While 2017 may be remembered as the ‘Year of the ICO’, the crypto-community is upbeat about the prospect of 2019 emerging as the ‘Year of the STO’. A ‘Security Token Offering’ (STO) marks the intersect between traditional capital markets and cutting-edge technology-enabled securities offerings and trading.
Insofar as Maltese law is concerned, the key to distinguishing between STOs and other token offerings is the analysis of the token in accordance with the Financial Instrument Test introduced by the Malta Financial Services Authority under the Virtual Financial Assets Act (Cap. 590 of the laws of Malta). Where a DLT-Asset (an asset that utilises or is intrinsically dependent on distributed ledger technologies) qualifies as a ‘transferable security’, such an asset would be subject to traditional financial services legislation.
Accordingly, an issuer proposing to issue an equity, debt or hybrid token qualifying as a transferable security being offered to the public would be subject to the regulatory requirements applicable to ordinary listed securities, including those arising under the Prospectus Directive (to be superseded by the Prospectus Regulation). In particular, the issuer would be required to draw up a prospectus.
STOs enable issuers to avail themselves of the benefits of distributed ledger technologies within a regulatory regime that is recognised across the EU, widening their potential investor base to over 500 million investors. From an investor perspective, STOs represent an opportunity to participate in the growth of the issuer, through voting rights, dividend rights or other participation rights attaching to transferable securities, while benefitting from a robust investor protection regime.
Malta is uniquely placed to offer a supportive ecosystem for STOs through the enactment of its virtual assets and innovative technology arrangements regulatory framework. In addition, the Malta Stock Exchange has announced plans for the introduction of DLT-based trading platforms for security tokens, a move that will enhance market liquidity and further support the DLT ecosystem Malta is creating.
This piece forms part of Camilleri Preziosi’s ‘Beyond Blockchain’ weekly series, in which members of the firm’s Blockchain and Fintech teams map out how the landscape has evolved since the ‘Unravelling Blockchain’ series published earlier this year. For further information, contact us on firstname.lastname@example.org.