From the traditional private equity or debt to less conventional crowdfunding. The most recent tokenisation method is the next step in the evolution of the capital markets.
Often ICO token issuers made public promises regarding future increase of value of their token. Such claims are deemed to be promoting securities, according to regulators. There were additionally cases where ICOs blatantly disregarded their roadmap commitments. Around the same time as some bad ICO apples were falling, and regulatory scrutiny was increasing, STO or security token offering ideas became vocal, as the natural continuation of the ICO industry.
Indeed, STOs make more legal sense, but much less retail buzz. The times of raising hundreds of millions for a white paper idea are deﬁnitely gone. But it is the contention of the author of the present article – that does not mean all ICOs are dead. There still can be cases of utility represented by a smart contract token.
However, if there is no utility or service on offer, then it is likely a future proﬁt distribution, or outright corporate rights exercise. In other words – a security.
A security is a legally deﬁned ﬁnancial asset that can be traded or exchanged. A legal deﬁnition however varies by jurisdiction. The main categories are equity or debt, or derivatives thereof. Securities are offered by an issuer. The primary offering of a security today can be done either through crowdfunding, private placement, or full- ﬂedged public prospectus offering. Depending on the amount and jurisdiction, either option would constitute an issuance of a security.
A tokenised security offers a combination of advantages of both the ICO practice as well as the existing securities laws. On the one hand, an STO complies with the law to the letter. And on the other hand, an STO offers a similar promise of an immediate (or delayed in case of legally required lockup periods) liquidity.
There are no “securities token exchanges” to date (April 2019). But there are quite a few initiatives looking to obtain regulatory authorisation to run a securities exchange for the modiﬁed securities asset class – security tokens. Potential way of exchanging security tokens would be OTC desks provided by ownership transfer agents such as Fintelum. See more below.
The main difference that sets security tokens apart from non-token securities is the actual blockchain aspect. Now in stead, or rather in addition to regulatory requirements, such as registration of certiﬁcates, shares, bonds and debentures – a smart contract is issued representing the registered rights and obligations of the issued security, whereas bearer securities could be most effectively tokenised.
Investors or participants of an STO are typically cryptocurrency users, but not necessarily. STO practice will continue the path carved by the ICO industry in setting the use cases for cryptocurrency at large. The STO offer is not so democratic than ICO used to be. Security token offering is much less frictionless than it used to be with utility tokens.
Today, the potential buyer of an STO will need to overcome burdensome KYC/AML proﬁling process to be compliant with the sales of a security. And often try providing the impossible – the accredited, sophisticated or professional investor status. And depending on the jurisdiction and the project offering, the pain levels may vary. This is why, an STO issuer should have an attractive proposition on the table to be able to attract investors.
Security token or tokenised securities?
As a note of importance, not to confuse the two concepts, well posted out by Noelle Acheson in her piece 1https://www.coindesk.com/security-tokens-vs-tokenized-securities-its-more-than-semantics. Security tokens are the subject of our present article. Whereas tokenised securities are a token representation of an already existing security. For example, an Apple stock may be tokenised and traded on a separate exchange than the original stock is traded (eg.: APPL ticker, traded on the New York Stock Exchange). Although it is questionable, but there seem to be attempts at listing tokens that allegedly represent an Apple stock 2https://www.ﬁntelum.com/blog/digital-securities-tokens-based-on-share-of-10-nasdaq-listed-companies/.
This is part 4 of a 5 part series.
Regulated Digital Assets Take Over in 2020 – Thought Leaders
2018 was the highwater mark for initial coin offerings (ICOs), when 1,253 new coins raised $7.8 billion. In 2019, this “Wild West” market went from boom to bust. Dollars raised in ICOs plummeted 95% compared to 2018, and the Securities and Exchange Commission (SEC) continues to announce new actions against various ICO players for fraud and unregistered issuances. The sheriff has come to town.
