Can it delay allowing the token sale?

This article is first on the Fin Law Blog appeared.

It has been known since 2019 at the latest that tokens issued by companies can also be classified as securities under German securities supervision law if they are fundamentally tradable and are associated with securities-like rights. Since the Electronic Securities Act (eWpG) came into force in Germany in summer 2021, crypto securities have even been a form of tokenized securities expressly provided for in the law.

For BaFin, the first public offerings of security tokens have not been uncommon for a long time. If the publication of a securities information sheet (WIB) is required for such issues, BaFin must decide on the approval of the WIB before publication. Since 2019, BaFin has already checked a large number of WIBs for security token offerings.

The authorities often seem to have problems if the planned token sale is only to take place several weeks or even months after the permit has been granted. In such cases, it often refers to its administrative practice, according to which approval must not be too early before the start of the offer in order to ensure that the information in the document is up-to-date.

Delaying approval by BaFin without any legal basis

The administrative practice of BaFin is legally untenable. BaFin’s task under the Securities Prospectus Act is to check whether the legally required minimum information and instructions are contained in the securities information sheet in full and in the prescribed order.

In addition, BaFin should check whether the issuer’s last annual financial statements are not older than 18 months at the time of approval. The determination date of the annual financial statements is decisive in this respect. If there is a guarantor for the token issue, BaFin also checks whether the guarantor’s annual financial statements are up to date.

According to the Securities Prospectus Act, BaFin does not carry out any further checks to ensure that the information is up-to-date. There is no statutory order according to which the offering of a security token on the market must begin promptly after approval.

Up-to-dateness of the information in the WIB is ensured by the obligation to add additional information

Of course, it is of considerable importance for potential investors that the information contained in a WIB is up-to-date and offers a reliable basis for an investment decision. However, the information is up-to-date even without BaFin’s further audit obligations, as issuers of securities and thus also of security tokens are obliged to immediately supplement or correct any new circumstances and any important inaccuracies in the information in the WIB .

The update must be made via an addendum, which must also be approved by BaFin before it is published. In this respect, the obligation to check that the information is up to date is not the responsibility of BaFin, but of the issuer, who can also be held liable to investors if this obligation is breached. Consequently, the Securities Prospectus Act also stipulates that each WIB must contain a reference to the fact that the correctness of the content of the securities information sheet is not subject to review by the Federal Agency.

Contrary to the administrative practice of BaFin, a WIB can therefore also be permitted well before the start of the offer. However, issuers must note that WIBs are only valid for a maximum of one year.

Specialist lawyer Lutz Auffenberg has specialized in the field of fintech and innovative technologies with his law firm Fin Law. In particular, the blockchain technology and its regulation is the focus of his work.