, to offer the regulated crowdfunding services only on the basis of an authorization in accordance with the ECSPR and stipulates that they are subject to ongoing supervision by BaFin. In contrast to the national provisions of the VermAnlG, the regulation therefore does not apply in relation to the issuer or provider with respect to the filing of transparency documents, but rather to the operator of the internet platform. As an authorized crowdfunding service provider under the ECSPR, the latter is obliged to check the necessary documentation for each such offering, the so-called key investment information sheet (KIIS), for completeness, accuracy and clarity and to report any deficiencies to the promoter, who is responsible for preparing the KIIS, which is a maximum of 6 DIN A4 pages long, and to work towards correcting it. In contrast, when issuing a subordinated loan in accordance with the VermAnlG, for example, the issuer or provider of such a funding must prepare an investment information sheet no longer than 3 DIN A4 pages and file it with BaFin. With the appropriate authorization, it is possible to provide both crowdfunding under ECSPR as a crowdfunding service provider and as an operator of an Internet service platform within the meaning of the VermAnlG. Of course, it is not possible to offer crowdfunding issued in accordance with the VermAnlG in other European countries. However, this possibility exists under certain conditions for crowdfunding issued under ECSPR.

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        May 27, 2024

        Reverse Solicitation – Does MiCAR also Apply to Crypto Service Providers from Third Countries?

        From December 30, 2024, crypto service providers in Europe will only be allowed to provide crypto services with a MiCAR license. The companies affected must already prepare now for the new rules to apply and ensure that they will be able to offer their crypto services in the future on the basis of the authorizations that will then be required and in compliance with all applicable compliance obligations. However, MiCAR will also bring advantages for European crypto service providers. In particular, the European crypto market will no longer be a regulatory patchwork under MiCAR. The standardized supervision of crypto service providers in Europe means that passporting will also be possible. Under MiCAR, crypto service providers will therefore be able to use a MiCAR license granted to them in one member state to provide services in other EU member states without having to obtain further authorization there, provided they have gone through a comparatively simple notification procedure with the supervisory authority of the target country. But what is the new regulatory situation under MiCAR for crypto service providers from third countries? Will they be able to serve European customers without MiCAR authorization as long as they do not actively solicit such customers?

        Passive Freedom to Provide Services is to be Severely Restricted under MiCAR

        Although MiCAR expressly allows companies from third countries without a MiCAR license to provide crypto services in cases where the service is used exclusively at the instigation of the client without any action on the part of the company, this exception is to be interpreted very restrictively. However, in its consultation paper published in January 2024, ESMA, which was tasked with specifying the provision, made it clear that this exemption should be interpreted very restrictively. ESMA emphasizes that the so-called reverse solicitation, which is an exception to the principle of the permission requirement, is actually a ban on actively approaching clients, which should only allow unlicensed companies from third countries to serve clients from Europe in individual cases within very narrow limits if the business initiation takes place on the client’s initiative. ESMA further states that, when interpreting the provision on the passive freedom to provide services, the national competent supervisory authorities should take into account that crypto service providers from third countries will attempt to systematically offer crypto services in Europe on the basis of the exception for reverse solicitation. In EMSA’s opinion, this possibility should not be granted by the interpretation of the provision.

        According to EMSA, Authorized Reverse Solicitation Should Not Be a Free Pass for Unlicensed Crypto Services

        ESMA therefore further restricts the possibility of reverse solicitation under MiCAR in its consultation paper by clarifying that crypto service providers from third countries may only provide their services on the basis of the exception in a very short time window. In particular, in the case of an authorized service provision, they will not be permitted to offer further crypto services to the customer acquired due to the fulfillment of all requirements of the passive freedom to provide services. This restriction is expressly provided for in the MiCAR exception to reverse solicitation itself. The opportunities for companies from third countries to serve European customers are thus limited to a minimum under MiCAR. For crypto service providers from non-EU countries, this means that they should either acquire a MiCAR license via a branch in Europe or create internal processes for handling customers from Europe. The only alternative would be to generally refuse to accept European customers without exception in order to avoid the risk of providing unauthorized crypto services.