Regulation, my old friend
It’s no consolation to investors who lost millions in ICO scams, but they were part of a natural market evolution. The laws governing traditional securities were also originally inspired by bad actors like “bucket shops” that emerged as another new technology, the telegraph, was changing financial markets. The SEC’s decision to crack down on digital assets and apply those same laws to blockchain securities is good news for market participants.
Blockchain securities have the potential to increase efficiency, lower costs, provide greater transparency and mitigate risk. However, the financial industry can’t fully realize the potential of blockchain securities without a public market and regulated ecosystem to support their full lifecycle. That means fully compliant issuing, investing, trading, settlement and custody.
Governments around the globe are working to establish the necessary frameworks in their own jurisdictions. This is lowering the risk of investing in blockchain securities by introducing investor protections associated with traditional markets. Although different jurisdictions have different requirements for regulated entities, investors, traders and users, there are four common areas being addressed:
- Distribution – how are security tokens created and why, and how are they delivered to their owners?
- Custody – where is the ultimate record of ownership kept and by whom?
- Reporting and Record Keeping – what additional regulatory requirements are placed on participants such as transfer agent services?
- Specific Processes – what additional processes are required, for example, in order to move security tokens between personal and master wallets?
The SEC and the Financial Industry Regulatory Authority (FINRA) have established guidance in all four areas through a series of communications including the report on The DAO and a joint statement on broker-dealer custody of digital assets. The necessary U.S. framework is finally in place to allow regulated, public trading of blockchain securities to blossom.
If the juice don’t look like this
In parallel with these regulatory developments, companies have rushed to create the necessary market infrastructure. Critical components are in place and more are coming this year. The question for those considering whether to participate: is the juice from this 2.0 version of digital assets worth the squeeze? The answer will be yes if the blockchain securities market looks like an upgrade of traditional markets, which would require that it offers two key benefits to investors and companies looking to raise money.
The first is efficiency. Blockchain securities need to eliminate the cumbersome data systems and manual paper-based processes of traditional securities trading. The potential is there but execution is everything as the saying goes. Implemented correctly, blockchain can efficiently support the entire lifecycle of digital assets from issuance and investing through trading, settlement and custody.
The second benefit is smart oversight. To be viable over the long term, the blockchain securities market needs to be fully compliant not only to satisfy regulators, but to create liquidity. It needs to supply investors with convenient access to transparency, account safeguards, and regulated trading. This will require integration with traditional brokerage accounts as well as intuitive user interfaces.
I’ve become so numb
I was hoping to get through this article without using “disruption” because I know we are all numb to the concept. Unfortunately, I keep hearing that blockchain securities will disrupt financial markets. I’ve said it myself! But the reality is that blockchain securities are an evolution not a revolution. The same year that ICOs peaked at $7.8 billion, the traditional US securities industry raised $2.4 trillion. For blockchain securities to become a mainstream asset class, they can’t remain on the island of personal wallets. They need to be bought, held and sold by retail investors, institutions, and advisors through traditional trading systems and brokerage accounts. That could happen as early as this year.
Under Scrutiny: How to Pass Due Diligence as a Blockchain Project – Thought Leaders
Every business is destined to undergo multiple assessments. Regulators granting licenses and permissions, potential partners, investment advisors and investors – each of them has a set of filters that a tech project should pass to be considered viable. The task gets more tricky for deep tech startups utilizing blockchain, AI and other cutting-edge technologies.
This article is structured as a list of questions for a startup to check its investment readiness and prepare for a due diligence process, grouped in three broad categories: 1) technical, 2) legal, and 3) business. Starting with generic ones, we are diving deeper into industry-specific questions with particular examples in the tech part to illustrate nuances and pitfalls a project might face, especially fueled by high competition in the space.
Is the proposed solution technically possible?
This might sound obvious – but many founders neglect this question while chasing the visionary technological dream, especially in deeptech areas like AI/ML, brain-computer interfaces, biotech, or blockchain. If your project exists only as a concept yet (especially if you’re not the tech guy and will do external hiring), make sure that it is possible to develop before you pitch.
