Securities Token Offerings (STOs) in Switzerland

Marcel Hostettler
Oct 22, 2018 · 7 min read

Prologue
This paper is the first edition of a series called “Blockchain — Legal Snapshot Switzerland”. The aim of this series is to provide a hopefully helpful update related to hot topics in the current crypto scene. The author is an attorney-at-law and partner at a Swiss based law firm specialized in the area of distributed ledger technology / blockchain. He intends to provide content as interesting as possible, and to avoid unnecessary academical and sales language. The “Blockchain — Legal Snapshot Switzerland” series are not legal documents. They rather strive to provide insight in the blockchain / distributed ledger technology market, give a quick update about legal developments, and give an outlook of the potential quarterly developments. It is envisaged that the author publishes a “Blockchain — Legal Snapshot Switzerland” Paper regularly.

Classification of Token

What is a STO about?

As a first disappointment, at the beginning there is no unified or event translational definition related to Security token. However, at least a few jurisdictions provide some guidance what a Security Token consists of. In Switzerland, according to FINMA’s characteristic, an Asset token represent assets such as participations in real physical underlings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, these tokens are analogous to equities, bonds or derivatives.

Other jurisdictions, such as the US, have a rather broad understanding of Security Token: The SEC is making use of a US Supreme court decision which dates back more than 70 years. The scene at these times was sunny southern Florida, where the Howey Company was leasing part of their citrus farms to finance other ventures. This case, and in particular the created “Howey test” for finding out under which circumstances a security is considered as security, has influenced the SEC’s definition of “securities” forever. According to the Howey test a transaction will be considered a security if all of the following requirements are met: (i) There is an investment of money, (ii) there is an expectation of profits, (iii) the investment of money is in a common enterprise and (iv) any profit comes from the efforts of a promoter or third party

In a nutshell, if someone is investing money planning on profiting from someone else’s efforts, you’re buying a security.

Analysing further jurisdictions, a common denominator can be found: Security Tokens are Tokens which are linked to “something”. This “something” can be literally anything. Concluding from that, a Security Token needs to have an underlying. It is not a surprise that there is neither a unified nor a clear definition related to the relationship between a Token and its underlying. In particular, it is unclear whether the Token is for example backed or pegged by the underlying.

Legal and regulatory implications of STOs

a) Synchronisation between the security token and its underlying

As a (security) token as a “digital unit of value” does not have any physical characteristics, it is highly disputable whether a token can qualify as a security. From a Swiss perspective, it would be a great advantage when Swiss security law would be adapted by mentioning that also (security) token may qualify as securities. By such an amendment, it would be ensured that all functions inherent to a security could be legally embedded in a security token. There are several task forces busy proposing changes to the securities law. Nevertheless, this may require some time. Good new is that already today, we have efficient and solid legal concepts which ensure a full synchronisation between security token and its underlying.

b) Primary and Secondary market issues related to security token

Secondary market issues are related to trading of security tokens. Professional securities dealing requires a securities dealer license and needs to take place on a regulated exchange. There are currently a lot of interesting projects in the pipeline for establishing regulated marketplaces for security token in Switzerland. Probably the most prominent one is the one of Switzerland’s stock exchange — owned and managed by SIX — announced that it is building a fully integrated trading, settlement, and custody infrastructure for digital assets. Other projects are well advanced, and we will quite likely see a regulated exchange for security token in Switzerland soon.

Are STOs the next big thing?

Is the future really that bright or is there a hidden trap somewhere? There isn’t. Nevertheless, it is important to mention that the issuance of Security Token (primary market implications) and trading of Security Token (secondary market implications) need to be analysed carefully.

STOs vs. IPOs

What are the differences between IPOs and STOs? It is mainly about cost: An STO does not require a “facilitator” such as an investment bank as with an STO security tokens are directly offered to the public without any intermediary. This is directly reflected in lower transaction costs. As a rule of thumb, an IPO costs between 6–12% of the gross issuing proceeds. Compared to that, an STO devours a much lower share of the proceeds. An STO can be executed faster than an IPO as the lengthy and cumbersome roadshows related to ICOs can be done in an abbreviated procedure by online advertisement of the security token to be offered. What about regulation? In Switzerland, both, IPOs and STOs take place in a regulated environment and therefore provide for legal certainty. With a smartly designed onboarding / KYC process STOs can be arranged in a way that they surpass ICOs in this regard.

After the rise of payment and utility tokens it is expected that security tokens, respectively STOs, will have a tremendous impact on existing means for raising of capital.

What does it mean technologically?

Insights

STX currently develops a decentralized exchange and launch platform. The underlying technology is promising as it focuses on transaction speed and has invested considerable efforts for the development of a user-friendly frontend.

And for sure we are all excited to see how Switzerland’s stock exchange is setting up its crypto exchange.

Outlook


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MME Legal

MME is an innovative, cutting edge consulting firm for all…

Marcel Hostettler

Written by

Partner at MME Legal AG

MME Legal

MME Legal

MME is an innovative, cutting edge consulting firm for all of your legal, tax, and compliance needs. We represent companies and individuals in all business related matters. Our partners assist clients with personal and thorough attention — in Switzerland and internationally.

Marcel Hostettler

Written by

Partner at MME Legal AG

MME Legal

MME Legal

MME is an innovative, cutting edge consulting firm for all of your legal, tax, and compliance needs. We represent companies and individuals in all business related matters. Our partners assist clients with personal and thorough attention — in Switzerland and internationally.

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