Just How Significant is the New Prospectus Regime for Issuers of STOs?

3 June 2019

With the new Prospectus Regulation on the horizon for all European Union (EU) member states, how will these important provisions impact the crypto sector and its ability to launch security token offerings (STOs)?

The shift from initial coin offerings (ICOs) to security token offerings (STOs) is in motion, with the early crypto market appearing to have hit a wall in relation to overall market value and the number of investors interested.

Instead, businesses and investors are starting to see the value in digital securities and STOs. Offering these assets alongside cryptocurrency enables investors to establish themselves as early adopters and broaden their portfolios.

Mixing their assets and having the ability to change depending on the market condition gives them the choice to shift to more stable assets that are less volatile or not in-sync with the wider market.

However, piggybacking onto a market trend as significant as this will always attract the interest of regulators too.

What is the new Prospectus Regulation?

The new Prospectus Regulation (2017/1129) comes into full effect across the EU from 21st July 2019, following on from the first directive in 2003 and the revised version in 2009.

A prospectus is a legal document that companies issue to potential investors about the securities they are issuing and about themselves. It also contains detailed information about the particular company’s finances, shareholding structure and business.

This makes prospectuses a vital source of information for investors and a tool for any company wanting to raise capital across the EU securities market.

The upcoming changes are designed to simplify the rules and streamline related administrative procedures, while making it easier and more cost-effective for SMEs to access capital markets. The regulation will come into force in two different phases.

Who’s exempt from the obligation to issue a prospectus?

Security issuers operating in EU member states can be exempt from the obligation of drawing up a prospectus if the offering is under certain thresholds – which were determined according to Article 3.3 (b) of the Prospectus Regulation.

Here’s a breakdown of this, taken from the European Securities and Markets Authority (ESMA):

  • €1 million threshold – Slovakia, Romania, Latvia, Hungary, Czech Republic, Cyprus and Bulgaria
  • €2.5 million threshold – Poland and Sweden
  • €3 million threshold – Slovenia
  • €5 million threshold – Austria, Belgium, Croatia, Estonia, Germany, Greece, Iceland, Ireland, Lithuania, Luxembourg, Malta, Netherlands, Norway, Portugal and Spain
  • €8 million threshold – UK, Italy, France, Finland and Denmark.

Countries that have opted for the highest threshold arguably favour STOs, giving average sized crypto start-ups easier access to funding within the home jurisdiction. However, it’s worth noting that because no prospectus has been issued here, the fundraising must be limited to the home country and the passporting regime doesn’t apply.

Those EU companies who don’t fall under the exemption thresholds listed above, and want to issue security tokens, can do so by taking advantage of a new simplified prospectus regime called “EU Growth Prospectus”.

Article 15 broadened the definition of SMEs to include companies that meet at least two of the following criteria:

  • the company has less than 250 employees on average during the year;
  • the company’s total balance sheet doesn’t exceed €43 million;
  • the company’s annual net turnover doesn’t exceed €50 million.

While most SMEs in the EU would usually qualify under the above definition, the EU legislator has also chosen to extend the benefit of the Growth Prospectus to non-SMEs – including:

  • Any other issuer whose securities are traded or are to be traded on an SME Growth Market and they have an average market capitalisation of less than €500 million on the basis of end-year quotes for the previous three calendar years.
  • Any other issuer providing that
    • the offer of securities to the public is of a total consideration in the EU below €20 million over a period of 12 months;
    • they have no securities trading on a Multilateral Trading Facility; and
    • they have an average number of employees averaging no more than 499 during the year.

An easier way of obtaining the certificate of approval

The new Prospectus Regulation should also make the process of attaining the certificate of approval a lot simpler.

In the past, the previous Prospectus Directive caused several frictions across the EU, as each member state posed different sporadic requirements. For example, the publication of the prospectus on magazines, payment of fees and translations.

However, now this is a regulation and not a directive, hence no implementation is required by member states in their national legislation. This means that the regulation will be automatically enforced in the national legislation and will eradicate any said inconsistencies.

Companies that are already listed on a public market that want to issue additional shares (secondary issuance) or raise debt (corporate bonds) will also benefit from the more simplified prospectus.

The decision to give people free online access to all prospectuses approved in the European Economic Area will help create a transparent way of working too. Plus, with paper prospectuses no longer being required (unless a potential investor requests them), this benefits the environment and drastically cuts another lengthy process.

Looking ahead

Like most alterations in the crypto market, there are always going to be those who remain sceptical about how the new Prospectus Regulation will impact the market and the growth of STOs.

In particular, the Prospectus Regulation requires issuers to specifically detail potential risks, which doubters believe regulators will use as a sticking point to delay the approval process.

In other words, it’s a process that will bring the negative elements of an STO to the forefront, which is something a regulator will pick up on very quickly.

Nonetheless, getting issuers to be more succinct and upfront about any specific teething problems is just a case of ironing out the details. Regulators act on behalf of the investor, so raising any concerns should be welcomed and deemed as a way of safeguarding people from wasting their money on poor STOs.

Overall, the clearer stance on exemptions for some security issuers combined with the new Growth Prospectus regime and the simplified passporting procedures should, in theory, give companies an improved passage into the EU’s capital markets via STOs.

 

This article should not be construed as a recommendation, endorsement, opinion or approval of any kind. It has been written for information only and should not be relied on for legal purposes. Professional advice should always be sought before taking action based on the information provided. 

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