If the solution is not technically possible at the moment, how much time and effort is needed for research and development (R&D)? Are these estimates aligned with time and funding limitations, if there are any?
In some cases, a tech team is strong and the idea is very promising, but it might take full five or ten years to develop and be adopted – like quantum computing for solving enterprise-grade problems in the pharmaceutical industry.
You have to be honest – and realistic – about the timing and expenses. You will certainly get this question. Here you need to distinguish between research and common software development costs: the research stage is inventing algorithms to build something that previously hasn’t been possible due to technological limitations, with uncertain results and timelines. The software development stage is building a well-understood solution, which only requires a certain period of time.
Clearly enough, investments at the research stage are much less predictable. However, development can also take much longer than team plans originally, trying to impress investors and overestimating capacity. Make sure you don’t.
In the case of a software product, does the project really need proprietary software and not a white-label solution or SaaS?
Reinventing the wheel might be seductive. However, in some cases, spending resources for the development of a new in-house technical solution can be a waste of time. If you as a startup do not suggest a software innovation, it might be easier and cheaper to purchase a ready technical part and customize it to the particular business needs.
What are the external dependencies (e.g. libraries)? How is external software maintained?
No software is written totally by the company in-house team. Every project in the world uses multiple external databases and code libraries, often open-source, maintained by global communities of developers or by corporations. The resilience of the project depends on the timely update of external software for security and efficiency.
If you’re doing an AI project, what is the source of data? Is it sufficient? Is it available?
The viability of AI projects is extremely dependent on data quality. Algorithms may be inefficient when there is not enough data. Also, inherent biases in the data (e.g. racial) will impact the final algorithm. Furthermore, there may be a chicken-and-egg problem if the customers are a source of data and, at the same time, the main value is delivered using the AI/ML. If the data is not free, its cost should be considered vs potential value compared to using less advanced methods.
If you’re doing an AI project, how is the context-dependence addressed?
Even if there is plenty of data available, it may be gathered in a specific context, often being non-applicable in another. For example, if the network was able to distinguish cats and dogs indoors, it may be unable to do so outdoors.
If you’re doing a blockchain project, why the database should be distributed, in other words, why do you need blockchain?
Many problems that are claimed to be solved with the blockchain can be solved with a simpler cryptographically protected database with a robust permission management system that can also utilize public-key cryptography if needed.
In the case of the original concept of blockchain, the database is distributed among multiple participants with all of them being able to make an input. This is not always needed. For example, an enterprise may need a database to store and process its internal data, in which case it shouldn’t be distributed. Or it may be a database of a governmental body, to which everyone should have access but only the government should be able to validate input data.
If it makes sense for a database to be distributed, does blockchain have to be public?
Blockchains can be generally divided into public and private. Public (permissionless) blockchains are the ones in which anyone can host a node, thus having access to all data recorded and validate database updates. In private (permissioned) blockchains only certain participants can have access to data and validate input.
Public chains significantly reduce the control over the business as the state of the database is now controlled by multiple people scattered across multiple countries. This also means an increased regulatory uncertainty, especially in the case of heavily regulated industries or the ones that are of systemic importance. For these reasons, the case for public chains must be really strong. In many cases, a private blockchain is enough to satisfy business requirements. For example, transaction processing requires only financial institutions participating in the blockchain, sharing medical history data requires only hospitals participation.
If you’re doing a blockchain project, what are the incentives of participants to act for the benefit of the system? What are the ways to break these incentives and how are they addressed?
As blockchain, especially the public one, is maintained by common efforts, and the quality of data, the transaction costs depend on the participants, incentives should be designed in a due way to ensure that the system is sustainable.
