One of the important steps in issuing a security token is being aware of the rules and regulations that apply in each jurisdiction the issuance will take place.
Many factors go into choosing the jurisdiction including how the country handles compliance and regulations. Of course, you will want to use a jurisdiction with fair and not unduly burdensome regulations but also one that has very clear and well established laws. Having clear and well established laws can make it easier to find good legal counsel that can assist in your offering and can also offer more assurances for the potential investors.
Because security tokens are a regulated financial product, most countries will have established regulatory bodies and rules to govern the transactions. Some of the main countries in Europe that will be used for security token offerings and other important factors to consider are listed below.
Liechtenstein: The Financial Market Authority (MFA) is developing new laws in the hope of attracting more blockchain business to Liechtenstein. They are discussing exemptions for security token offerings that could be among the mostly friendly to issuers in the world.
Luxembourg: The Commission de Surveillance du Secteur Financier (CSSF) is the primary financial regulator body in Luxembourg and they provide fairly clear regulations that have attracted many hedge funds to the region. In terms of number of hedge funds accounted for, Luxembourg is second only to the USA.
Malta: The Malta Financial Services Authority (MFSA) has been proactive in trying to provide clear and less burdensome rules for token offerings. The MFSA is constructing new rules and exemptions to attract companies in the blockchain space and could provide an ideal jurisdiction for issuance, although at this time the new rules primarily involve utility token offerings.
Switzerland: The Swiss Financial Market Supervisory Authority (FINMA) has shown themselves and the region to be crypto-friendly. They have provided clear exemptions to standard security registration requirements including Qualified Investor exemptions and self-issuance exemptions.
The Prospectus Directive:
Having your Prospectus published and approved can give you access to the entire European market but it can be a timely and costly process.The most commonly relied on exemption for publishing your Prospectus in the EU is to make a private offering to Experienced Investors. The Experienced Investor is synonymous with the Accredited Investor in the United States and can include persons who work in the financial field and would have the proper knowledge to make sound investment decisions, corporations, trusts and persons with assets in excess of €1,000,000 not including their primary residence, among other less commonly used exemptions.
An Issuer may also sell their Security Token without publication if the minimum investment amount per investor is €100K. This can be attractive when targeting large institutional investors and individuals.
In June 2017 the EU published a “New Prospectus Regulation” which will provide additional exemptions from publishing your Prospectus as it is rolled out over a period of years. Some of these exemptions that may become useful to a Security Token offering include:
- Issuers with existing securities may issue a new Security Token without publication if the Token represents no more than 20% of their existing securities in a 12 month period.
- No prospectus publication will be required for offerings under €1,000,000 in a 12 month period, additionally individual Member States may increase the amount to €8,000,000.
Many European countries have Crowdfunding rules that work as an exemption to publishing a Prospectus. We are seeing an increase to the maximum cap that can be raised and the amount per investor that can be invested. Germany for example has moved to increase the 12 month investment cap from €2.5M to €8M. In the UK non-Experienced Investors can invest up to 10% of their net investable assets. The EU has recently moved to enact new rules that reconcile all of the different European countries Crowdfunding rules which should provide more clarity in working across Europe.