STO regulation and law in Hungary

This depends on the specific right, which is securitized in the tokens.

Under the Hungarian Civil Code, the definition of securities is the following:

Securities are unilateral legal statements (i) issued in the form of paper-based documents or any other legal means (in practice: dematerialized securities); (ii) containing all mandatory material information listed in the Hungarian Capital Market Act; and (iii) the rights represented by the security can be exercised or disposed exclusively with the securities.

Based on this definition, security tokens may be classified as securities if:

(i) their form is either physical or dematerialized; and 
(ii) one may dispose of the right represented by them exclusively with the token.

Based on the legal definition above, STOs can be deemed as securities in Hungary. However, STOs are currently unregulated in Hungary and one shall decide on a case-by-case basis whether an STO-like scheme would fall under securities or investment regulations. Such regulations will entail customary reporting and other obligations (e.g. the preparation and the publication of a prospectus on the security issuance, reporting obligations to the Hungarian National Bank - “Magyar Nemzeti Bank”, or “MNB”).

Unless otherwise provided by law, in case of public trading of securities or their introduction to a regulated market, issuers must publish a prospectus and a notice on the planned security issuance. Issuers must prepare only a minimum notice and publish it on their webpage if the counter-value of the securities would be less than EUR 1 million within 12 months in EU level.

It is not necessary to publish a prospectus and a notice on the planned security issuance in case of the following types of issuance:

a) in connection with the offering of money market instruments with an original maturity of less than 12 months;

b) in connection with the offering of investment units of an open-ended investment fund;

c) in connection with the registration of the following types of securities in a multilateral trading facility:

• shares representing, over a period of 12 months, less than EUR 5 million, or its equivalent in another currency, in total issue value, or
• securities issued as part of a series already admitted to trading on a regulated market or on a stock exchange established in an OECD Member State;

d) in connection with the public offering of securities where:

• an issuer issues substitute shares of the same class and type as the shares it has issued previously, and these new substituted shares will not result, as a consequence, in the increase of the issued equity capital;
• securities are offered in payment for acquiring any participating interests in a limited company in connection with a takeover bid, and the requirements set out in the Hungarian Capital Market Act are satisfied as pertaining to the securities;
• securities are offered for payment underlying the merger or division of companies, and the requirements set out in the Hungarian Capital Market Act are satisfied as pertaining to the securities;
• dividends are paid out to existing shareholders in the form of shares of the same class as the shares in respect of which such dividends are paid;
• the issuer or its affiliated company sells or provides securities to their employees, executive officers, supervisory board members, or to their former employees, executive officers, or supervisory board members, provided that:
• the issuer has its registered office shown in its instrument of incorporation in the territory of the European Union, and information concerning the number and type of securities and the reasons and circumstances in which such securities have been sold or provided are available, or
• the third country issuer already has other securities admitted for trading on a regulated market, or on a market which the European Commission considers as equivalent, and information concerning the number and type of securities and the reasons and circumstances in which such securities have been sold or provided are available in at least a language customary in the sphere of international finance.

e) A prospectus is not required for the admission of securities for trading on a regulated market:

• where securities issued to substitute securities of the same class and type have already been admitted to trading in the same regulated market, and if these substituted securities will not result, as a consequence, in the increase of the issued equity capital;
• where securities are offered as payment for acquiring any participating interests in a limited company in connection with a takeover, and the requirements set out in the Hungarian Capital Market Act are satisfied as pertaining to the securities;
• where securities are offered as payment underlying the merger or division of companies, and the requirements set out in the Hungarian Capital Market Act are satisfied as pertaining to the securities;
• where shares are offered free of charge to existing shareholders, and dividends paid out in the form of shares of the same class as the shares in respect of which such dividends are paid, provided that these securities have already been admitted for trading in the same regulated market;
• where the issuer or its affiliated company sells or provides securities to the employees, executive officers, supervisory board members of the issuer or its affiliated company, or their former employees, executive officers, supervisory board members, provided that securities of the same class have already been admitted to trading in the same regulated market;
• relating to securities which have already been admitted to trading in another regulated market, provided:
  1. that these securities or securities of the same series have been admitted for trading in another regulated market at least eighteen months previously,
  2. that a prospectus has already been published in accordance with the laws of another EU Member State,
  3. that the requirements for keeping the securities in circulation are duly satisfied,
  4. that the person applying for admission to trading on a regulated market publishes an executive summary referred to in the Hungarian Capital Market Act in Hungarian, by way of the means specified in the Hungarian Capital Market Act. The executive summary shall contain an indication of the venue where the last issue prospectus and the most recent financial information published under the obligation of regular disclosure is made available to the investors for review.