An example of where it is problematic is the Tezos blockchain that utilizes the so-called Liquid Proof of Stake (LPoS) consensus algorithm. A consensus algorithm is a way in which validators agree on the new state of the ledger. In LPoS consensus participants can stake a certain amount of a blockchain native token to get a right to either validate transactions themselves or select another trusted person that would do that instead, who would validate a transaction and distribute the reward. Although such algorithms have multiple benefits, the common point of criticism is that incentives for participants to become validators are questionable as they can select someone else, and still receive a significant chunk of reward because of the competition among potential validators, while not spending time and computational resources on network maintenance and governance. This creates a risk of blockchain centralization and various types of attacks.
How is the cybersecurity ensured?
Cybersecurity is a primary feature of any IT infrastructure. Especially for a regulator, who’s main concern is protecting customers.
If you’re doing a hardware business, how is the quality of supplies ensured?
While software businesses are dependent on external libraries, hardware businesses depend on supplies providers for the quality of their solutions.
Assessing legal implications of a project, compliance costs and limitations arising from legal requirements.
Does the company need licenses to operate legitimately, and which ones?
This point is especially important for heavily regulated industries, such as fintech. Almost any financial services require some kind of licensing, and some of them – such as MiFID II in Europe – can take up to two years or more to acquire.
Also note that in most cases you need a separate license in every country where you intend to operate and provide services, although there may be various arrangements between competent authorities, especially between the EU Member States, that allow facilitated transfer of license.
All clients need to be identified, especially in the financial services industry, as well as the origin of their funds so that the business is not used as a means for money-laundering. However, making customers confirm their identity may not be a great and engaging UX, negatively impacting conversion rates. The proportionality principle should be applied – the higher the risk, the stricter measures.
Who holds the custody of the funds?
This question will be asked to any business that allows clients to deposit their funds, such as investment management. Holding clients’ money and assets also requires licensing, and the project should consider a partnership with an applicable license holder institution.
Who is liable for failures?
This happens to be one of the most neglected matters. Even if you will suffer eventual reputation damage, you can still protect itself from legal liability by building corresponding arrangements with service providers. For example, if client data is stored on third-party servers, they should be responsible for the data safekeeping. Note, though, that such arrangements will increase service costs. Sometimes providing a service for which a liability may be taken is a core business of a company. Although it is impossible to avoid liability completely in such case, it can still be reduced, for example, if employees are liable, and not a company, or if limits are imposed on the amount of liability.
Founders of blockchain projects, especially of decentralized ones, tend to consider that they hold no liability, as they don’t control the network. However, regulatory authorities may have another view as the legislation is built on the premise of a liable service provider who has the responsibility to ensure that the system operates in a due manner. Thus, the project team may become subject to claims in case of failures.
Being poorly managed, taxes can significantly reduce company profits, especially in the case of unfavourable double taxation regime between countries the company operates in. Furthermore, taxation issues can make the company much less attractive as an investment opportunity. A proper optimization should be undertaken in order to mitigate these problems.
What is the intellectual property of the company? Is it protected? Does the company violate any IP?
There are three main points to it.
Firstly, a company may at some point become a target for patent trolls, so it should get patents and copyrights for all its relevant assets.
Secondly, in order to make an MVP startups may violate someone’s intellectual property in some cases, for example, use protected images, design, UX, etc. It is unlikely to be problematic at the initial stage but may be when the company grows bigger. Especially if the IP violated belongs to direct competitors.
Thirdly, IP is an asset that increases valuation, that may be used for tax optimization.
In recent years GDPR became an increasingly pressing issue. Basic privacy setup goes far beyond cookies disclaimers and should include proper storage of personal data, hijacking of which may result in significant lawsuits, proper data management, such as not giving to third parties without consent, the possibility of erasure, etc.
The blockchain may often store sensitive personal and financial data, which are strictly protected on the regulatory level. They can sometimes be contradictory to the nature of the technology, such as the right to be forgotten or the obligation to store data on the server of the country where the person resides. It is advisable to consider not storing personal data on the public blockchains at all, which enables more control over them.
What problem does the project solve?
