Introduction
Let’s start off by pointing out that the term Security Token Offering – STO is an umbrella term and attempting to decipher this term can at times be all-but impossible.
STOs give you ownership or part thereof of an asset or of a company. So, what is inherently different when it comes to STOs? The main difference is the underlying technology.
When thinking of an STO think of it as having the same characteristics as an Initial Public Offering but having the variations of MiFID instruments.
Malta enacted a new regulatory framework which is mainly comprised of three Acts: the Malta Digital Innovation Authority Act (the “MDIA” Act), the Innovative Technology Arrangement and Services Act (the “ITAS” Act), and the Virtual Financial Assets Act (the “VFA” Act). STOs fall under the Investment Services Act (Malta) and the technology therein fall under the Malta Digital Innovation Authority (MDIA) Act.O
Defining a Security Token Offering (STO)?
STOs are the ‘process of investing funds that represent the fractional ownership of real-world assets such as bonds, stocks, and real estate, amongst others, on the blockchain, and are powered by DLT technology’.
We cannot say that they are powered by Smart Contracts and here is the reason why. One can create a token on their own ecosystem which is not a smart contract and can still resemble an STO. This is like how traditional investments are carried out. If you replace the paper work with a new token, you do not necessarily need a smart contract.
Security tokens are on the blockchain and allow the owner to have monetary rights. Tokenisation provides ownership of an underlying asset and that is why it is not considered to be a utility token. Utility tokens can be differentiated from STOs insofar as their main use is for the exclusive purchase of goods or services on a platform/system.
Why Malta is STO friendly…
In the Malta Blockchain Summit of 2018, the Prime Minister of Malta Joseph Muscat described Malta as “the land of opportunity for Blockchain.” Malta has attempted to create a robust crypto-friendly framework to primarily guarantee legal certainty and investor protection. In this connection, Malta has introduced new methods of regulating Blockchain (DLT) Technology.
In fact, back in November 2018, the Maltese Parliament passed three very relevant bills into law and established the first regulatory framework in the world. It therefore comes as no surprise that given Malta’s foresight and initiative, the island-nation was aptly termed: ‘Blockchain Island’. Malta is having its own identity and focusing on 3 main principles being; market integrity, consumer protection and industry protection.
Therefore, it is safe to say that Malta has a business-friendly legislative framework covering the whole ‘umbrella’ term of Cryptocurrencies and the traditional ‘financial instruments’.
Within a European Jurisdiction, whereby the investors are the target of the Company issuing the token, the security token would generally qualify as a security if it can be traded without boundaries and it can thus fit for capital markets. In this regard, the EU Prospectus Directive (Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC) would be applicable.
The public offering of such tokens in Malta can happen if a securities prospectus is created and approved by the MFSA, which would need to be published prior to the offering.
The method of introduction of a security token offering in Malta entails the issuer to apply to the MFSA and prospective issuers are required to submit documentation to the competent authority for its approval.
STOs in light of the VFA Act
Malta’s aim is to act as a leader by being the first to attempt something on this scale and all other countries will follow.
The VFA Act is an innovative piece of legislation which regulates Initial Virtual Financial Assets Offerings and outlines their licensing requirements, entitled The Virtual Financial Assets Act, 2018. In the context of this Act, STOs are likely to constitute financial instruments if one must undertake the Financial Instrument test.
Thus, STOs would currently fall outside the scope of the above-mentioned Act and would thus (as previously hinted) be subject to the provisions of traditional regulation.
The meaning of a Virtual Financial Asset as per the regulatory framework of Malta, is computed in a ‘negative format’. Thus, a VFA is a form of digital recordation that is NOT electronic money, a financial instrument and neither a Virtual (Pure Utility) Token.
Securities Prospectus
The EU Prospectus Directive outlines the obligation to publish a securities prospectus upon offering the security token.
Such obligation applies when the offering is to the public. If it is offered to family and friends or to investors who already have an established relationship, then a prospectus would not be necessary.
As per the Companies Act (Chapter 386 of the laws of Malta): “To the public” does not include securities which are made only to qualified investors, an offer made available to less than 150 non-qualified investors within the EU and/or the EEA, where the minimum offer is at least €100,000 per offer, where the nominal value of each security is at least €100,000 or not exceeding such limit thereto within a 12 month period, where the offer of total securities within the EU and the EEA does not exceed €5,000,000 within a 12 month period or where an offer of non-equity securities by credit institution is less than €75,000,000 in the EU and the EEA over a 12 month period.
When asking for the admission to trade on a regulated market, one can be exempt from such imposed obligation and would thus benefit from the single passport.
The securities prospectus shall contain all information which enables the investors to be able to asses the assets and the liabilities thereof, the financial soundness, prospects of the issuer and rights attached thereto.
Conclusion
Essentially STOs are tokens on the blockchain that grant the owner of such STOs certain rights. This is thus essentially what differs STOs from Utility tokens. The EU Prospective Directive is applicable to those tokens and having a securities prospectus is seen as an obligation, saving some exceptions. From a Maltese Jurisdiction perspective, Malta has a business-friendly legislative framework and it is within a European Jurisdiction.
Within a such jurisdiction, whereby the investors are the target of the Company issuing the token, the security token would generally qualify as a security if it can be traded without boundaries and it can thus fit for capital markets.
Disclaimer*
The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet up with any of our representatives to seek further information, please contact us for an appointment.
