What’s the winning combination of STO and Switzerland?
Going from the traditional and the new capital market thanks to the growing popularity of assets…
STO – Security Token Offering
A token represents entitlement to ownership of an asset or equity or debt security of the issuer.
Diligence requirements depend on venue and jurisdiction of listing.
The issuer may charge or pledge the underlying security/asset under custody of a credible intermediary (e.g. custodian). Certain terms of the token would be coded into the token.
Disclosure documentation requirements depend on venue and jurisdiction of listing.
What does an STO do, and how?
The rising popularity of asset tokenization is bridging the gap between traditional and new capital markets. A STO (Security Token Offering) unlocks new opportunities for a token-based fundraising in a regulated environment.
The Swiss Regulation of token economy: following the principle of technology neutrality, it builds on existing financial market law, both of which are constantly evolving.
The main difference between the new method and the traditional, is that a STO does not necessarily require a financial intermediary.
For this reason, every STO must be analyzed, on a case-by-case basis, in view of the application of the Swiss financial market law to ensure security. Relevant provisions are, for example, the regulations for banks and securities dealers, the prospectus requirement or the collective investment schemes act.
In September 2020, the Swiss parliament has approved the Federal law to developments in distributed ledger technology (Swiss DLT Bill).
Then, in line with the technology-neutral approach by the Swiss legislation, selective adjustments were made to existing laws:
From February 2021, the issuance of the newly introduced DLT-securities shall be possible. In August 2021, the remaining parts of the new regulations shall enter into force.
This new DLT Framework delivers advanced regulatory solutions and specific amendments in key areas, namely Civil Law, Insolvency Law, and Financial Market Law, but also Anti-Money laundering regulation and International private law. These changes will bring increased legal certainty and remove obstacles surrounding blockchain applications, as well as reduce the risk of abuse.
In a nutshell, the core DLT activities that will benefit from the new DLT Framework are the following:
- (Security) Token Exchanges: Introduction of a new license type for trading venues focusing on digital assets (DLT Trading Facilities)
- Custody Service Provider: Clearer and lighter regulatory regime for digital asset custody providers
- Security Token Issuer: Introduction of a Civil law concept for digital securities (“asset token”), enabling the creation and transaction of digital uncertificated securities in a DLT ecosystem without legal uncertainties.
The newly introduced register uncertificated security does not require a regulated institution such as a bank, securities firm or central securities depository for its creation and transfer. Instead, the creation of such register uncertificated security is subject to the so-called “registration agreement” via a ledger-based register that must fulfil certain material requirements (Art. 973d par. 2 items 1 – 4 Swiss Code of Obligations). In addition, the segregation of crypto-based assets has been clarified in the case of bankruptcy.
Alongside, new rules for corporations looking to issue shares in a tokenized form are being released. The goal of the legislator is to allow for stable and legally robust tokenization of rights, through the electronic registration of rights, that entails the same protection and functionality as security.
To create those Uncertificated Register Securities, parties must meet a certain set of requirements put forth in the Code of Obligation:
- The register must, through technical means, grant only the creditors the power to dispose over their rights, excluding the debtors.
- The information regarding the content, functionality, and agreement of the register must either be saved on the register itself or linked to the associated data.
- Similarly, creditors must be able to access all information concerning them in link to the register without the intervention of a third party.
- Most importantly, appropriate technical and organizational protective measures must be implemented to prevent any unauthorized changes to the register.
The creation itself is made by the parties, through a registration agreement according to which the relevant right is entered into a “Register of Uncertificated Securities” and may exclusively be asserted based on and transferred via the register.
It is still possible to register the Uncertificated Register Securities with a custodian (Verwahrungsstelle), which will give the register the same value as a “traditional” book-entry security.
Security tokens under Swiss financial market law
- Regulatory classification: Instead of “security token”, the Swiss regulator FINMA uses the term "asset token”. Such tokens represent assets like debt or equity claims on the issuer, and promise, e.g. a share in future company earnings or future capital flows. In terms of their economic function, they are thus analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the DLT/Blockchain also fall under this category. A token that qualifies as an asset token is classified as a security under Swiss financial law.
- Application of prospectus requirements: The Swiss Financial Services Act (FinSA) has introduced a general duty to publish a prospectus for securities. However, there are numerous exemption provisions, e.g. for offerings to (i) professional investors, (ii) less than 500 investors, (iii) investors that invest more than CHF 100’000, or (iv) which are limited to total amount of CHF 8 Mio calculated over 12 months.
- KYC/AML requirements: According to FINMA, issuers of asset tokens do generally not fall under the Swiss AML regulation. However, this must be asse
Key Advantages of STOs in Switzerland
Switzerland is one of the most advanced countries in the world in terms of DLT adaption and is an international hub for innovative companies comprising a wide network and profound expertise. The strong collaboration between the DLT ecosystem and the conventional finance industry helps to promote a sustainable growth of STOs in Switzerland.
- Lower costs: By eliminating numerous intermediaries and processes, the administrative burden and cost of each step is significantly lower, thus resulting in cheaper access to capital
- Easy and swift transferability: DLT-based settlement drastically increases transaction speed so that tokens and shares can be transferred within a minute - without paperwork and even digital/written signatures
- Full automation: Automated processes, such as fully automated execution of corporate actions (e.g. dividends or interest payments) or approval processes from existing investors
- Global investor reach: Digitized shares can be easily transferred globally 24/7 and location-independent with a simple investor onboarding, allowing investor outreach beyond established networks
- Enforceable rights: Token holders act as shareholders with enforceable rights, incl. dividend and voting rights
- Opening of market access and opportunities: Lower entry barriers to capital markets and access to new investment opportunities with options for smaller ticket size as well as portfolio diversification (incl. previously hardly investable assets)
- Fast incorporation: The whole procedure is accelerated by digitization of the processes as well as lighter regulatory requirements (FINMA no-action letter or tax ruling not required)
- Optimized corporate housekeeping: Digital corporate housekeeping including real-time token holder/ shareholder registry for optimizing the investor communication
Based in Zug, the platform is fully compliant with all Swiss laws related to financial intermediaries, banking, anti-money laundering, and organized trading facilities. Among its core values, there are innovative solutions through blockchain technology, which ensures security and liquidity.
EDSX is the first platform in Europe with primary and secondary markets for both institutional and retails. EDSX is a pioneering platform that employs the world’s leading technology to globally list security tokens in both primary and secondary markets, listing digital securities of real financial instruments to the public with a decentralized peer-to-peer exchange. Our goal is to fully engage every aspect of the financial revolution.
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