Emerging technologies are sometimes called “a solution looking for a problem” – not unjustly. Behind the engaging narrative and brilliant technological thought, it can be easy to lose the most important question: who is your target audience, and why it will use the proposed solution?
Check if the stated problem does exist, confirmed by the potential clients. Customer surveys and test can help a project make sure that you are moving in the right direction. If a project operates in a vacuum with no direct contact with its target audience – it is a red flag for investors, as it risks meeting no demand once it goes live.
Sometimes a problem is not pressing enough for it to require a separate solution.
How is the problem currently solved? How is the proposed solution better?
In order to be adopted, a project has to offer a very clear benefit to its customers – saving someone’s time or money, fulfilling a particular need or simply providing positive emotions.
If the benefit is marginal, clients are unlikely to pay more or bother switching to a new service at all – so make sure a project has to lead a competitive analysis and found its clearly defined niche in the market.
We once had a discussion with a project building a network of supercomputers in different countries that would solve the AI problems with built-in algorithms so that customers would only input data and choose algorithms. The problem was that in cloud computing they were competing with Amazon and Microsoft, and in AI software – with IBM. No chance they would win.
What are the core assumptions on which the business model is based? How are they validated or are going to be validated?
How actually the company is going to make money? What metrics in such cases determine the profits? Are the revenue predictions realistic?
For example, if transaction fees are the main source of revenue, certain transaction volumes are expected and should be justified by market analysis.
What is the place of a company in the industry value chain? Who are other participants the company is working with? How supply chain sustainability is managed?
No company delivers its value to end customers independently, it is always working together with multiple other actors. It is critical to identify the exact added value the company provides. All other companies in the value chain are external dependencies that may pose risk and should be managed, for example, by diversification.
How does the unit economics of the company work? Can it be profitable at all?
That is, does a single customer bring more money than it costs, including processing and acquisition costs.
In the case of broken unit economics, is the increased revenue per customer possible, or they will not pay more? Is it possible to cut costs in the future with significant investments, for example, software that reduces operational expenses, or marketing that raises the credibility, reducing acquisition cost?
In other words, investors will look at the factors that will make the investment justified.
What is the growth strategy? How is the growth engine validated? Does it suit the business model?
To make the investment feasible, a project should have a certain growth potential that matches the risk. For an operational profitable business growth expectation is lower compared to a startup. The company with the potential of viral growth prospects differ significantly from the B2B company that should employ sales department.
Who are the direct competitors? What is the competitive advantage, if any? If there are none, what are the possible options to gain some and the expected investments? If there are some, how are they sustained?
A business does not necessarily need a competitive advantage at every point of time if the demand on the market is significantly higher than supply. However, this is not a sustainable situation, and the competition will increase. Thus, if there is no competitive advantage, you should focus on getting one. If you do have one – make sure you’re able to sustain it and adapt to the ever-changing market conditions.
Did the company use debt funding? What is the debt to earnings ratio?
Indebtedness of the company creates additional risks for anyone engaging in business with it, resulting in less favourable collaboration or a lack thereof.
Who are the major company shareholders? How will they impact company direction? Do they support profitability or growth? Do they participate in operational management?
Shareholders are a source of information about the business that will be looked upon. In the financial industry or when offering securities to the public, major shareholders and directors should pass fitness and properness checks. The company should be cautious and make its due diligence when accepting investments not only regarding the legal background of the investor but also the broader impact it will have on the company’s strategy.
If a project is looking into engaging serious partners, attracting significant funding round or raising public and media awareness, it will definitely become a subject to thorough scrutiny that will target not only superficial financial parameters and the quality of the idea, but also the non-sexy things, such as taxes, intellectual property, cybersecurity, and supply chain resilience. Answering those questions in advance makes you not only well-prepared for the due diligence, but also more able to succeed in the fierce competition on the market, and should be undertaken as early as possible.
Due diligence requires asking hard questions. But it is critical to ensure that we devote our time and money to what will have a real impact on the world.