If it is not necessary to issue a prospectus, the issuer shall inform the MNB concerning the placement of securities within 15 days following the conclusion of the procedure. The MNB shall have the power to check the procedure to determine as to whether it was conducted in compliance with the aforementioned provisions.

Yes. To the extent the security token is qualified as a security, prospectus requirements apply. However, prospectus rules were tailored to traditional securities and neither the Hungarian legislator nor the MNB has published any official guidance on how the current prospectus rules could be adapted to STOs and security tokens. Every planned scheme must be inspected on a case-by-case basis.

According to the Hungarian Capital Market Act, the MNB decides on the approval of the prospectus within 20 working days in case of first trade of securities and within 10 working days in any other cases. In our experience the whole approval procedure together with the legal groundwork takes approximately 2 to 3 months.

Generally, KYC/AML rules apply depending on what type of entity the issuer of the security tokens belongs to. The Hungarian AML Act covers the following types of entities:

a) credit institutions;

b) financial services institutions;

c) institutions for occupational retirement provision;

d) voluntary mutual insurance funds;

e) operators accepting and delivering international postal money orders;

f) providers of real estate agency or brokering and any related services;

g) providers of auditing services;

h) providers of accountancy (bookkeeping), tax expert, certified tax expert services, tax advisory activities under agency or service contract;

i) operators of casinos, card rooms, or providers of gambling services - other than distance gambling -, distance gambling services, online casino games;

j) traders in precious metals or articles made of precious metals;

k) traders in goods, involving a cash payment in the amount of two million five hundred thousand forints or more;

l) attorneys, law firms, European Community jurists, law firms of European Community jurists, bar association legal counsels, notaries public; and

m) fiduciary managers.

If the issuer of the security token does not fall under these categories of organizations, the Hungarian AML Act and AML rules shall not apply. 
KYC/AML rules also apply to clients as well as their representatives and persons entitled to decide on their behalf.

Under Hungarian law, rights can be securitized in a unilateral legal declaration. Any disposition of the declaration is, at the same time, a disposition of the right represented by the declaration. It is not possible to separate the right from the declaration. Therefore, tokens may qualify as unilateral legal declarations in Hungary. However, there is no official guidance or market practice on this. In order to minimize the underlying risks, one potential solution is to include safeguards in the token purchase agreement which forbid that the token holder sells the token without selling the (tokenized) right, and vice versa.

Since the tokens are often sold via internet, the issuer must comply with e-commerce regulations. Compliance with tax laws is also a must. Once the tokens are traded, regulatory restrictions may apply to the trading platforms, depending on the circumstances of trading and the ways of reaching investors (e.g. a businesslike lending activity may be subject to the license of the MNB). If tokens are classified as securities and are traded on a regulated market the issuer must observe market follow-up obligations, for example according to the Market Abuse Regulation (Regulation EU No. 596/2014). Corporate law restrictions may also apply. For example, in Hungary, a limited liability partnership (in Hungarian: ‘korlátolt felelősségű társaság’), limited partnership (in Hungarian: 'betéti társaság’) or private limited company (in Hungarian: ‘zártkörűen működő részvénytársaság’) may not recruit investors publicly, therefore such entities may not launch STO under Hungarian corporate rules.

MNB has issued several statements and warnings so far, highlighting that ICOs and similar types of offerings are currently regarded as an unregulated form of source collection and do not provide sufficient protection for investors due to the lack of overseeing by financial authorities and to the vast number of frauds and malicious schemes. The MNB further warned that cryptocurrencies are risky investment tools due to the fact that their exchange rate is extremely volatile, the responsibility rules concerning such investments are unclear and there is no authority overseeing the trading (which is a key feature of cryptocurrencies in practice).

For more information on MNB’s concerns, please find more information especially on the following links: 

• https://www.mnb.hu/sajtoszoba/sajtokozlemenyek/2017-evi-sajtokozlemenyek/rendkivuli-kockazatot-hordoznak-az-ico-befektetesek;
• https://www.mnb.hu/archivum/Felugyelet/root/fooldal/topmenu/sajto/sajtokozlemenyek/bitcoin_kozl.

Besides the above, the Hungarian legislator or authorities (including the MNB, as well as the Hungarian tax authority) have not published specific statement or guidance concerning STOs.