        Attorney Lutz Auffenberg, LL.M. (London)

        I.  https://fin-law.de

        E. info@fin-law.de

         The competent lawyer for advice on MiCAR exceptions for the passive freedom to provide services for crypto service providers from third countries in our law firm is Attorney Lutz Auffenberg, LL.M. (London).

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          May 13, 2024

          The EU Growth Prospectus – Who May Benefit from These Regulations and What Facilitations Are There?

          In principle, there are various ways for companies to raise capital. The bank loan as a way of raising debt capital and the issue of shares as an equity instrument are probably the classic approaches. If capital is to be raised not via a bank loan, but by issuing securities such as profit participation rights securitized in profit participation certificates, tokenized bonds or in shares, the issuer must generally comply with prospectus requirements when making a public offer to retail investors. In the European Union, these arise primarily from the EU Prospectus Regulation (EU) 2017/1129 and the accompanying regulations. Since the Regulation came into force on July 21, 2019, the EU Prospectus Regulation has also provided for the EU Growth Prospectus as an option for documentation for certain issues. The EU Growth Prospectus promises both simplified content and a smaller scope compared to a “normal” prospectus, and therefore generally lower costs when preparing the prospectus. But who can take advantage of these facilitations and what must be disclosed in terms of content?

          Growth Prospectus Is Not Only Aimed at SMEs

          The basic prerequisite for the possibility of fulfilling the prospectus requirement by means of an EU Growth Prospectus is always that no securities of the issuer concerned have yet been admitted to trading on a regulated market. If this requirement is met, issuers can choose this prospectus to fulfill their prospectus obligations if they fall into one of the following categories. Firstly, cases in which the issuer is a small and medium-sized enterprise (SME) are covered. However, the EU Growth Prospectus can also be used for a public offer regardless of whether the issuer qualifies as an SME if the issuer’s securities only have a limited market capitalization. In addition, the rules on the EU Growth Prospectus are also applicable if the issue has a total consideration in the EU over a 12-month period of no more than EUR 20 million and no securities of the company are traded on an MTF and the issuer had no more than 499 employees in the last year. Furthermore, the Growth Prospectus is eligible if the issuer’s shares are already traded on an SME growth market or the issuer has made an application to do so and the total value of the following two items is less than EUR 200 million: (i) the price of the final offer or the maximum price; (ii) the total number of shares outstanding immediately after the public share offer calculated on the basis of either the quantity of shares offered to the public or the maximum quantity of shares offered to the public. In addition, offerors of securities issued by issuers falling under one of the first two categories can also benefit from the EU Growth Prospectus rules. It is therefore not only SMEs that can make use of the EU Growth Prospectus.

          What Content-Related Facilitations Are There?

          In terms of content, this type of prospectus is very similar to the old SME prospectus. However, further streamlining has been introduced here by the European regulator. For example, information on the company’s history, employees, competitors and management practices is no longer required. Furthermore, there are simplifications with regard to the presentation of the issuer’s business and financial situation. The special registration document for the EU Growth Prospectus provides for the inclusion of financial information including key performance indicators (KPIs) and financial statements for one year for bonds and two years for shares. Overall, this results in a considerable simplification with regard to the scope of the preparation of an EU Growth Prospectus compared to a “normal” prospectus. This simplification should also be reflected in the costs of preparing the prospectus, so that companies for which this form of prospectus is an option have a real incentive to use the EU Growth Prospectus.

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            Apr 29, 2024

            Crypto Advisory Under MiCAR – Will Referrers Need a BaFin License in the Future?

            The European Markets in Crypto Assets Regulation (MiCAR) will gradually replace the national regulation of crypto services this year. On December 30, 2024, the rules of the EU regulation will apply to all CASPs in Europe. Thanks to various transitional arrangements, not all of them will require a MiCAR license immediately. However, it already makes sense to plan the transition to the new regulatory regime now. Compared to traditional regulation in the financial services sector, one crypto service that differs significantly under MiCAR is advice on crypto assets. This is because under the current regulation in Germany, investment advice only covers advisory services on transactions relating to financial instruments, including crypto assets. However, advice on crypto assets under MiCAR will go significantly further and, in addition to advice on transactions relating to crypto assets, will also regulate advice on the use of crypto services. This means that from 30 December 2024, anyone who provides customers with personalized recommendations on the use of certain crypto services may themselves be subject to a licensing requirement under MiCAR as a crypto advisor and may have to obtain a BaFin license for this activity beforehand.

