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Insights on the Euro­pean legal frame­work for Secu­ri­ty Token Offerings

Are Secu­ri­ty Token Offer­ings reg­u­lat­ed in the Euro­pean Union?


Yes they are! - Secu­ri­ty Token Offer­ings (“STOs”) are sub­ject to the same reg­u­la­tions and laws as any paper based secu­ri­ty or dig­i­tized stock you can trade in your bank­ing app. 


Five years after our team at Black Man­ta Cap­i­tal Part­ners facil­i­tat­ed the first reg­u­lat­ed cross-bor­der issuance of real estate backed Secu­ri­ty Token for retail investors in Ger­many we still get asked the same ques­tions — “Are there any laws for STOs?”, “Can I secure­ly invest into Secu­ri­ty Token?” — That’s why we thought we should take a look at the basics of STOs again.


STOs inte­grate blockchain tech­nol­o­gy with the reg­u­la­to­ry require­ments of secu­ri­ties mar­kets, facil­i­tat­ing the liq­uid­i­ty of assets and broad­en­ing access to finan­cial oppor­tu­ni­ties. In this arti­cle, we delve into the dynam­ics of STOs, explor­ing their struc­ture, reg­u­la­to­ry impli­ca­tions, and the evolv­ing reg­u­la­to­ry land­scape of Tok­eniza­tion. It also con­sid­ers these aspects with­in the frame­work of the Mar­kets in Cryp­to-Assets Reg­u­la­tion (“MiCAR”).


STOs involve the issuance of dig­i­tal token on  a blockchain, trans­form­ing assets like gold, receiv­ables or real estate into trans­fer­able secu­ri­ties. Tok­eniza­tion ampli­fies the reg­u­la­to­ry objec­tives of secu­ri­ties mar­kets, pri­or­i­tiz­ing dis­clo­sure, fair­ness, and mar­ket integri­ty. Simul­ta­ne­ous­ly, it fuels inno­va­tion and effi­cien­cy through the imple­men­ta­tion of smart contracts.


From a token per­spec­tive, a STO sig­ni­fies the dig­i­tal rep­re­sen­ta­tion of own­er­ship in assets or eco­nom­ic enti­tle­ments. Whether it’s a share of prof­its, rev­enue, or own­er­ship in tan­gi­ble assets, STOs pro­vide a dig­i­tized and reg­u­lat­ed gate­way to tra­di­tion­al­ly illiq­uid mar­kets and a more effi­cient access to liq­uid markets.


Nav­i­gat­ing Reg­u­la­to­ry Waters


1. MiFID II:

Mar­kets in Finan­cial Instru­ments Direc­tive (“MiFID II”), which has been applic­a­ble since Jan­u­ary 3, 2018, forms the legal frame­work for require­ments for invest­ment firms, reg­u­lat­ed mar­kets, data report­ing ser­vices and third-coun­try firms that pro­vide invest­ment ser­vices or per­form invest­ment activ­i­ties in the Euro­pean Union. 


With­in Europe, Secu­ri­ty Tokens fall into the cat­e­go­ry of trans­fer­able secu­ri­ties rather than being con­sid­ered a new cat­e­go­ry of secu­ri­ty. There­fore, Secu­ri­ty Tokens are sub­ject to the exist­ing reg­u­la­tions, includ­ing MiFID II and the EU Prospec­tus Reg­u­la­tion 2017/1129 (“Prospec­tus Reg­u­la­tion”). The clas­si­fi­ca­tion as a “finan­cial instru­ment” is pre­cise­ly defined in Arti­cle 4(1) No. 15 of the MiFID II Direc­tive. Addi­tion­al­ly, cer­tain juris­dic­tions have imple­ment­ed spe­cif­ic laws con­cern­ing the use of Dis­trib­uted Ledger Tech­nol­o­gy (“DLT”), poten­tial­ly impact­ing STOs, as illus­trat­ed by Ger­many’s eWpG (Dig­i­tal Secu­ri­ties Act).


Before ini­ti­at­ing the sale, the issuer must assess the investors they aim to tar­get with the Secu­ri­ty Token Offer­ing in order to under­stand the nec­es­sary reg­u­la­to­ry doc­u­men­ta­tion. MiFID II cat­e­go­rizes investors into the fol­low­ing three groups: pri­vate clients, pro­fes­sion­al clients (Source), or eli­gi­ble coun­ter­par­ties. The pri­ma­ry goal of this clas­si­fi­ca­tion is to ensure that each client receives an appro­pri­ate lev­el of pro­tec­tion. Pri­vate clients enjoy the high­est lev­el of investor pro­tec­tion. Pro­fes­sion­al clients have the option to clas­si­fy them­self as a pri­vate clients, there­by gain­ing access to ele­vat­ed lev­el of investor pro­tec­tion afford­ed to pri­vate clients. Eli­gi­ble coun­ter­par­ties are clients pos­sess­ing suf­fi­cient expe­ri­ence and knowl­edge to make their invest­ment deci­sions con­sid­er­ing asso­ci­at­ed risks (Source).


