The “catch” is that newly issued security tokens need to fulfill the requirements of the Prospectus Directive. Issuers have to submit a prospectus to the financial regulator of the country where the STO happens.
This prospectus then needs to be approved. In some cases and in some countries, issuers are exempted from this requirement. In Luxemburg, for instance, no prospectus is needed if the total value of issued security tokens does not exceed the EUR 1.5 million mark. These conditions differ from one country to another.
A new law regarding prospectuses is expected later this year. It will apparently relax some of the existing rules, making STOs easier.
These laws are some of the strictest in the world, which is not necessarily a liability from the perspective of the investor.
Security tokens may be exempted from some of these laws in the future. If they are deemed crowd-funding vehicles, they will come under an exemption clause. More legal clarity is required in this regard, though.
Chinese authorities have been consistent regarding the legal status of STOs.
The head of the Beijing Financial Supervision Authority also called security tokens illegal. Fundraising activities can only be undertaken with the express approval of the government.
Australian law treats financial and non-financial tokenized securities differently.
If the security token is financial, it is governed by the Corporations Act and the ASIC Act of 2001. If it is non-financial, it falls under the Australian Consumer Law. In both cases, ASIC is responsible for enforcement.
– security tokens (which fall under existing laws governing securities)
– exchange tokens (actual “currencies” such as BTC, ETH, etc. which are outside the regulatory perimeter of the agency)
– utility tokens
Of these, only security tokens qualify as Specified Investments. Thus, they come under the Regulated Activities Order and are therefore within the regulatory perimeter of the FCA.
Security tokens are quite different beasts, however. They may yet earn the nod from Indian regulators.
French lawmakers have even raised the limit under which STOs are exempted from the requirements of the Prospectus Directive to EUR 8 million.
What this means is that STOs that offer security tokens the total value of which does not exceed EUR 8 million do not require direct approval from the AMF
(Autorite des Marches Financiers).
By and large, security tokens are governed by the same laws as traditional securities, such as stocks, bonds, etc.
In addition to that, they are also subject to KYC laws as well as to Swiss banking regulations.
Like the UK’s FCA, FINMA has defined three classes of digital tokens:
– payment tokens
– asset tokens
– utility tokens
The country serves as the home base of the first STO in Europe.
The law governing such crowd sales is the Securities and Exchange Act of the country.
Thus far, no one has attempted to register an STO with the CVM.
The country’s recently passed FinTech Act provides the basis of a legal framework for STOs. Further legal clarity is needed, however.
Entities looking to hold an STO also have to abide by the Securities and Exchange Act. Such activities require direct CNBV approval.
That said, research shows that local regulators already see security tokens in a much more favorable light.
In fact, use cases for tokenized securities are already being considered.
STOs may be the future of South Korea’s digital asset industry.
Such laws include prospectus requirements or exceptions, registration requirements or exceptions, as well as KYC requirements.
STO issuers have to submit a prospectus and they have to deliver regular reports to the ISA. They also have to observe regulations concerning insider trading and they have to register with an exchange.
There is some regulatory ambiguity about where utility tokens stand in this picture.
The classification of the token is of the essence. Decisions in this regard are made on a case-by-case basis.
Security token issuers need to draft a prospectus and to submit it to BaFIN for approval.
The laws that govern such tokenized securities are the German Securities Trading Act, the European Markets in Financial Instruments Regulation, and the European Market Abuse Regulation.
The overall economic/bureaucratic atmosphere is not favorable to such activities either.
There are three draft laws currently on the table, addressing the issue of STOs directly or indirectly. Lawmakers have not really shown much interest in moving any of them forward though.
The Thai National Legislative Assembly paved the way for this regulatory stage through a February 2019 decision.
The decision concerned the amending of the country’s Securities and Exchange Act to accommodate tokenized securities.
The regulatory approach of the government is bound to be a conservative/strict one. There is a lot of concern about financial crime.
The law governing STOs is the Securities and Futures Act.
The authority in charge of enforcing the law is the MAS (Monetary Authority of Singapore).
Security token issuers have to draft a prospectus and submit it for MAS approval unless granted an exemption. Token issuers with such exemptions cannot advertise their offer.