            When Does the Obligation to Obtain Permission for Provider Recommendations Apply?

            In particular, crypto service providers that advertise the crypto services of third-party providers as part of their own service provision may constitute crypto advice in individual cases. This would be conceivable, for example, in cases where a crypto trading platform presents the services of various crypto custodians to its customers or a provider of crypto exchange services presents the use of the services of various portfolio managers for crypto assets. However, in order to trigger the licensing requirement in relation to crypto advice, it is always necessary for personalized recommendations to be made to the customer. It will therefore not be sufficient to simply name several different providers of a crypto service. MiCAR authorization may only be required if an advisory element is added. Therefore, if statements are made that suggest to the customer that a certain crypto service provider is particularly suitable for this customer compared to others, the crypto advice may be in the form of a provider recommendation. However, whether the recommendation to the customer is actually tailored to them, for example by taking their specific portfolio, their investment preferences and their personal risk profile as a basis, should not play a role. Rather, the decisive factor should be how the recommendation is presented from the customer’s perspective. Referrers should therefore exercise caution with statements that are intended to make customers believe that the use of a particular crypto service is a perfect fit for them or meets their specific needs.

            What Should Referrers of Crypto Service Providers Consider in the Future?

            Referrers should always take the MiCAR licensing requirement for crypto advice in the provider recommendation variant seriously and design all of their customer communications with this in mind. In all advertising statements relating to the offer of third-party crypto service providers, referrers should ensure that under no circumstances can the impression be given to the customer that the recommendation of the third-party provider was made taking into account the customer’s personal circumstances. The more general the advertising statement, the lower the risk of inadvertently providing crypto advice that requires a license. For influencers who make recommendations via public channels, on the other hand, the risk of providing crypto advice regulated under MiCAR is low, as they cannot make personalized recommendations because their audience is usually unknown to them.

            Attorney Lutz Auffenberg, LL.M. (London)

            I.  https://fin-law.de

            E. info@fin-law.de

            The competent lawyer for the application of a BaFin license according to MiCAR and structuring of a business model to avoid licensing obligations in our law firm is Attorney Lutz Auffenberg, LL.M. (London).

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              Apr 22, 2024

              Incorrect Crypto Whitepaper According to MiCAR – What are the Consequences?

              When the Markets in Crypto Assets Regulation (MiCAR) comes into force on December 30, 2024, the provisions on crypto asset whitepapers contained therein will also become applicable. On this date, providers who publicly offer crypto assets other than asset referenced tokens or e-money Tokens must, among other things, prepare and publish a corresponding crypto asset whitepaper and submit it to BaFin as the competent authority in the event of a public offering in Germany. The information contained in the crypto whitepaper must not be incomplete, dishonest, incomprehensible or misleading. The regulations ultimately aim to ensure that the crypto whitepaper contains all the information necessary for the potential investor to make an informed purchase decision. But who would be liable should the crypto asset whitepaper be incorrect in the aforementioned sense?

              In General, the Provider, the Applicant for Authorization to Trade or the Trading Platform Operator are Liable

              Firstly, MiCAR stipulates that those who assume responsibility for the crypto-asset whitepaper are also the addressees of any liability for errors in the whitepaper in question. These are either the provider of the crypto asset or the person who has applied for the authorization of the crypto asset for trading or the operator of the trading platform on which the crypto asset is to be traded. Interestingly, the term “issuer” was not included in the scope of the liability addressees on the grounds that this would not be expedient, as there is often no identifiable issuer for this type of crypto asset. In principle, it is stipulated that all of the aforementioned possible responsible parties must be legal entities. As a general rule, they are only subject to limited liability insofar as they are only liable with their company assets. This limitation of liability would also affect liability for an erroneous crypto asset whitepaper, meaning that young companies with a thin capital base that assume responsibility for the whitepaper in question could only have very limited liability. In this respect, claims for damages due to losses caused by erroneous crypto asset whitepapers could well come to nothing.

