STO regulation and law in the Netherlands

1. Are Security Tokens securities in this jurisdiction?

Whether security tokens qualify as securities depends on the characteristics. In order to qualify as a security within the meaning of the Dutch Financial Supervision Act (Wet op het financieel toezicht, "FSA"), the token should qualify as (a) a negotiable share or other negotiable instrument or right considered equivalent and not being an apartment right; (b) negotiable bond or other negotiable debt instrument, (c) any other negotiable instrument issued by a legal person, corporation or institution by which securities referred to under (a) or (b) may be acquired through exercising the rights attached to this instrument or through conversion, or that can be settled in cash.

A negotiable share or other negotiable instrument or right considered equivalent to share will qualify as a security within the meaning of the FSA. In order to assess if a token qualifies as a security the token should therefore be negotiable. Furthermore, it is relevant to determine whether the holders of a token participate in the company's capital, the holders of a token have voting rights, the holders of a token receive a payment for their participation and whether this payment corresponds to a return achieved with the invested capital. In this respect any controlling rights are not decisive. From the available guidance of the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten, "AFM") it can be derived that a negotiable token that provides for a participation in the issuer's capital and an entitlement to a payment, which depends on the return achieved with the invested capital, will probably qualify as a security within the meaning of the FSA.

2. Under what conditions is a prospectus necessary under this jurisdiction?

In the event that a token qualifies as a security within the meaning of the FSA, an approved prospectus should be published if these tokens will be offered to the public in the Netherlands, unless the issuer can make use of an exemption. Exemptions from the obligation to issue a prospectus upon an offering include, inter alia, (i) offerings addressed solely to qualified investors, (ii) offerings addressed to fewer than 150 non-qualified investors per EU member state, (iii) offerings whose denomination per unit amounts to at least EUR 100,000, (iv) offerings which the total consideration value in the EEA does not exceed EUR 5 million, calculated over a period of 12 months, whereby offers of group companies are being aggregated.

Issuers that intend to benefit from the EUR 5 million exemption will have to notify the AFM in advance and need to provide a standardised information document to investors. A mandatory exemption notice should be included in all offer documentation if the issuer makes use of the aforementioned exemptions from the obligation to issue a prospectus, unless the offer is addressed to qualified investors only.

3. Do the prospectus duties of this jurisdiction apply to STOs?

Yes. If an STO qualifies as a security within the meaning of the FSA, the prospectus duties apply to the same extent as the security was not tokenized.

If the issuer has not previously offered securities to the public or admitted to trading on a regulated market, the AFM decides on the approval of the prospectus within 20 working days of the submission. In the event that documents submitted by the applicant are incomplete or if further information is necessary for the AFM, the AFM will notify the applicant within a period of 20 working days and will grant the applicant the opportunity to supplement such information. The 20 day approval period will start again when the applicant provides the additional information. Generally, including the legal groundwork, the process takes about 4-6 months.

5. Do KYC/AML requirements apply?

Yes. The KYC requirements that apply to issuers are limited. More stringent requirements apply to parties that provide advice, brokerage services or exchange services with respect to tokens that qualify as securities within the meaning of the FSA. In practice, these parties often use service providers to take care of the KYC/AML process.

In July 2018, the fifth Anti-Money Laundering Directive ("5AMLD") entered into force, which amends the fourth directive and aims to combat the risks rising from the anonymity of virtual currencies. EU member states will have to transpose this directive into national legislation by 10 January 2020. With 5AMLD, providers engaged in exchange services (between crypto and fiat) and custodian wallet providers (entities that provide services to store private keys on behalf of their customers, to hold, store and transfer virtual currencies) were brought within the scope of AML. These providers of crypto-services will have to apply customer due diligence controls and report suspicious activity.

6. Can rights be securitized or otherwise represented by way of tokens under this jurisdiction?

Contractual rights and depositary receipts are being securitized or represented by way of tokens in the Netherlands. There are legal restraints for the transfer of shares or depositary receipts on a blockchain.

There will be supervision if tokens are sold to parties in the Netherlands. Unfair commercial practices towards consumers are prohibited in the Netherlands and omission of such information will be regarded as misleading commercial practice. Furthermore, organizing an STO has also several privacy implications from a data protection law perspective.

8. Statements from authorities and/or legislator regarding STOs

The AFM and the Dutch Central Bank (De Nederlandsche Bank, "DNB") have issued several warnings about the risk associated with cryptos and ICOs. At the same time, the AFM and DNB acknowledge the potential of specific functional crypto applications and the underlying blockchain technology. Recently, the AFM and the DNB prepared a joint advisory report in which they stress that STOs may open up opportunities for the funding of small and medium-sized enterprises, provided that investors receive clear and enforceable rights in return, as is the case with e.g. shares and bonds. According to the AFM and DNB, issuers can lower the costs of attracting funding through the use of blockchain technology by eliminating the involvement of third parties. Furthermore, it can also help to improve the liquidity due to the inherent tradability of these rights. The AFM and DNB state that STOs may help to make the capital markets more accessible to small and medium-sized enterprises.