STO regulation and law in Germany

It depends what kind of “right” is securitized in the tokens. In Germany, tokens offered as STOs are classified as securities from a regulatory perspective if they are standardized and tradeable on a capital market, and if they are transferable. Generally speaking, if the rights represented by the tokens are similar to those of shares, bonds and certificates, the tokens qualify as securities from the regulatory viewpoint.
For example, we see a growing number of tokenized profit participation rights. Those are currently qualified as securities (Wertpapiere), which means that the German Securities Prospectus Act (Wertpapierprospektgesetz, WpPG) applies to such tokens, which, in turns, leads to a prospectus requirement for a public offer of securities, unless exemptions apply. It is also possible to tokenize equity, but there is currently not yet any administrative practice. Tokenized equity rights would also be considered as security.

Exemptions for STO issuers apply if the offer is either (i) addressed exclusively to qualified investors or (ii) addressed to fewer than 150 non-qualified investors in each EU member state or (iii) aimed at investors who can acquire securities from a minimum amount of EUR 100,000 per investor per offer or (iv) has a minimum denomination of EUR 100,000. STOs limited to a total volume of up to EUR 8 million in the European Economic Area an approved prospectus can be avoided by exemption from the EU Prospectus Directive (PD). In this case, however, two criteria must be fulfilled. Firstly, the tokens need to be offered by way of regulated investment advice or investment brokerage. Secondly, individual investment by a non-qualified investor may not exceed EUR 1,000 EUR 10,000 if the investor proves he or she has at least EUR 100,000 in free funds, or two months’ worth of the investor’s average monthly net salary, but not more than EUR 10,000. Furthermore, in order to make use of these exemptions, an information document for securities (Wertpapier-Informationsblatt) must be drawn up and published after the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) has approved the document.

Yes. To the extent the security token is qualified as securities - which is usually the case - prospectus requirements apply to the same extent as if the tokenized right was sold without a token.

Depending on the extent of the preparation and the clients' cooperation as well as the time the BaFin takes to respond, we estimate the time required from the preparation of the prospectus to the approval to be approximately 3 to 4 months. However, a more accurate market practice will only emerge with the approval of further STO prospectuses in the future.

Yes, which means that investors need to be identified and need to be checked. In practice, emitters often use service providers to fulfill this task. Service providers are usually paid on a per-use basis.

Under German law, rights can be securitized in a deed, which always requires the written form. Any disposition over the deed is, at the same time, a disposition over the respective right which the deed represents. It is basically not possible to separate the right from the deed.

Although there are good reasons to argue in this direction, there is currently a huge uncertainty whether such mechanism also applies to tokens, which, of course, are no written deeds. The safest way is to include respective safeguards in the token purchase agreement, which forbid that the token holder sells the token without selling the (tokenized) right, and vice versa. Token transfers to other jurisdictions impose further difficulties, which is why a diligent contract draft is key.

For the possibility to create electronic securities see below.

Since the tokens are often sold via internet, e-commerce regulations have to be obeyed. Besides, compliance with tax laws is of course an important topic. Once the tokens shall be traded, regulatory restrictions apply to the trading platforms, which usually lead to a license requirement. 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).

The BaFin has currently approved one prospectus which is related to tokenized profit participation rights. This approval shows that the BaFin does not per se forbid tokenization of rights, and it also shows that the BaFin basically qualifies tokens and the rights represented by them as securities (Wertpapiere). In our discussions with the BaFin, we have noticed that they are open for innovations such as security tokens.

There have been recent efforts by the German Ministry of Finance to create the possibility for electronic securities. These would then no longer have to be evidenced in a deed, but only entered in a register created for this purpose. The security and the right embodied in it could then be transferred in one single legal act and there would no longer be any risk of the rights falling apart.