              Liability of Members of the Administration Bodies, Management Bodies or Supervisory Bodies

              For this reason, MiCAR cumulatively also holds the administrative body, management body or supervisory body of the person responsible for the whitepaper liable to the holder of the crypto asset for damages suffered due to breaches of the aforementioned obligations. Specifically, this means that the natural persons in the aforementioned bodies of the legal entities may also be liable for damages caused by an erroneous crypto asset whitepaper. A limitation or even an exclusion of this liability by the general terms and conditions of the person responsible for the whitepaper is excluded by MiCAR itself. A proper and careful preparation of the required crypto asset whitepaper to avoid liability risks for the person responsible for the whitepaper by a law firm specializing in the preparation of MiCAR whitepapers is therefore advisable for all parties involved. This is particularly important as there is no time limit for this type of liability in MiCAR, which is otherwise usual for prospectus and documentation obligations.

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                Apr 15, 2024

                Getting Ready for MiCAR – BMF Proposes Two New Regulations for the Transition to MiCAR

                On 5th of April 2024, the Federal Ministry of Finance (BMF) published two draft regulations intended to effectuate the transition from national crypto regulation to the MiCAR regime, which will finally apply to crypto service providers (CASP) as of 30th of December 2024. Market participants, associations and experts will have the opportunity to submit critical comments on the content of the planned regulations to the Federal Ministry of Finance by 19th of April 2024. With the MiCAR Transit Regulation (MiCAR-TransitV), the Federal Ministry of Finance intends to regulate the use of a simplified procedure for obtaining a MiCAR license as provided for in MiCAR. The draft MiCAR Application Regulation (MiCAR-Antragsverordnung – MiCAR-AntragsV), on the other hand, is intended to define the details of the application process for all application procedures provided for by MiCAR, in particular when which applications for authorization under MiCAR can be submitted by crypto service providers. Both draft regulations find their legal basis in the German Crypto Markets Supervision Act (KMAG), which is also available as a draft version of the Federal Government dated February 7, 2024, but which can be expected to be adopted in the near future in view of the MiCAR, which will already take legal effect as of 30th of June 2024, at least with regard to e-money tokens (EMT) and asset referenced tokens (ART).

                MiCAR-TransitV Facilitates Obtaining MiCAR License for Investment Firms and Crypto Custodians

                According to MiCAR, the simplified procedure for obtaining a MiCAR license is intended to benefit companies that already are licensed under national law for the provision of crypto services. In Germany, these are in particular crypto custodians that already hold a BaFin license under the German Banking Act (KWG) and crypto service providers with a BaFin license under the German Investment Firms Act (WpIG) or the KWG, for example for investment brokerage or investment advice in relation to crypto assets, operators of multilateral crypto trading systems, proprietary traders or financial commission agents who trade crypto assets for their own account. The MiCAR-TransitV will specify the content requirements for applications in the simplified procedure in the future. In all cases, the applicant will have to state the specific crypto services for which authorization is being applied for under MiCAR. In addition, the applicant must confirm that its business model has remained unchanged since its authorization procedure under national law and that the information on business organization and company management submitted to BaFin at the time is still up to date. Additionally, the applicant must make adjustments to its business organization with regard to the specific compliance requirements of MiCAR and submit them to BaFin. Finally, an updated business plan must be submitted, showing which crypto services are to be provided in which member states in accordance with MiCAR and how the applicant intends to market them.

                MiCAR-AntragsV Aims to Regulate Submission Deadlines for All Types of Applications for MiCAR Authorization

                The MiCAR-AntragsV merely serves to create the possibility of being able to submit applications for authorization as a CASP to BaFin prior to MiCAR taking full legal effect. This is because as long as the provisions of MiCAR do not yet apply with regard to the application – this will not be the case until 30th of December 2024 – an effective legal basis is required for the application. At the end of 2024, the MiCAR-AntragsV will have served its purpose and will therefore cease to apply. Applications for the simplified procedure to be regulated by the MiCAR-TransitV should be able to be submitted as soon as the MiCAR-AntragsV comes into force, which can be expected by summer 2024 at the latest. The MiCAR-TransitV itself should already regulate the expiry date for the possibility of using the simplified procedure and set it at 31st of August 2025. Initial applications for authorization as a CASP under MiCAR, as well as notification applications from credit institutions or investment firms, should be able to be submitted or transmitted from the date on which the MiCAR-AntragsV comes into force. For market participants in Germany, this means that they should start preparing MiCAR-related applications now in order to be able to submit them immediately after the MiCAR-AntragsV comes into force.

