STO Registration Procedures in the Russian Federation

Victoria Rogova is a Managing Partner at Lex Futurus Group, LLC, an international boutique law firm providing blockchain and decentralized ledger legal advisory services. Since 2016, Victoria has been involved in the blockchain community, completing the “Introduction to Digital Currencies” course at the University of Nicosia (UNIC). Continuing her studies in 2018, she finished the “Blockchain Technology Regulation” course at Moscow State Institute of International Relations. Her legal practice and research interests in this sphere include, inter alia, smart contracts, initial coin offerings, security token offerings/digital security offerings, and regulatory technologies.

What are the main regulations that exist in your region if you’d like to launch an STO/ICO?

Nowadays, the adoption of any regulations for STO/ICOs is a highly topical issue in the Russian Federation. If you want to launch an STO/ICO in Russia, you will face a bunch of problems, starting from governmental institutions’ misunderstanding of your project’s essence and finishing with the absence of any regulations. Russia currently does not have any legislation that could be applied to the process of launching an STO/ICO, but hopefully this will soon change.

Russia is currently considering three bills that are meant to provide a regulatory framework for ICO and cryptocurrency turnover. The three bills are as follows:

• A draft law “On Digital Financial Assets” passed the first reading in May, 2018. In brief, it defines cryptocurrency and tokens as digital financial assets (which are not considered as legal tender), allowing for the trading of tokens (not cryptocurrency) only via authorized exchange operators, and establishes initial Know-Your-Customer (KYC) regulations for ICOs. Only qualified investors are allowed to participate in ICOs, except for cases to be defined by the Central Bank.

The bill encountered criticism from different institutions, inter alia Russian Union of Industrialists and Entrepreneurs (RSPP), Russian Association of Crypto Industry and Blockchain (RACIB), and even the Presidential Council for Codification and Enhancement of Civil Legislation highlighted contradictions within the bill and returned it to the first reading.

Although token and cryptocurrency are not literally defined as securities in the bill, the legal requirements for them virtually overlap with provisions contained in the federal law “On the Securities Market”, which gives rise to concerns that tokens and cryptocurrency, along with the essence of the project will be given the status of security. This would create deterrent mechanisms for the development of the digital economy in the Russian Federation and would make Russia less attractive for potential ICOs.

• A draft law “On Amendments to Part One, Two and Four of the Civil Code of the Russian Federation” passed the first reading in May 2018. The bill defines “digital rights” as a new object of civil rights, “digital money,” and “smart contracts.” However, as experts note, this bill has not yet been sufficiently elaborated on and is in contradiction with existing legislation.
• A draft law “On Alternative Methods of Fundraising (Crowdfunding)” passed the first reading in May, 2018. The bill is aimed at the regulation of attracting investments via investment platforms. As experts say, the amendments introduced into the bill propose setting a maximum annual limit of 600,000 RUB (9,000 USD) for ordinary citizens wishing to participate in any blockchain, DLT-related crowdfunding efforts, whereas individual investors cannot exceed 100,000 RUB (1,500 USD) per crowdfunding project.

As a result, these three bills have been in the State Duma for nearly a year almost without a movement. That is why, to answer your question in brief — there are no regulations in the Russian Federation for launching an STO/ICO. However, some projects managed to launch in the Russian Federation.

Are there any examples of ICO/STO projects that have already complied with regulations? Do you consider their pick to be appropriate or not?

Taking into account the absence of any special regulations in the Russian Federation, which could somehow facilitate the process of launching an ICO/STO, startups and companies do not rush to experience it.

I would like to start my answer with an analysis of the ICO launched by the company LavkaLavka. LavkaLavka is a farmers’ cooperative uniting small and midrange farms across the Russian Federation, thus helping people to buy natural food. LavkaLavka launched its ICO BioCoin in the end of 2017 and according to the founder of LavkaLavka Boris Akimov by the end of the ICO (in February, 2018) the project raised more than $16 million, which exceeded their expected hard cap. The BioCoin was widely recognized as the first token sale to be held in compliance with Russian legislation.

