02 Jan STO Checklist: What You Need To Know About STO Regulations in Europe (Malta, Swiss, Estonia & more)
Security token offering gaining adoption in Europe
Initial coin offerings (ICOs) have experienced a torrid 2018 following increase in criticism due to the unregulated nature of the market. This led to the creation of security token offerings (STO), and they have gained popularity in Europe.
A generalized regulation for securities in Europe
Regulation surrounding security offerings in Europe is a unique one as the rules apply to virtually all countries in the EU. When a company is issuing a token, they will need to register a prospectus which abides by the EU Prospectus Directive. The Prospectus Directive is a framework that was initiated under the Financial Services Action Plan. The directive covers a single regime throughout the continent which governs token offering and its content, format, approval and their publication. The prospectus assembles all the requirements for security token offering to the public.
The prospectus is designed to ensure that investors are protected anytime a security token is issued. It demands the provision of clear and comprehensive information in addition to making it easier for companies to raise funds throughout the continent once they receive approval from a single competent authority.
The general prospectus is a good thing since STOs carried out in one jurisdiction can easily expanded or transferred to other countries in Europe. The prospectus has to be translated to the official language of each country as the security token offering regulation also covers private offerings. However, each member state is allowed to have slightly different financial exclusions.
There are some cases when the prospectus will not be required, and they include:
- When a security token is addressed to only qualified investors or when it targets less than 150 people per members state.
- When the securities are designed for investors, who purchase them for a total of 100,000 euros or more per investor.
- Securities with a total of fewer than 2,500,000 euros per all the Contracting States in total calculated within a year of offering the security.
In a scenario when none of the above-listed conditions exists, then the security offering will be regarded as a public offer, and the prospectus for the offering will have to be prepared and registered with the local financial agency.
Once the prospectus registration application has been submitted, the local financial regulatory agency will set a timeline to review the application and give its verdict. The bank accounts for the prospectus doesn’t have to be located in the country it is being registered though it will need to be within Europe. Also, excluding investors from the host nation wouldn’t change the rules so long as the securities are sold to people in other EU states.
Malta Digital Innovation Authority Act (MDIA) tasked with looking into STOs in Malta
Even though Malta like the rest of Europe has yet to put together a comprehensive regulation covering the STO market, they have assembled a body that has been tasked with providing legal, technical, and tokenomic definitions to STO and other crypto-related platforms in the country.
The lawmakers in the region passed the Virtual Financial Asset Act (VFA Act) which has guidelines directing ICOs and STOs in Malta to deliver their white paper to the MFSA. The VFA Act also requires STO issuers to appoint an MFSA-approved VFA agent who will monitor and make reports on the token offering.
Malta differs from other EU countries because they have set up agencies to look at the technology behind security token offerings to ensure that they are viable not only short-term but also long-term.
Security Token Regulation in Switzerland
In Switzerland, security tokens are gaining traction. Under the FINMA guidelines, security tokens are regarded as asset token. The securities regulation in this country is aimed at ensuring that investors can make informed decisions on the equities or bonds they are investing in.
The regulation also points out that trading should be fair, reliable, and offer efficient price information to investors. FINMA categorizes securities as standardised certificated or uncertificated securities, derivatives and intermediated securities.
Tokens that qualify as securities will be suitable for mass standardised trading and can be made public as long as they are not designed solely for a select group of investors. The uncertified securities are regarded as rights that are issued or established in large numbers.
The Code of Obligation requires token issuers to keep a book that will contain the details of the number and denomination of the uncertificated securities issued, with the creditors to be recorded also.
No simplified approach for security token offering by other EU member states
Despite the increase in adoption of security token offerings in Europe, the member states are yet to put together individual regulatory frameworks to cover the emerging fund-raising market. In crypto-friendly EU countries such as Estonia, Switzerland, Germany, Luxembourg, France, Portugal, and others, security tokens are regarded as equity or capital debt of the issuing company.
It remains to be seen which EU country will simplify STO regulations in such a way that it becomes easier for crypto companies to regard them as the primary destination for carrying out security token offerings. At the moment, it is not a question of which countries are willing to do it but rather which countries can do it. It should be noted that EU has strict regulations regarding issuing securities and it would be hard for member states to roll out individual regulations while ignoring the general EU rules.
Security token platforms rising in Europe
The generalized rule present in Europe has made the continent a very attractive region for security token offerings. Cryptocurrency companies are entering markets such as Malta, Estonia, and Switzerland to issue and hold their security token offering. This has played a role in the creation of numerous security token platforms on the continent.
In Estonia, Comistar Estonia established its security token offering platform which has attracted STOs to the country. The state of Estonia also granted full regulatory approval to another STO platform B2BX, and this move was considered to be a very positive one for the development of tokenized securities in the region.
Security token offering regulation in Europe is still in its early days, and the general regulation surrounding securities have made it easier for crypto companies to security tokens. To ensure that everything goes smoothly, token issuers will have to follow the EU Prospectus Directive.
There are some who still call for proper regulation for the new fundraising model as a regulated market will help remove the bad eggs and make it more attractive to investors. The regulations to be put in place are expected to protect investors from scams without affecting the growth of the sector.