Security Token Offering
ILF A & A provides strategic advise on your fundraising needs and can take care of the legal implementation of your STO, including the contracting of your STO, your legal structuring, compliance with (global) securities laws (incl. the drafting of a prospectus or the usage of exemptions thereto) and compliant KYC/AML practices.
Securities laws is the field of law that is occupied with investor protection. It requires issuers of securities to register with authorities and provide their investors with information disclosure documents (i.e. a prospectus), in order to reduce information asymmetries between the issuer and the investor. Depending on the design of an token, the structure of the STO and the jurisdiction where the token is offered, different legal requirements might be applicable to an issuer. As STO issuers often want to issue globally, they have to deal with a multitude of securities laws regimes from different jurisdictions. Generally, depending on the amount raised, and whether the issuer wants to solicit investors from the public, one would seek to fall under specific exemptions to prospectus and/or securities registration document requirements for a multitude of jurisdictions. Additional legal complexities also arise in connection with the possibility of listing security tokens to public exchanges.
Depending on the type of token issued, the legal classification thereof and the jurisdiction(s) in which is offered, so-called ‘know-your-customer’ and ‘anti-money-laundering’ regulations might be applicable. In general, this requires the issuer to know and confirm the identity of his/her investors. Risk-analysis and risk-mitigation procedures might be applicable, as well as requirements relating to the monitoring of transactions and the checking of OFAC, sanction and PEP lists. When doing an STO, A proper KYC/AML implementation is vital to combat money laundering (and comply with applicable law).
Restrictions imposed by corporate law
In the issuer’s jurisdiction, it is moreover required to examine the system of national corporate law in place. Here, large differences exist across jurisdictions as tokenization might prove difficult because of a broad spectrum of possible legal challenges. Especially with regards to traditional asset tokens (or digital securities), rules might apply which might tokenization difficult or even impossible. Relevant laws could be concerned with restrictions in terms of the transferability of securities, requirements relating to legal structuring, the lack of recognition of digital (representation of) assets under property law or financial law, lack of recognition of electronic instruments, documentation, signatures or deeds etc.
Finally, the contracting around an STO (eg. relevant subscription agreements or the terms and conditions applicable to a token sale) is of vital importance. The usage of blockchain as an underlying infrastructure, by nature, brings about new risks that are not usually accounted for when selling traditional securities. Of course, such risks should be contracted for. The interests of both investors and the issuer have to be taken into account, while additional attention should be given to the compliance elements that are to be coded into the relevant smart contracts used for the STO.
The programmability of compliance
To achieve fully compliant security token offerings, many restrictions in terms of the transferability of tokens have to be in place, depending on the jurisdiction of the issuer and nature of the token. Interestingly, such restrictions can be programmed into the smart contract of the tokens themselves. For example, one could dictate in the smart contracts that, before a token is transferred, the transferor has to be whitelisted, based on a KYC/AML implementation. Similarly, vesting schemes or lock-up restrictions can also be programmatically enforced. The programmability of legal compliance has the potential to reduce frictions in capital markets and increase efficiencies across the board.
Securities Laws Compliance (EU/US)