STOs combine the trust that comes with regulation and the use of Blockchain technology, developing alongside the emerging cryptocurrency rules and regulations.
The Advent of STO: Security Token Offering
STOs have appeared as an answer to some, if not all, the fears and inhibitions related to ICOs. The primary differentiating factor for the STOs is that they fall within the regulatory framework of securities and they are overseen from point a to z by the authorities. This increases their transparency and is a major step towards investor protection, raising the trust in the company’s intentions and its ability to meet obligations. Due to the compliance process STOs go through, the government agencies and watchdogs often have a more favourable view of them.
The gain in safety against scams is balanced by the reduction in the speed of trading and liquidity when compared to ICOs. The processes of verification like the KYCs are much more formal in nature and thus the speed of trading takes a severe beating. This is also applicable when costs are considered. In ICOs as there are no intermediaries, all value is shared between the company and the investor. However, in STOs since the trade takes places on intermediary platforms, they take a chunk of the value too.
STO in Cyprus
STOs in Cyprus are governed under already existing securities laws and regulations. The most popular two ways to launch an STO in Cyprus is to either incorporate a company or establish a Cyprus investment fund (UCITS) & Alternative Investment Funds (AIF).
Currently, with the new Law, there is an exemption of Prospectus Approval for funds raised up to 5 million EURO with Cyprus Companies.
The Cyprus Securities and Exchange Commission follows the guidance of the European Securities and Markets Authority. The ESMA released an advisory statement in early 2019 stressing the importance of ICOs to adhere to the full package of regulations especially when their tokens or coins offered qualified under the definition of financial instruments. The specific regulations mentioned in the statement applying to financial instruments are the following –
- The Prospectus Regulation
- The Transparency Directive
- MiFID II
- The Market Abuse Directive
- The Short Selling Regulation,
- The Central Securities Depositories Regulation
- The Settlement Finality Directive
Thus, it becomes crucial to employ the services of a knowledgeable legal representative in order to advise you on the most suitable license e.g. in the case there is a fund structure involved, or the legal requirements provided by Cyprus law whereas debt instruments or shares are offered. Also, it is essential to establish the Know-Your-Client/ Anti-Money Laundering (“KYC/AML”) compliance requirements that must be met according to the complexity of securities offered and the jurisdictions you’re advertising to.
The Prospectus Regulation
In the European Union, the legal framework surrounding the offering of securities to the public and the admission of securities to trading on a regulated market are set by the Prospectus Regulation which came into force since 20/07/2017 and repeals and replaces the Prospectus Directive. Its provisions will come into full effect on 21/07/2019. The Regulation’s provisions are directly applicable in Member States.
Financial Instruments and Security Tokens
The Prospectus Regulation sets the definition of ‘securities’ as the transferable securities set by MiFID II excluding money market instruments having maturity of less than 12 months. Therefore, in the European Union to determine whether STOs fall within the security definition of the Prospectus Regulation one must apply the definition included in MiFID II.
‘Transferable securities’ are defined as those classes of securities which are negotiable on the capital market, excluding instruments of payment, such as:
(a) Shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;
(b) Bonds or other forms of securitized debt, including depositary receipts in respect of such securities;
(c) any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.
Exceptions to the Prospectus Obligation
The Regulation does not apply to offers of securities to the public with a total consideration in the European Union of less than EUR 1.000.000, which shall be calculated over a period of 12 months. This means that the obligation to publish a prospectus does not apply to STOs below this threshold.
Furthermore, the Regulation provides to Member States the option to exempt offers of securities to the public where the total consideration of each offer in the European Union is less than EUR 8.000.000 calculated over a period of 12 months and provided that such offers are not subject to a passporting notification. Passporting refers to the harmonized disclosure regime established by Article 24 of the Regulation, enabling the admission in other Member States of cross-border offers of securities or admissions to trading on a regulated market where a prospectus has gained the prior approval of the home Member State. Some issuers falling below this threshold issue a prospectus voluntarily to gain the “passport” for all European countries.
Member States must notify the Commission and ESMA whether and how they decide to apply the above-mentioned exemption, including the monetary amount below which offers of securities are exempted in the Member State and for any subsequent changes to that monetary amount. It is also noted that while Member States are expressly prohibited by the Regulation to impose prospectus requirements for offers less than EUR 1.000.000, they may introduce other disclosure requirements given that they are not disproportionate. In practice, STOs falling below the threshold set by their home Member State or the Regulation may still need to comply with disclosure requirements set by other Member States.
