STO regulation and law in Austria

Whether a token is a security essentially depends on the particular rights securitized in such token and can only be determined on a case-by-case basis. The definition of a security in the Austrian Capital Market Act (KMG; Kapitalmarktgesetz) or the Austrian Securities Supervision Act 2018 (WAG 2018; Wertpapieraufsichtsgesetz 2018) is based on the term ‘transferable security’ as defined in the Directive on Markets in Financial Instruments (MiFID II, Directive 2014/65/EU). In order to determine whether a token is a security as defined in the Austrian Capital Market Act, the following criteria must be met:

• Materialisation or embodiment of a “right” in a security: The right must be dependent on the possession of the transferable security. A classical securitisation in the form of a (global) certificate is not necessary according to the prevailing opinion for the definition of a transferable security.
• Tradability on the capital market: Transferable securities are designed identically in large quantities and are substitutable between one another (standardization). Transferable securities may be transferred and traded without any restriction (negotiability). A specific listing or specific inclusion in trading is not necessary.
• Comparability with shares, bonds or similar transferable securities: Typical characteristics include the participation in profits, voting rights, negotiability, interest payments or the redemption of contributions after a certain period, as defined in MiFID II.
• Not subject to exceptions: Certain specific instruments are not covered by the definition of ‘transferable security’, such as e.g. certain payment instruments, bills of exchange, savings account books or money-market instruments.

If a token cumulatively meets the above mentioned criteria, it is highly likely that it can be regarded as a security under applicable laws.

When a token is qualified as a security (Wertpapier) or investment (Veranlagung) under the Austrian Capital Market Act, a prospectus must be published at least one banking day before such tokens are being publicly offered, provided that no exemption of Sec. 3 of the Austrian Capital Market Act applies. 1

The most important exemptions are:

• public offerings where the minimum amount to be acquired per investor is EUR 100,000 or more,
• public offerings with a denomination per security or investment of EUR 100,000 or more, 
• offerings addressed to fewer than 150 natural or legal persons per EEA Member State who are not qualified investors,
• offerings exclusively directed to qualified investors, and
• public offerings having a total volume of less than EURO 2 million in the European Union.

The latter exemption is owed to the Austrian Alternative Financing Act (AltFG; Alternativfinanzierungsgesetz), which provides that public offerings of a total volume of more than EURO 250,000 but less than 2 million allow the issuer to publish an information sheet instead of a prospectus. Such information sheet is standardized, less comprehensive and, as a result, less expensive than an actual prospectus, thereby making it an attractive alternative for startups looking for financing. It also applies to the issuing of tokenized securities, bonds, etc. Public offerings not exceeding a total volume of EURO 250,000 do not even require an information sheet, while offerings of a total volume of at least EURO 2 million but less than EURO 5 million require a simplified prospectus.

Yes. If security tokens are qualified as securities - which is usually the case - prospectus requirements apply to the same extent as if the tokenized right was issued as a “conventional” security.

This will depend on a variety of factors, namely the nature and kind of the tokens to be issued, as well as the extent of the preparation and the clients' cooperation and the time the Financial Market Authority takes to respond. We estimate the time required from the preparation of the prospectus to the approval will amount to approximately 3 to 4 months. However, a more accurate market practice will only emerge with the approval of further STO prospectuses in the future.

The applicability of KYC/AML rules depends on which service a stakeholder provides in the course of an STO and, as a result of this, whether the act regulating the respective service contains KYC/AML rules. A STO might require, for instance, services from banks, payment providers, e-money providers, providers of services related to securities or services of alternative investment fund managers. All acts regulating these services require the respective service provider to follow KYC/AML rules laid down in the Austrian Financial Market Anti Money Laundering Act (Fm-GwG; Finanzmarkt-Geldwäschegesetz). The same is true due to the Austrian Alternative Financing Act (AltFG; Alternativfinanzierungsgesetz) for internet platform providers who help issuing security tokens through an internet platform. If none of these laws apply, stakeholders might still be subject to the Austrian Commercial Code (GewO; Gewerbeordnung), which provides for KYC/AML rules for businesses that are covered by this law.

In general, the Austrian Civil Code (ABGB; Allgemeines Bürgerliches Gesetzbuch) provides that rights can be transferred without following a specific form. Only when the law provides for a specific form, for example that an agreement must be made in writing or that transaction requires the physical transfer to be effective, such form must be observed when a right is transferred.

Austrian securities laws are, in general, based on the assumption that rights are securitized in a deed. However, as regards shares in corporations, certificates, bonds, shares in partnerships, or hybrid forms of investments, the existence and the transfer of the respective rights is not bound to the existence or the transfer of a deed. Thus, issuers of such securities can stipulate that the transfer is effectuated by completing the transfer of the respective token, which is associated with a particular security, on the blockchain. Such transfer then represents the legal transaction required for the effective transfer of the security, i.e. the assignment (Abtretung).

As regards corporations (Aktiengesellschaft), the Austrian Commercial Court that keeps the company register has already accepted a company's articles of association that provide for the companies' shares to be legally transferred through the transfer of tokens on the Ethereum blockchain. In contrast, the tokenization of a share in a limited liability company (GmbH) would not bring along much benefits since the transfer of such share requires a notarial deed to have legal effect.

Since the tokens are often sold via the internet, e-commerce regulations should be observed. Once the tokens are traded, regulatory restrictions apply to the trading platforms which usually lead to a license requirement.

If the distribution of tokens is connected with the provision of banking or investment services, a special license may be required. If tokens are stored with the issuer (or a third party), this may be regarded as the provision of depositary services, which is subject to licensing requirements.

If the STO raises capital in the form of fiat money and such funds are to be repaid, this can constitute deposit-taking business which is also subject to licensing requirements. If the STO serves to raise capital from investors and to reinvest it according to a specific investment strategy, the STO can be considered an alternative investment fund (AIF, Alternativer Investmentfonds), which is subject to additional regulations.

If tokens are classified as securities and are traded on a regulated market, which is probably not the case so far, then market follow-up obligations must also be observed, for example according to the Market Abuse Regulation (Regulation EU No. 596/2014).

Finally, issuers must ensure compliance with applicable tax laws.

In regard to ICOs, the Austrian Financial Market Authority issued a general statement, a brief excerpt of which shall be provided below:

More comprehensive Information of the Austrian Financial Market Authority regarding FinTechs in general and ICOs in particular can be found on https://www.fma.gv.at/querschnittsthemen/fintechnavigator/initial-coin-offering/