Security Token Offering (STO) and Token Sale

A security token offering is given where financial instruments are offered publicly to investors that are linked to a token in such a way that they qualify as securities within the meaning of securities regulation. According to the administrative practice of BaFin, the representation of financial instruments not actually to be classified as securities via tokens can even lead to the tokens being classified as so-called securities sui generis in individual cases. Such products are subject to securities regulation. For the tokenization of a financial product to lead to its classification as a security sui generis, the tokens must be transferable, tradable on the financial market and equipped with rights similar to securities. A token is tradable if it can be transferred to other users. In the opinion of BaFin, tradability on the financial markets requires in particular that the tokens of an issue have the same structure among themselves. According to BaFin’s administrative practice, the term financial markets refers not only to regulated exchanges, but also to all kinds of  crypto trading platforms. If the financial instrument associated with the token conveys an equity interest similar to that of a shareholder or a debt interest comparable to that of a debt creditor, BaFin also considers the characteristic of rights similar to securities to be fulfilled. If the aforementioned criteria are met, non-fungible assets can also be classified as securities sui generis through tokenization.

The Documentary Requirements for an STO

If a financial instrument meets the requirements for a security sui generis through tokenization, documentary requirements must be observed in an STO. In the case of a public offering of securities sui generis, a prospectus must be prepared and published in accordance with Regulation (EU) 2017/1129 (Prospectus Regulation). In the case of a public offering in Germany that is between EUR 100,000 and EUR 8,000,000, the issuer may prepare a four-page securities information sheet in accordance with the German Securities Prospectus Act (Wertpapierprospektgesetz, WpPG) instead of a prospectus. Both the securities prospectus and the securities information sheet must be approved by BaFin. If the security sui generis created by tokenization is a so-called packaged investment product and the issue volume is also between EUR 100,000 and EUR 8,000,000, a basic information sheet in accordance with Regulation (EU) No. 1286/2014 (PRIIP Regulation) may be prepared instead of a securities information sheet. Packaged investment products include, in particular, structured financial products whose value or payouts are derived from external underlying assets.

Requirements for the Distribution in case of a Security Token Offering

Should in a security token offering a securities prospectus be used, the issuer may also sell the security sui generis created by tokenization independently by way of self-distribution. The situation is different if the issuer has prepared a securities information sheet in accordance with the WpPG or a key information document pursuant to the PRIIP Regulation. In case of such token sale, the law provides that the securities offered may only be distributed by way of investment advice or investment brokerage via a regulated investment firm. The latter must ensure that the maximum investment limits provided for in the WpPG are complied with. Regardless of whether it is a securities prospectus, securities information sheet or key information document, the advertisement for the security token offering must be consistent with the information in the respective document. Any advertisement must state that a corresponding information document has been published or is pending publication. Advertising for a security token offering must be clearly recognizable as such.

The competent lawyer for questions concerning Security Token Offering and Token Sale in our law firm is Attorney Dr. Konrad Uhink.