According to LavkaLavka’s charter, the state of incorporation and the main place of doing business is in Moscow. The key role in the BioCoin token sale plays to its loyalty program. All contracts, which underpin the loyalty program of BioCoin, are governed by Russian legislation.

The reason why LavkaLavka chose Russia for launching the BioCoin token sale is that the target audience of the loyalty program are citizens of the Russian Federation, who are consumers within the framework of Federal Law “On Consumer Rights Protection.”

The main documents consist of the public offer on selling BioCoins, the public offer on buying BioCoins, terms and conditions, and rules of the loyalty program. Almost all provisions of the documents were enshrined in compliance with the Civil Code and other existing legislation such as Tax Code, the “On the Protection of Competition” law, the “On Anti-Money Laundering and Financing Terrorism” law, the “On the Securities Market” law, and others.

BioCoin itself can be considered as a token, which has elements of certificates ascertaining the right of ownership of tangible assets. BioCoin does not have characteristics of securities since it does not give a right to share in the charter capital of LavkaLavka, LLC, BioCoin token holders do not have a right to receive dividends, to attend and vote at general company meetings, etc.

Although the start of BioCoin was very promising, it would be fair to say that now the project and its partners adopted a wait-and-see attitude with regards to development of the project in the absence of ICO-related legislation.

The other project worth considering is the ICO by the company LevelOne, since it is the first ICO carried out in the pilot regime within the “regulatory sandbox” launched by the Central Bank in April 2018.

LevelOne is a company that organizes lectures on culture and science. Sberbank and the National Settlement Depository have chosen LevelOne to launch the placement of tokens in the pilot regime. Almost 286,000 tokens were placed on the Russian blockchain platform “Masterchain” in May 2018, which were then transferred to the account of Sberbank. Some of the tokens were used to pay for online-courses offered by the issuer via the transfer of these tokens from the Sberbank account to the account of the issuer. The test was found to be a success and now Sberbank together with the National Settlement Depository are working on a road map for launching a real ICO within the Russian Federation.

This test was undoubtedly a huge step in the development of ICOs in Russia. Experts note that the adoption of special legislation (the draft laws I mentioned earlier) would facilitate the expansion of experience in launching ICOs gained by usage of the “regulatory sandbox.”

As for security token offerings (STO), to my knowledge no STO was launched in Russia due to legal uncertainty in this area.

What are the recommended legal arrangements (legal structure) for pre-sale (private sale) investment deals (ST buyout, SAFT, options, etc.)?

Well, I cannot recommend perfect legal arrangements that would be suitable for all projects. It should be considered on a case-by-case basis and each the essence of each project should be evaluated by lawyers. If one wants to launch an STO in the Russian Federation, I would recommend to wait for the adoption of any regulations in that sphere, since the SAFT Agreement, for example, is likely to be noncompliant with existing Russian legislation. Therefore, it is very risky to use any templates not taking into account peculiarities of Russian regulations.

What are the main liabilities of an STO team to the ST holders and who is in control over the fulfillment of this obligation?

Taking into account the absence of special regulations which would stipulate, inter alia, liabilities of an STO team to the security token holders, the main liabilities are the same as liabilities of a public company, i.e. at each stage of the process the issuer shall disclose the registration of a prospectus and securities issuance, the placement opening date and the placement price, the commencement of the placement, pre-emptive rights, the completion of the placement, the filing of a placement notice or report, etc.

What are the advertising limitations for the STO marketing campaign in comparison with one for an ICO?

Certain limitations for the marketing campaign were prescribed in the amendments introduced into the draft law “On Digital Financial Assets.” According to the amendments, the issuer in the advertisement shall indicate the maximum amount of tokens available for acquisition for non-accredited investors and inform them about the risks the project may entail. However, it has not been adopted as a federal law yet.

Is there any special territory in your country that is a tax haven or has other beneficial regulations for cryptocurrencies and blockchain startups?