Firsthand Overview of Digital Securities Legislation in Malta
When it comes to choosing a jurisdiction for a digital securities offering, Malta is among the first on the list. In the course of the past several years, Malta has taken a unique position as the “blockchain island”, fostering technological innovation by introducing advanced blockchain legislation, friendly tax policies and progressive approach to regulation.
This article provides a comprehensive overview of the legal status of digital securities in Malta, based on the months of research and personal communication with Maltese regulator and local lawyers, while we have been structuring our platform for digital securities offering on the island.
Digital securities on Malta are regulated, first and foremost, by traditional legislation on financial instruments and services, the most important of them being the Companies Act and Investment Services Act. These acts incorporate themselves into provision of the EU legislation, namely MiFID II, Prospectus Regulation and others.
Apart from the existing set of laws, Malta has also introduced a specific legislation on innovative blockchain-based financial instruments that defines what should be regulated by the traditional legislation and what falls under the scope of the new ones.
This approach is different from the one adopted by countries with a common law system that don’t require a specific legislation to define the legal status of an innovative object, relying on the existing one instead.
There are three main acts referring to the digital securities particularly:
- Virtual Financial Assets (VFA Act), which defines DLT-based assets and the rules governing them
- Malta Digital Innovation Authority (MDIA), which established MDIA as a governing entity and its role in regulating blockchain companies
- The Innovation Technology Arrangements & Services (ITAS), which introduced the term “innovative technology arrangement”, the procedure and conditions for the licensing
A separate act regarding STOs as a fundraising method is currently under development.
Apart from that, there are several guidelines and strategies. The most relevant of them are the MFSA STO Consultation Paper that outlines the MFSA approach to STO and MFSA Fintech Strategy, which, inter alia, discusses plans to establish regulatory sandbox for fintech ventures.
Below, I am taking a closer look at the most important aspects of the existing legislation.
There are two main regulatory bodies governing digital securities on Malta: The Malta Financial Services Authority (MFSA) and The Malta Digital Innovation Authority (MDIA).
MFSA is the single regulator of financial services in Malta, which regulates both financial services providers and issuers of any types of financial instruments. This has two implications for digital securities issuers:
- They need to work with MFSA-licensed service providers
- Their offering has to be approved by the MFSA
The role of MDIA is to set and enforce rules and standards for technological innovation. In digital securities regard, the regulator reviews and authorizes the technical infrastructure of crypto and security token exchanges and other infrastructural projects to make sure they are reliable and secure.
In order to get an MFSA (prevailing financial authority) license, you do not necessarily need MDIA authorization – in most cases, system audit is enough and MDIA opinion remain voluntary. However, if transaction volumes exceed certain levels, the authorization by the latter becomes mandatory.
Obviously, MDIA has limited bandwidth and cannot check every application for authorization itself, so the regulator attracts third-party MDIA-licensed system auditors to review the technical blueprint of the suggested system. There are currently five of them, including consulting giants KPMG and PwC. Once the audit is done, MDIA makes the final decision to grant the authorization based on the auditor assessment, business model, senior management personalities and qualifying shareholders of the innovative technology company.
The competent authorities are pursuing three priority goals: protecting investors, supporting
Malta’s reputation of the “center for excellence for technological innovation” and promoting healthy competition and choice.
The strong focus on reputation makes Malta different from other blockchain-friendly jurisdictions, such as Estonia. Although Malta does much to promote blockchain-based business by establishing clear legislation, creating regulatory fintech sandbox and so on, getting licenses here is more difficult. To get licensed, a company needs to comply with strict requirements, pass systems audit to ensure the resilience of infrastructure, defend its business model.
One of the necessary requirements to get authorization for any regulated activity on Malta are so-called “fit and proper checks” for all qualifying shareholders (>25% stake) and senior management – another mechanism to prevent fraud, protect investors and good reputation of Malta.
