Security Token Offering in Estonia

Comistar is an official partner of the Estonian e-Residency program. We are focused on helping blockchain companies to start and grow their businesses. Estonia is one of the most popular ICO hubs in Europe. Our website can be found at www.e-resident.me

Security tokens and regulated markets are coming. It’s yet to see whether the regulators of some countries will come out with a simplified approach for launching STOs. The current requirements may be too overwhelming (financially) for startups and companies in a growth stage.

There’s a lot of discussion about security tokens in the blockchain communities, and rightfully so. While the ICO market is still booming, many industry insiders are waiting for the explosion of the security token markets.

The potential of the security tokens is simply incredible- it’s an estimated 10 trillion dollar market. It’s also a huge opportunity for the countries and investments they can attract.

It remains to be seen which countries will simplify the STOs in a way that it becomes a no-brainer for the entrepreneurs to make it as a number one destination, and still have credibility as a jurisdiction. And it’s not only the question of which countries will want to do it, it’s also a question of which countries can do it. For example, EU has strict regulations on issuing securities, and it’s very difficult for the Member States to simply ignore them.

So, what about Estonia?

Naturally, to do a security token offering (STO), you have to follow a set of laws in place.

Generally, if you want to issue security tokens, you’ll need to register the prospectus with the Estonian Financial Supervision Authority. There are some exceptions to this rule though. If at least one of the following conditions are met, the prospectus is not required:

• an offer of securities is addressed solely to qualified investors, or
• an offer of securities is addressed to fewer than 150 persons per Contracting State, other than qualified investors, or
• an offer of securities is addressed to investors who acquire securities for a total consideration of at least 100,000 euros per investor, for each separate offer, or
• an offer of securities with the nominal value or book value of at least 100,000 euros per security, or
• an offer of securities with a total consideration of less than 2,500,000 euros per all the Contracting States in total calculated in a one-year period of the offer of the securities.

If none of the above conditions exist, the offer is deemed to be a public offer, in which case a prospectus for the offer must be prepared and registered with the EFSA.

All listing prospectuses must be prepared in accordance with the Prospectus Regulation 809/2004 and EU prospectus directive 2003/71. If the total value of the offering is less than 5 000 000 EUR, then drafting the prospectus under Estonian domestic regulations is also acceptable. These simplified rules are written in the Estonian domestic law — unfortunately, this is currently available only in the Estonian language. (https://www.riigiteataja.ee/akt/118072012004 ).

I’ve also uploaded the extract of the EU requirements for the prospectus, which you can find here.

If the securities are offered and available for all the people in the European Union, the prospectus has to be registered with the Estonian Financial Supervision Authority (EFSA). The state fee for that is 600€.

After submitting the prospectus registration application, the EFSA has 10 working days to provide a decision. If necessary, the EFSA may extend the deadline by an additional 10 working days.

You may have questions whether there are requirements for the company. There are no specific requirements for the company type, hence, it can be a simple LLC (OÜ) with a minimum share capital of 2500€ (i.e no specific capital requirement).

You also don’t need to have a local director or any substance for that matter. The bank account does not have to be opened in Estonia, although, if you submit a prospectus with the Estonian FSA, then it may be a sufficient substance for the Estonian bank to start a relationship with you.

Excluding Estonian citizens as investors will not change the rules if the securities are publicly sold to persons from other EU States.

Some samples of prospectuses that are registered lately with the Estonian FSA can be found here:

https://www.fi.ee/index.php?id=14926 (simplified under the Estonian law)

https://www.fi.ee/index.php?id=14925 (fully under the EU Directive)

Conclusion

As you can understand from above, it’s definitely more complex to issue a security token compared to the requirements of the utility token ICOs. However, it may not be a bad thing.

There are plenty of ICO projects that have raised a lot of money without any intention to do what they promised. For example, a Vietnamese crypto company raised $660 million from approximately 32 000 people. Then the team just disappeared.

While too many regulations is obviously a bad thing, some regulations are necessary — otherwise, we have a chaos.

The SEC of the United States has already declared, that in their eyes, most of the utility tokens are actually security tokens. And securities are obviously regulated. These regulations are in place to protect the investors.

It’s important to note one important thing about regulations — there’s a difference between tackling a scam and a bad idea. These laws should protect investors from scams, but not from bad ideas, as to whether the business idea or concept is bad or good is decided by the market, not by regulations.

If you have any questions or would like to raise funds in an ICO or STO, contact us at estonia@comistar.com. If you are looking to start a company online in European Union, go to our website at www.e-resident.me