There is no such place in the Russian Federation, however, in April 2018 the Central Bank of Russia launched a “regulatory sandbox,” which welcomed all entities that develop or use innovative services whose implementation requires regulatory changes.

The sandbox was set up to test the processes of the use and application of innovative financial services, products, and technologies. Any organization can initiate piloting a project in the sandbox by submitting an application to the Bank of Russia. The application should include, inter alia, general information about the applicant, information about the potential advantages of the use of the new financial services, products and technologies, and the assessment of the impact and risks that such a product might have on the financial market.

As I have already mentioned, LevelOne ICO has already successfully gone through the pilot launch. Currently (as of February 8, 2019), there are 15 projects in the Central Bank sandbox.

What will be the cost of all registration procedures for a startup to incorporate in your jurisdiction? Will it differ for a foreign startup?

According to Russian legislation there are two options to start your business in Russia.

The first option is to set up a subsidiary in any legal form provided by Russian law (LLC, JSC, partnership, etc.). In that case a separate legal entity will be established and it will be fully under Russian legislation with all the consequences that it entails, including the registration for business and tax purposes with local tax authorities. The cost of the registration procedure will include the State Fee for Incorporation (4,000 RUB, approximately 60 USD as of February 15, 2019), the Minimum Charter Capital (10,000 RUB, approximately 150 USD as of February 15, 2019), and the legal fees for drafting all incorporation documentation (which depends on the complexity of the structure of the company to be incorporated). The State Fee for Incorporation and the Minimum Charter Capital do not differ for a foreign startup. As for the legal fees, they will be higher for a foreign startup due to complexity of the legal work involved, including the notarization of foreign shareholder documents if necessary.

The second option is to establish a foreign legal entity subdivision (a branch or representative office). In that case, a separate legal entity will not be established in Russia and a branch, representative office should be accredited by the State Registration Chamber in Moscow. The cost of registration is higher than in the first option, since it involves a more complicated procedure. It consists of the State Fee for Accreditation (120,000 RUB, approximately 1,810 USD as of February 15, 2019) and the legal fees for drafting all incorporation documentation (which depends on the complexity of the legal work required).

What is the legal status of cryptocurrencies in your country?

The legal status of cryptocurrencies is not yet defined in the Russian Federation and it has long been the subject of learned debate.

The Civil Code of the Russian Federation in Article 128 sets an exhaustive list of objects of civil rights. Cryptocurrency is not literally described in this list, that is why this kind of legal uncertainty raises concern among various government agencies and judicial bodies.

Furthermore, Section 1, Article 75 in the Russian Federation Constitution establishes that the Russian Ruble is the unit of currency in the Russian Federation, and currency issuance is performed exclusively by the Bank of Russia. The issuance of other money is prohibited. Therefore, cryptocurrency cannot be considered as Russian money or foreign money and thus cannot be a legal tender in the Russian Federation.

As for judicial practice, in May 2018 the court heard the case regarding the bankruptcy of a person who had cryptocurrency (BTC, ETH, BCH) in his crypto wallet. The court defined cryptocurrency as “other property” within the meaning provided for in Article 128 of the Civil Code of the Russian Federation and adjudged that the debtor should give the access to his cryptocurrency wallet to the financial manager.

The same classification of cryptocurrency was given by the Ministry of Justice in its letter in December 2018.

However, again, it is necessary to note that views still diverge as to the legal status of cryptocurrency, which is yet to be defined by federal legislation.

Can you describe general/special taxation schemes for cryptocurrency owners and token issuers?

The last recommendation issued by the Ministry of Finance of the Russian Federation in November 2018 states that there are no grounds to apply a special taxation regime for income received from selling cryptocurrency. The tax base for the income received from selling cryptocurrency shall be calculated as total income received by a taxpayer from selling cryptocurrency in the tax period minus the total documented expenses for purchasing it. If a taxpayer received such income, he/she should calculate and pay the tax and file the tax return to the appropriate tax authority.