Such measures create an additional credibility for a company licensed on Malta, which in its turn creates incentives for decent companies to establish business activities there.
Virtual Financial Assets Act: providing classification
VFA Act introduced the legal framework for virtual financial assets and asset offerings in November 2018. The Act defines four types of DLT-assets:
- electronic money – common money, accounted for on DLT
- virtual tokens – units that have value only inside a system, for example, loyalty points
- financial instruments – assets defined by MiFID II regulations which include, inter alia, transferable securities and units in collective investment undertakings
- virtual financial assets – everything that does not fit into any of the above
The beauty of the Act is that when an asset does not fall into conventional forms, it is dealt with on a case-by-case basis. Many jurisdictions don’t adopt such a granular approach, preferring to qualify DLT-based assets broadly as security, utility and payment tokens with the same rules for every group of assets.
While it might seem like a good idea to create a separate category for cryptocurrencies, the problem is that, as we know, they can be very different by their essence: some are native tokens of a blockchain, others are not, some are anonymous, some are not, some are decentralized, and some are not.
VFA Act is mostly focused on procedures regarding the issuance or offering of virtual financial assets. However, it is unclear from the act itself how security tokens should be qualified depending on their nature. Thus MFSA has issued further guidelines and is working on a specific legislation for digital securities, which is going to cover all specific use cases in the industry.
STO Consultation Paper: defining digital securities
STO Consultation Paper divides security token offerings into traditional and non-traditional.
Units, offered during traditional STO, are classified as financial instruments under MiFID. Thus, they are regulated mostly by MiFID and Investment Services Act. At Stobox we call such units “digital securities”, and mostly work with them.
All other exotic types of investment units fall under the definition of non-traditional STOs. The most common example may include a unit that provides a right to a revenue share but does not represent a company’s equity, thus being some sort of a derivative contract. Many of the security token offerings conducted so far have been of such nature, although the regulation they fall under differs depending on the jurisdiction. Most security token offerings conducted so far have been of that nature.
MFSA has not yet issued an opinion on non-traditional STOs.
Prospectus regulation: offering & trading digital securities
The offering of digital securities is regulated mainly by the Prospectus Regulation, which requires issuers to register a Prospectus when making a public offering. However, European legislation courteously offers exemptions under which the offering can be conducted without registering a Prospectus.
The two most widely used include:
1) offering targeted solely on accredited investors (private sale)
2) offering with a total consideration under EUR 5 million in the European Union during a 12 months period.
Nonetheless, if the issuer is seeking to get listed on a trading venue it has to comply with the listing rules and prepare a Prospectus-like Admission Document, thus reducing the benefits of an exempted offer.
However, there are secondary market arrangements that do not fall under the definition of a regulated trading venue and, thus, can introduce less strict admission rules. One of them is bulletin board, which is a market at which participants can place their buying and selling interests, but there is no automated matching. Instead transaction is initiated when another clients agrees with the proposed terms and chooses to become a counterparty of the trade. Although there is no precedent of a kind on Malta yet, UK’s Financial Conduct Authority, which is subject to the same EU legislation, does not consider such arrangement an MTF:
“In our view, any system that merely receives, pools, aggregates and broadcasts indications of interest, bids and offers or prices should not be considered a multilateral system. That means that a bulletin board should not be considered a multilateral system. This is because there is no reaction of one trading interest to another other within these types of facilities.”
For this reason, we at Stobox are building our secondary marketplace in the form of a bulletin board to reduce requirements for companies to be onboarded and have access to liquidity.
Malta has introduced one of the most progressive legislative frameworks for digital securities in the world, which finds balance between investor protection and facilitating innovation. Creating comprehensive legislation from scratch is an non trivial task and takes a lot of time –– it explains why the majority of digital securities offerings to the date took place in other jurisdictions. However, exactly due to the fact that Malta has put so much time and effort into it, Maltese providers and companies can be trusted from both the perspective of long-term regulatory stability and correspondence to prudential standards.