                Attorney Lutz Auffenberg, LL.M. (London)

                I.  https://fin-law.de

                E. info@fin-law.de

                The competent lawyer for the application of a BaFin license according to MiCAR in our law firm is Attorney Lutz Auffenberg, LL.M. (London).

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                  Apr 08, 2024

                  Lending Business and Subordinated Loans – What to Consider When Issuing Subordinated Loans on a Regular Basis

                  In principle, the German Banking Act (KWG) makes the lending business a banking business and thus a regulated activity subject to authorization. This applies in any case if the business is conducted in Germany on a commercial basis or to an extent that requires a commercially organized business operation. The lending business concerns the granting of money loans and acceptance credits. The provision of such services therefore requires prior authorization from BaFin, which also exercises ongoing supervision over companies that engage in this activity. It is a criminal offense to conduct banking business, including lending business, without prior authorization if it exceeds the aforementioned scope. In particular, business models that initially intend to raise money by means of subordinated products in order to then in turn lend this money to other companies by means of loans should check whether they fall under the aforementioned authorization requirement. In this context, the question arises as to whether these transactions are generally prohibited if there is no BaFin license?

                  Exception Based on Agreement of a Subordination Clause

                  According to BaFin’s guidance note on the lending business, the general obligation to obtain prior permission to operate a lending business does not apply in cases where subordination clauses or loss-sharing agreements on the part of an entrepreneurial borrower mean that taking out a loan does not qualify as a deposit-taking business within the meaning of the KWG. In these cases, it should be possible to grant loans to companies without a license, even on a commercial basis or to an extent that requires a commercially organized business operation. Lending to private individuals on this scale, on the other hand, qualifies as a credit transaction requiring a permit despite the agreed subordination or agreed loss participation. In this respect, the regulation mirrors the assessment made by BaFin as part of its interpretation of the deposit business. According to this, funds received from third parties with a qualified subordination clause are not unconditionally repayable and are therefore not considered deposits within the meaning of the deposit business.

                  Exception for Appearing on the Market like a Credit Institution

                  However, the exception described above should not apply if the loan is granted by a market participant that acts like a credit institution on the market or in public. Such an appearance should be given in particular if the granting of the loan and the refinancing of the lender result in the overall image of a credit institution. In a case decided by the Administrative Court of Frankfurt, the plaintiff planned to raise investor funds via profit participation rights and also by issuing bearer bonds under the business model it had in mind. Here, the court found that there was no legal scope for a restrictive interpretation of the definition of a lending business analogous to the definition of a deposit-taking business if the company that intends to grant such loans refinances itself by accepting repayable funds from the public – even if this is by issuing bearer bonds. In this respect, in this constellation, loans to companies with qualified subordination also fall under the definition of lending business. It must therefore be decided on a case-by-case basis, taking into account the overall business model, whether the intended transaction of the company granting the loan may fall under this exemption.

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                    Mar 25, 2024

                    BaFin License, Crypto Whitepaper, Redemption Obligation – Which Requirements Does MiCAR Set for the Issuance of E-Money Tokens?

                    The issuance of stable coins that derive their value directly from an official currency such as the euro or US dollar will only be possible in the European Union from June 30, 2024 in compliance with the regulations of the new Markets in Crypto Assets Regulation (MiCAR). As in the case of traditional, non-tokenized E-Money within the meaning of the Second E-Money Directive, strict requirements will also be imposed on the issuers of E-Money Tokens, which is why not every company will be eligible to issue E-Money Tokens under MiCAR. Rather, this privilege will only be granted to licensed and supervised credit institutions and e-money institutions. In Germany, a BaFin license will therefore always be required for the issuance of E-Money Tokens under MiCAR. However, MiCAR also imposes further obligations on issuers of such Tokens. For example, issuers of E-Money Tokens must prepare a comprehensive crypto whitepaper containing the minimum information specified in MiCAR so that the Tokens may be offered publicly in Europe or authorized for trading on crypto exchange platforms, for example.