The Prospec­tus Reg­u­la­tion out­lines the require­ments for prepar­ing, approv­ing and dis­trib­ut­ing a prospec­tus when offer­ing the secu­ri­ties to the pub­lic. Notwith­stand­ing this gen­er­al oblig­a­tion, exemp­tions exist based on the nature of the offer, as spec­i­fied in Arti­cle 1(4)(a) to (d) of Prospec­tus Reg­u­la­tion (Source). These exemp­tions come into play when the offer is exclu­sive­ly direct­ed at pro­fes­sion­al investors, when the offer tar­gets few­er than 150 non-qual­i­fied investors per mem­ber state, when secu­ri­ties can be acquired with a min­i­mum amount of EUR 100,000 per offer and investor, or when they have a min­i­mum denom­i­na­tion per unit of EUR 100,000 (Source).


2. MiCAR and its Scope:

MiCAR stands apart, tar­get­ing cryp­to-assets not cov­ered by pre-exist­ing Euro­pean reg­u­la­tions. Its pri­ma­ry objec­tives include stan­dard­iz­ing the reg­u­la­to­ry frame­work for cryp­to-assets, specif­i­cal­ly address­ing the issuance and trad­ing of var­i­ous tokens, licens­ing and super­vi­sion of Cryp­to-Asset Ser­vice Providers (“CASPs”), and pre­vent­ing mar­ket abuse. Secu­ri­ty Token, being clas­si­fied as finan­cial instru­ments, fall under the purview of exist­ing leg­is­la­tion, and are there­fore exempt­ed from MiCAR (Source). 


Insti­tu­tions hold­ing a MiFID II license can con­tin­ue to oper­ate under MiCAR with­out hav­ing to obtain an addi­tion­al license under MiCAR, as long as they exclu­sive­ly offer one or more cryp­tocur­ren­cy ser­vices equiv­a­lent to the invest­ment ser­vices and ancil­lary activ­i­ties for which they are autho­rized under MiFID II. 


MiCAR spec­i­fies that autho­rized MiFID II insti­tu­tions are only required to noti­fy their nation­al author­i­ty (i.e. in Ger­many the BaFin) at least 40 days pri­or to com­menc­ing busi­ness, indi­cat­ing their inten­tion to offer cryp­to asset ser­vices in accor­dance with MiCAR (Source).


Accord­ing to Arti­cle 65, MiCAR oper­ates under the prin­ci­ple that allows the pro­vi­sion of per­mit­ted activ­i­ties across all EU mem­ber states with a sin­gle license. Hold­ing a per­mit is all that’s required to con­duct activ­i­ties through­out the EU, remov­ing the neces­si­ty for a phys­i­cal pres­ence or addi­tion­al licens­ing pro­ce­dures in oth­er mem­ber states. This not only opens up sig­nif­i­cant mar­ket oppor­tu­ni­ties but also inten­si­fies com­pe­ti­tion simultaneously.


The imple­men­ta­tion of a reli­able rule­book under MiCAR pro­vides EU author­i­ties with a clear frame­work to oper­ate with­in, enhanc­ing sta­bil­i­ty and allow­ing for more con­sis­ten­cy in admin­is­tra­tive prac­tices and decision-making.


3. Tok­enized Crowdfunding:

Crowd­fund­ing serves as a unique chan­nel for small com­pa­nies to obtain growth cap­i­tal. Crowd­fund­ing focus­es on tap­ping into the finan­cial sup­port of indi­vid­ual investors inter­est­ed in com­pa­nies with high-return poten­tial. Tok­enized Crowd­fund­ing lever­ages the ben­e­fits of tok­eniza­tion such as trad­abil­i­ty, enhanced secu­ri­ty and effi­cien­cy. Tok­eniza­tion  pro­vides a more reg­u­lat­ed and com­ple­men­tary approach to crowd­fund­ing. There­fore, the use of DLT makes the fundrais­ing process even more effi­cient, and dis­tin­guish­es it from tra­di­tion­al crowd­fund­ing methods.


Up until now (tokenized-)Crowdfunding has been a dif­fi­cult source of fund­ing for issuers, since the reg­u­la­to­ry land­scape has been high­ly frag­ment­ed in the Euro­pean Union. Reg­u­la­tion on Euro­pean Crowd­fund­ing Ser­vice Providers (“ECSP”) estab­lish­es a har­mo­nized Euro­pean frame­work for crowd­fund­ing. This reg­u­la­tion has been effec­tive since Novem­ber 10, 2021, mark­ing the first instance of a uni­fied reg­u­la­to­ry frame­work for the entire EU. Approval in accor­dance with the ECSP Reg­u­la­tion grants per­mis­sion for project spon­sors to access a max­i­mum financ­ing vol­ume of EUR 5.000.000,- per year. Beyond this thresh­old, autho­riza­tion under the ECSP Reg­u­la­tion does not apply (Source).




As the land­scape of STOs con­tin­ues to evolve, under­stand­ing the inter­play between blockchain inno­va­tion and reg­u­la­to­ry frame­works becomes para­mount. Nav­i­gat­ing the reg­u­la­to­ry waters ensures the legit­i­ma­cy of STOs, fos­ter­ing investor con­fi­dence and paving the way for the broad­er inte­gra­tion of blockchain tech­nol­o­gy in the finan­cial landscape.


Should you be inter­est­ed in learn­ing more about reg­u­la­to­ry frame­works and our STO ser­vices, please con­tact us here