STO regulation and law in Switzerland

First of all, the Swiss Financial Market Supervisory Authority (FINMA) uses the term "asset token" and not "security token". Thus, one will often find the former term as far as Swiss law is concerned.

According to FINMA asset respectively security tokens represent assets such as debt or equity claims on the issuer. Asset tokens promise for example a share in future company earnings or future capital flows. In terms of their economic function, they are thus analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the blockchain also fall under this category.

Once a token qualifies as asset respectively security token, it is classified as security under Swiss financial market law by the FINMA.

Unlike the law of other jurisdictions such as the European Union, Swiss law does currently not provide for a public law prospectus duty supervised by the authorities (or by self-regulatory bodies to which such task is delegated). In particular, there is no requirement to have a prospectus approved by any authority. Exceptions concern namely the issuance of collective investment schemes and listings on Swiss stock exchanges.

Apart from these exceptions the prospectus duty is provided for in the Swiss Code of Obligations (CO). If such private law prospectus duty is not complied with and certain further preconditions are met, investors may raise prospectus liability claims in civil courts.

According to the CO, the prospectus duty is basically triggered in case of public offerings of shares or bonds. According to the legal definition, an offering is not to be considered public if it is only addressed to a limited number of persons. The term "limited number of persons" is, however, not further defined in the law and there are neither precedents which would detail such term (see for the consequences with respect to STOs below, question 3).

With the introduction of the future Swiss Financial Services Act (FinSA) the legal situation will considerably change. The FinSA will provide for a public law prospectus duty. According to such duty issuers of securities must, as a rule, publish a prospectus to be reviewed and approved by a reviewing body authorised by FINMA. This does not apply where the FinSA specifies an exception. The exceptions include (i) offerings to professional investors, (ii) offerings to less than 500 investors, (iii) offerings to investors that invest more than CHF 100,000, (iv) offerings of securities that have a minimal denomination of CHF 100,000 and (v) offerings which are limited to a total amount of CHF 8 Mio.

The date of commencement of the FinSA is expected for 1 January 2020. However, with respect to the prospectus duty there is a transition period of six months starting once the above mentioned reviewing body has been licensed which may take some time.

STOs trigger the prospectus duty according to the CO if shares or bonds are tokenized and the offering is public. STOs will be considered public if they are open to the general public, whereas private placements require a careful analysis whether this is the case or not. Furthermore, there may namely be a prospectus duty if the instruments issued by way of STOs qualify as shares in collective investment schemes.

Under the future FinSA STOs will basically entail a prospectus duty unless an exception applies.

As mentioned above, Swiss law does, as a rule, currently not require issuers to have a prospectus approved by any authority.

The future FinSA, on the other hand, contains such requirements. It basically provides for short periods within which a decision on the approval of a prospectus is to be rendered (20 days for first time issuers if no amendments to the submitted prospectus are required). However, it remains to be seen whether the reviewing body will always adhere to these periods. In case of STOs, it should be expected that the approval of a prospectus including the legal groundwork will take at least two months.

According to the FINMA issuers of asset respectively security tokens do generally not fall under the ambit of the Swiss AML regulation. However, this must be assessed on a case-by-case basis, inter alia since the tokens in question may also qualify as payment tokens with the consequence that the AML regulation would apply.

Under Swiss law rights can, first of all, be securitized by way of a deed (Wertpapiere). According to a report of the Swiss Federal Council (see below, question 8), it is, however, difficult to classify security tokens accordingly.

Yet, Swiss law also provides for uncertificated securities (Wertrechte). Uncertificated securities are created with an entry in a register of the issuer. Such register may be maintained electronically. According to the report of the Swiss Federal Council as well as FINMA security tokens will often qualify as uncertified securities.

The major problem with such qualification is that a transfer of uncertified securities basically requires a written declaration of assignment. Such written declaration will normally not be available if tokens are transferred. Scholars discuss concepts according to which the written form requirement may not have to be respected, in particular, regarding tokenized equity shares in Swiss stock corporations. It is, however, uncertain whether transfers of tokens according to such concepts would be considered valid.

Against that background, the Swiss Federal Council has proposed an amendment of the law to enable the legally secure transfer of uncertificated securities by way of an entry in decentralized registers, including blockchains. A respective draft law has been published recently (cf. below, question 8) and, provided that the draft does not face opposition during the legislation process, the amended law might enter into force already by the end of 2020.
In any case, the transfer of the tokens and the related risks are a topic which should be addressed in the documentation of an STO (such as the prospectus and/or the token purchase agreement).

STOs may not only trigger the application of the Swiss financial market laws as contemplated above. Rather, every STO must be analyzed also in view of further financial market law provisions. Such provisions include the banking legislation, the securities dealers' legislation as well as aspects beyond the prospectus duty of the collective investment schemes act and, in future, the FinSA. 

When it comes to the secondary market trading of security tokens, the financial market laws must obviously also be accounted for. In this respect, it is particularly noteworthy that as per the recent draft law, a new license category for cryptocurrency-exchanges shall be created. Exchanges which are licensed accordingly shall be entitled to offer services in the areas of trading, clearing, settlement and custody of crypto-based assets, including security tokens. 

Beyond, particularly contract, corporate, data protection and tax law issues arise in relation to STOs.

The FINMA and the tax authorities offer the possibility to obtain a ruling regarding the financial market respectively tax law treatment of STOs. Such rulings cater for legal certainty in the still new area of law and are, hence, usually recommendable.

The most important documents of the Swiss authorities are the following:

• Guidelines of the Swiss Financial Market Supervisory Authority (FINMA) for enquiries regarding the regulatory framework for initial coin offerings (ICOs) of 16 February 2018, available under www.finma.ch/en/news/2018/02/
• 20180216-mm-ico-wegleitung/. The Guidelines address the financial market law treatment of ICOs, incl. security token offerings.
• Report of the Swiss Federal Council on a legal basis for distributed ledger technology and blockchain in Switzerland of 14 December 2018, available under www.admin.ch/gov/en/start/documentation/media-releases.msg-id-73398.html. The report addresses the legal treatment of blockchain technologies, including ICOs respectively STOs under Swiss private, insolvency and financial market law.
• Documentation on the consultation on new laws improving the framework conditions for distributed ledger technology and blockchain of 22 March 2019, available under www.efd.admin.ch/efd/en/home/dokumentation/nsb-news_list.msg-id-74420.html. The documentation includes namely a press release (available in English) as well as the draft laws and an explanatory report (only available in German, French or Italian).