                    MiCAR Places Content Requirements on Crypto White Papers for E-Money Tokens

                    Prior to the public offering of E-Money Tokens in the European Union, the issuer holding a BaFin liecense must prepare a crypto whitepaper and publish it on its website, and submit it to its competent authority – BaFin in Germany – no later than 20 working days prior to publication. In the crypto whitepaper, the issuer of the E-Money Token must, among other things, provide information about itself and how the E-Money Token works, the manner of the planned public offering or authorization for trading, the rights and obligations associated with the E-Money Token, the associated risks and also the main adverse effects of the underlying consensus mechanism on the climate. In addition, the crypto whitepaper must contain numerous warnings, such as the lack of deposit protection and the fact that the crypto whitepaper has not been approved by a supervisory authority. Overall, the crypto whitepaper must be formulated in a fair and comprehensible manner and must not contain any misleading statements. The crypto whitepaper must be written in a language of the issuer’s home country or in a language commonly used in the international financial community. Especially if the E-Money Tokens are not only to be offered in Germany, it is therefore advisable to prepare a crypto whitepaper in English.

                    Redemption Obligation and Interest Prohibition as Restrictions under Private Law

                    The MiCAR also imposes obligations on issuers of E-Money Tokens in terms of private law. Of crucial importance in this respect is the redemption obligation enshrined in the regulation, which guarantees the bearers of E-Money Tokens the right to redeem the Tokens in legal tender at any time at their nominal value. Issuers holding a BaFin license may not charge any fees for the exchange. The MiCAR legislator is also strict with regard to the possibility of paying interest on balances in E-Money Tokens. Interest may not be granted in relation to E-Money Tokens. The prohibition of interest applies not only to the issuers of E-Money Tokens, but also to crypto service providers, who are not allowed to grant interest in connection with the crypto services they provide. The MiCAR clarifies that interest within the meaning of the prohibition of interest shall also include all remuneration and other benefits in connection with the ownership of E-Money Tokens.

                    Attorney Lutz Auffenberg, LL.M. (London)

                    I.  https://fin-law.de

                    E. info@fin-law.de

                    The competent lawyer for the application of a MiCAR license and advice on issuances of E-Money Tokens and for obtaining a BaFin license in our law firm is Attorney Lutz Auffenberg, LL.M. (London).

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                      Mar 18, 2024

                      The MiCAR Crypto Asset Whitepaper – Can the Obligation to Create also Affect the Operator of a Trading Platform?

                      The Markets in Crypto Assets Regulation (MiCAR) will come into full force on December 30, 2024. From this date, the regulations relating to crypto asset whitepapers will also apply. Among other things, these will require providers who publicly offer crypto assets other than asset referenced tokens or e-money tokens to prepare, submit and publish a corresponding crypto asset whitepaper to the competent authority. The same obligations apply to persons who apply for the authorization of such crypto assets for trading. Exceptions to this obligation arise from the MiCAR itself, such as in the case of a public offer to fewer than 150 natural or legal persons or exclusively to qualified investors. An exception to the obligation to prepare a MiCAR whitepaper upon authorization of the crypto asset for trading exists if the crypto asset in question is already authorized for trading within the Union and a corresponding MiCAR whitepaper has been prepared and the person responsible for preparing the whitepaper consents to its use in writing. In this context, the issuers of crypto assets are therefore primarily obliged to prepare a whitepaper. They will regularly have a corresponding interest in both the public offering of the crypto assets and their authorization for trading. But can these obligations also apply to the operator(s) of a trading platform?

                      Operator of a Trading Platform as a Provider of Crypto Assets in the Context of a Public Offering

                      In the context of MiCAR, the term provider refers to a natural or legal person or another company that publicly offers crypto assets. Whether the operator of a trading platform can fall under this definition is likely to be a question of the specific case. According to MiCAR, the mere authorization to trade or the publication of bid and ask prices does not qualify as a public offer of crypto assets. In this respect, an operator of a trading platform would only be obliged to prepare a MiCAR whitepaper as a provider if its activities went beyond this. However, not every additional activity should automatically trigger the obligation for the operator to prepare a whitepaper. Rather, the activity of the operator must constitute a public offer itself. This means that the information published about the crypto asset must contain the terms of the offer in order to enable potential investors to decide whether to purchase the crypto asset. It would be desirable if ESMA were to publish corresponding guidelines on when a public offer exists for crypto assets that are already listed.