In Cyprus, the Prospectus Law prohibits the making of a public offer of securities in the Republic without prior publication of a prospectus which has been approved by the Cyprus Securities and Exchange Commission (“CySec”). CySec shall approve the prospectus if its content complies with the provisions of the Prospectus Law and the regulatory acts issued pursuant to it. On 19/04/2019 Cyprus amended the law to raise the threshold below which a prospectus is not required to EUR 5.000.000 in accordance with the option provided by the Prospectus Regulation, before that date the threshold was EUR 1.000.000 stemming from Article 1(3) of the Prospectus Regulation.
Therefore, Article 4(3) of the Prospectus Law was amended as follows:
“The obligation to publish a prospectus shall not apply to the following types of offer:
(a) an offer of securities addressed solely to qualified investors
(b) an offer of securities addressed to fewer than 150 natural or legal people per member state, which are not qualified investors
(c) an offer of securities for the acquisition of a deposit of a total consideration of €100.000 per investor is required, for each separate offer
(d) an offer of securities whose denomination per unit amounts to at least €100.000
(e) an offer of securities to the public with a total consideration in the Union of less than €5.000.000, which shall be calculated over a period of 12 months, whereas it is not subject to the notification procedure pursuant to Article 25 of the Regulation (EU) 2017/1129 of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated marker, and repealing Directive 2003/71/EC.”
The rest types of offer which are exempted are deriving from Article 1(4) of the Prospectus Regulation and the provisions in its predecessor, the Prospectus Directive. It is stated in the preamble of the Regulation that the exemptions to the obligation to publish a prospectus can be combined for an offer of securities to the public and/or admission to trading on a regulated market, where those exemptions are fulfilled at the same time.
Prospectus Fees and Timeframe
Simon Zenios & Co LLC – The Go-To Experts on STO
There have been many arguments made that STO is the ICO 2.0 – an evolved form of the Initial Coin Offering. As the governments all over the world raise their heads and take notice of the perils of ICOs the road ahead is bound to get bumpy. Whereas STO is seeing its dawn in 2018. STOs have already been offered through versatile structures exclusively to accredited investors and in other cases to common public too. This is only a matter of which legal definition does one decide to put their STO under and how good the company’s legal representation is to justify it; as there is no set legislation on this almost anywhere in the world.
The success of STO in no way means the death of ICO which is still going strong in 2018. The most foreseeable outcome seems to be of a coexistence of the two by being used for the specific distinct advantages they offer over each other. The trends in the market show enough demand for immense growth in both ICOs and STOs. The users will be able to choose in the future among the two or maybe more options depending on their use case.
Simon Zenios & Co – The Go-To Experts on STO & ICO
One of the most important things when planning an STO is to work on getting a reliable intermediary. We would help you in getting the best brokering services or Alternate Trading platforms to play the intermediary and ensure safety for the investors.
The quick-changing terrain of the crypto markets and technologies require even the experts to constantly be on their toes. Our team of highly experienced personnel has stayed on top of all the changes and is the leader when it comes to expertise STOs in Cyprus. We are one of the first firms to acknowledge this new development and invest our resources to make sure our present and future clients are secure.
The process of running an STO also presents legal implications in regard to token design which cannot be overlooked. Depending on the size of your project or the number and classification of investors it is directed to, your STO’s token may be exempted from licensing and thus avoid further costs. Therefore, it is vitally important to have legal advice and support throughout the process.
- Legal Report about the Token and the requirement to issue a prospectus after the Reviewal of the Whitepaper (Opinion Letter from our Law Firm – Requirement for the Bank & the Exchanges).
- Guidance on prospectus content requirements and application to CySEC (when applicable) and other jurisdictions for passporting.
- Selection, Negotiation, Appointment of Intermediary for STO
- Assessment of Anti-money Laundering regulations being met.
- Assessment of Transparency regulations being met.
- Legal Support during the Whitelist Period, Pre-STO & STO period.
- SAFT Agreement. (SAFT & Pre-STO Agreement)
- Token Purchase Agreement (STO Agreement).
- Legal Disclaimer for the Whitepaper.
- Security Policy.
- GDPR compliance.
- Legal Review of the Whitepaper or Prospectus.
- Legal Review of the Website.
- Legal Review of all Social Media Platforms.
- Legal assessment for the STO’s compliance with the current regulatory framework.
- Legal assessment of the application of the Token and STO within the current regulatory framework for investment services.
- Extensive legal review of the Token and STO’s compliance with other applicable legislation (Data Protection Regulations, Consumer Protection Regulations etc.).
- KYC Legal Advice and solutions for your STO.
- Token Company Incorporation and Administration.
- Tax Services.
- Corporate Legal Services.
- Administrative and Fiduciary Services.
- Accounting Services.
Other Non-Legal STO Services (Part C)
- Smart contract preparation and drafting.
- Creation of multi-signature wallet.
- Issuing of Tokens (ERC20 compatible).
- Listing on the Exchanges.
For any queries regarding any aspect of STOs or blockchain companies in general, or any other legal matter under the sun, we are always available.