Fri. Nov 15th, 2019

Planet Compliance

Innovation & Regulation in Finance

ICO, STO, ITO – The Requirements If You Launch In Germany

6 min read

Finally, here it is: a comprehensive list of the requirements you need to keep in mind if you want to launch an ICO, STO or ITO in Germany – straight from the regulator.

Long considered an unregulated area, token offerings continue their way into mainstream. Along this rocky path, it has become apparent that the initial assumptions about the absence of a legal framework were more than mistaken – the questions is not the if but how the different shapes of token offerings should be treated regulatorily and what this would mean for issuers. The matter could not have been approached more differently by regulators around the world.

Some jurisdictions have outright banned token offerings, others have embraced innovation and tried to establish themselves as hubs for blockchain technology. The latter certainly cannot be said for Germany. Its regulatory history regarding blockchain and token offerings is dominated by a constant stop-and-go and seesaw changes: As early as 2014, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) published an assessment on Bitcoin and an overview of the risks to which users of this and other cybercurrencies may be exposed, which is relatively early compared to other jurisdictions. The result was that Bitcoin was classified with legally binding effect as financial instruments in accordance with the German Banking Act.

Despite the awareness of cryptocurrencies and their different use cases, the German regulator then has been rather hesitant to provide further guidance. BaFin has issued several warnings against ICOs and cryptocurrencies, for instance, in 2017 and 2019plus the occasional statement and circulars that provided little certainty. The confusion was further increased by the contribution of German lawmakers like in the case of a response to an inquiry from the parliament. Like a puzzle the pieces arduously had to be put together. In April 2019, things seemed to take another turn when an article in the monthly BaFIN Journal indicated a new direction for German Token Regulation.

Now BaFIN has published another important document to provide clarity for token issuers. An advisory letter (in German) regarding various obligations for the issuance of crypto tokens sets out the regulatory classification and provides a list of requirements issuers have to comply with.

The German watchdog had already published an advisory letter on the classification of tokens as financial instruments in 2018, but it is this second document that delivers concrete guidance how to maneuver the German rules. No matter whether you want to launch an „Initial Coin Offering“ (ICO), an „Initial Token Offering“ (ITO), or „Security Token Offering“ (STO) – the latest advisory letter handily summarizes all forms of token issuance as an ICO despite its different regulatory nature – the letter provides assistance for ICO issuers and their legal representatives with regard to what information and documents in preparation of an ICO need to be presented to establish the exact regulatory requirements, e.g. how the token can be classified, what permissions are required and whether prospectus obligations need to be complied with. BaFin has always made it clear that each token offering needs to be determined on a case-by-case basis as the legal nature can vary significantly and as such the framework it moves in.

 

A lot of paperwork

The letter summarizes the key information that is to be provided in the following list:
– All relevant documents and contractual documents relevant for legal and regulatory classification (White Paper / General Terms and Conditions / Agreements, etc.) need to be attached to the request in a binding form.
– The inquiries contain an assessment of how the token is to be issued and how the ICO should be legally classified. This “self-assessment” needs to be legally justified. The justification should be based on the information letter and the fact sheet of the BaFin and address all points mentioned there. The legal justification should refer to the relevant information in the attached documents and contract documents, citing the relevant reference.
– Changes to the submitted documents and contractual documents should be reported to BaFin immediately. BaFin understands that changes may be necessary, not least because this can be attributed to measures taken by BaFin itself. In any case, it is important to communicate the changes to BaFin in good time.
– The amended documents and contractual documents, together with an adapted self-assessment and legal justification, should be submitted to the BaFin immediately.
– Changes to the timetables and any changes to the offer periods for a public offer of the relevant tokens / coins should be reported to BaFin without delay.
– The applicant must ensure to be contactable. For this purpose, a current address, a working e-mail address and a functioning telephone connection or accessibility via a mobile phone should be ensured.

An Annex to the letter provides further details with regard to these guidelines and while BaFin aims to answer all requests as soon as possible, applicants should plan well ahead to make sure that the large amount of requests the regulator receives does not cause a delay.

In addition to the instructions for an initial request, the advisory letter comes with guidance in respect of the potentially applicable financial laws, i.e. whether the issuer needs to comply with and obtain authorization pursuant to the German Banking Act (Kreditwesengesetz – KWG), the Investment Code (Kapitalanlagegesetzbuch – KAGB), the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) or the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG). While expert legal advice will be necessary, it presents a starting point for any assessment of token issues.

 

 

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