                      Operator of a Trading Platform as Initiator for the Authorization of Crypto Assets for Trading

                      If the operator of a trading platform is the initiator for the authorization of the crypto asset for trading, it is also responsible for ensuring that the corresponding crypto asset whitepaper is published if it has not yet been published in the cases prescribed by MiCAR. Specifically, the legislator is focusing here on the “initiative” of the operator of the trading platform. Generally, the initiative for authorization to trade will probably come from the issuer or, for example, the issuer’s distribution partner. However, if the initiative comes from the operator of the trading platform itself, it should also be subject to the corresponding obligations. Unfortunately, the regulation does not specify when exactly the initiative for the authorization of a crypto asset for trading comes from the operator or another person. In this respect, operators of trading platforms are advised to carry out a precise case-by-case examination. This should apply all the more to operators whose business model includes the tokenization of financial products and their distribution in addition to operating a trading platform. Depending on the field of activity, the threshold for becoming an initiator could be exceeded relatively quickly.

                      FIN LAW

                      I.  https://fin-law.de

                      E. info@fin-law.de

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                        Mar 11, 2024

                        The Stable Coin in Europe – Who Can Issue Asset-Referenced Tokens (ART) Under MiCAR?

                        In just over three months, the provisions of the Markets in Crypto Assets Regulation (MiCAR) on Asset Referenced Tokens (ART) and Electronic Money Tokens (EMT) will come into force. MiCAR will then ensure strict rules for the creation and offering of so-called stable coins in the EU. Issuers of stable coins will then have to fulfill numerous obligations designed to ensure the stable value of stable coins and provide investors with the highest level of security. This already shows that issuing ARTs in the EU will be a highly complex undertaking in the future. In the case of Asset Referenced Tokens, the stable value of the token is derived from another value or right or a combination thereof, as defined in the MiCAR. The reference value can therefore be composed very differently. As long as the composition leads to a stable value of the ART, the MiCAR regulations must be observed by the issuer, but also by other types of providers such as trading platforms offering ART. But who will actually be allowed to issue Asset Referenced Tokens in the EU from June 30, 2024?

                        Issuer of Asset Referenced Tokens (ART) Requires a MiCAR License

                        The issuer status is of central importance for the existence of stablecoins under the new regulation. Without an issuer – according to the MiCAR legislator’s approach – there is no stable coin. Therefore, from June 30, 2024, the public offering of Asset Referenced Tokens in Europe will in principle only be possible to be carried out by the issuer of the relevant ART itself. The same applies to an application for authorization of an ART for trading. In addition, issuers of Asset Referenced Tokens must generally obtain a license under MiCAR prior to commencing the public offering of their ART. The application for approval is comprehensive and must include a detailed business plan and detailed descriptions of the future issuer’s business organization. In addition, the management bodies must be professionally suitable and reliable and the owners of significant shareholdings must have successfully completed an acquisition approval procedure. A detailed crypto whitepaper on the planned ART must also be prepared. However, if the future issuer is a credit institution, no application for authorization as an issuer is required. It is then sufficient for the credit institution to provide the competent authority – BaFin in Germany – with specific information on the project and compliance with the MiCAR compliance requirements ninety days prior to the first issue.

                        No Need for a MiCAR License for ART Issuers in Certain Exceptional Cases

                        MiCAR does not require issuers of Asset Referenced Tokens who have only issued ARTs with an average value of not more than EUR 5,000,000 over a period of twelve months to apply for a license. In such cases, the legislator did not consider the strict rules for issuers of Asset Referenced Tokens to be appropriate. There is also an exception for issuers of ARTs that can only be held by qualified investors and the public offering of these ARTs is also aimed exclusively at such qualified investors. In these cases, MiCAR assumes that the investors have sufficient knowledge to be able to assess the professionalism of the issuer and the financial soundness of the Asset Referenced Tokens issued by the issuer. In both exceptional cases, however, the issuer must nevertheless prepare a crypto whitepaper in accordance with MiCAR regulations and submit it to the competent authority in its home Member State.

                        Attorney Lutz Auffenberg, LL.M. (London)

                        I.  https://fin-law.de

                        E. info@fin-law.de

                        The competent lawyer for the application of a MiCAR license and advice on issuances of stable coins in our law firm is Attorney Lutz Auffenberg, LL.M. (London).

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