30 Oct Ultimate guide on the criteria of the Spanish Financial Authority on Tokenizing Securities
This is a translation of the Spanish Financial Authority (CNMV) criteria on the regulation of ICOs (Initial Coin Offering) and STOs (Security Token Offering), issued on September 20, 2018.
Criteria in relation to ICOs
September 20, 2018
This document sets out the initial criteria that CNMV is applying in relation to ICOs. Given the complexity and novelty of the phenomenon, these criteria are subject to review in the light of the experience accumulated and the debate that is currently taking place at international level and, in particular, within the European Securities and Markets Authority (ESMA).
1. Consideration of tokens as negotiable securities
Proposals will be analyzed on a case-by-case basis
The criteria established in the CNMV Communiqué published in February 20181 are still valid, although with a nuance in view of the direction that the international debate on this subject is taking.
- In the statement of February it was noted that: “The “tokens” that give the right to access services or receive goods or products that are offered with explicit or implicit reference to the expectation of obtaining a benefit by the buyer or investor as a result of its revaluation or of any remuneration associated with the instrument or mentioning its liquidity or
possibility of trading in equivalent or purportedly similar markets to securities markets subject to regulation”.
- However, it is appropriated to exclude from consideration as a negotiable value those cases in which it is not reasonably possible to establish a correlation between the revaluation or profitability expectations of the instrument and the evolution of the underlying business or project.
The criteria included below refer to the case that the tokens issued in the ICO are considered as negotiable securities.
2. Need and scope of the intervention of entities authorized to provide investment services
As for the intervention of an authorized entity referred in the art. 35.3 of the[Spanish] Securities Market Law (LMV), the information published in the Fintech Q&A regarding the minimum degree of intervention of the entity authorized to provide investment services for the purpose of commercialization will be applied(which implies that the referred entity must carry out a general supervision of the process and validate the information to be delivered to investors, which must be clear, impartial and not misleading and refer to the characteristics and risks of the securities issued, as well as the legal and economic-financial situation of the issuer in a manner sufficiently detailed to allow the investor to make an informed investment decision).
Likewise, it is considered appropriate that the authorized entity does not proceed to validate the information to be delivered to the investors unless it includes prominent warnings about the novelty of the registration technology and the fact that the custody of the instruments is not carried out by an entity authorised to provide investment services.
In principle, it is not necessary the intervention of an authorized entity to perform the placement of the securities, since the operation will be merely occasional for the issuer. The activity reserve provided in the article 144.1 LMV (in relation to article 140e) and f)) requires that the activity should be carried out professionally or regularly.
In principle, the intervention of an authorized entity to carry out the custody of the securities does not have to be necessary either, since the activity reserve provided in the article 144.1 LMV (in relation to article 141 a)) requires that the activity to be carried out professionally or regularly.
3. Representation of the tokens and consequences of their negotiation in trading platforms
Article 6.1 LMV2 allows us to interpret that it is possible that certain securities are not represented by book entries or titles (since the term “may” is used). Therefore, the possibility of registering rights that may be considered negotiable value through DLT (blockchain) technology can not be excluded. Taking this into account:
- If the tokens are going to be traded in non-Spanish markets:
– Article 6.2 LMV3 is only applicable to Spanish trading centers. Therefore, if the tokens are traded in a non-Spanish market, the CNMV is not competent to require that they be represented by book entries.
– The law (and the competent authority) of the country in which the market in which the tokens are to going to be negotiated will determine the extent to which a specific form of representation of the securities is required for trading in an organized market and, where applicable, the need for the registration to be carried out by a central depository of securities.
- It does not seem to negotiate the tokens in regulated markets or Spanish SMN or SOC because:
– Article 6.2 LMV would require that the tokens be represented by means of book entries.
– Article 8.3 LMV would require that the registration be carried out by a central depository of securities.
- Neither does it seem possible to generate an internal market on an unregulated platform or that the tokens are traded on a platform (exchange) located in Spain because:
– In the case of tokens considered negotiable securities, these platforms should have the required authorizations to exercise their activity, including those needed as a trading center (such as regulated market, SMN or SOC) or as an investment services company (ESI) or credit entity that operates as a systematic internaliser. The management of the trading center should be carried out by an ESI [Investment Services Entity] or a governing entity of a market, and would be subject in general to market regulations and the scope of supervision of the CNMV.
– The same provisions of letter b) referred above would also apply to the need for representation through book entries and participation of a central depository of securities.
4. Need of an information prospectus
Given that most of the operations that are being considered can be covered by the article 35.2 LMV (regarding situations in which there is no obligation to publish a prospectus), issuers are advised to abide by the criteria discussed above regarding the article 35.3 LMV).
It must be borne in mind that the preparation of a brochure for an ICO may be difficult due to the absence of a harmonized model at European level, which, in turn, may cause dysfunctions with other European Authorities regarding the passport of the approved brochure by the CNMV.
However, when a prospectus is required due to the characteristics of the operation, the CNMV will make the necessary adaptation effort and will take into account the principle of proportionality (especially when it is foreseeable that the operations are not large) in order to reduce possible the complexity and extension of the document.
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