Stock tokens – transferable securities or unregulated blockchain tokens?

Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation are the focus of his work. In his guest contribution he addresses the question of whether stock tokens are transferable securities or unregulated blockchain tokens.

This article is first on the Fin Law Blog published.

At the end of April, BaFin announced via a report on its website that it had a sufficiently well-founded suspicion that a well-known crypto trading platform in Germany was publicly offering securities in the form of so-called stock tokens without the necessary securities prospectuses. Stock tokens are one of the most recent innovations in the crypto market, in which a special purpose vehicle buys shares in order to then tokenize the value of the portfolio it holds. The tokens are then offered to interested investors on a crypto trading platform, who can thus participate in the price development of the underlying share. The specific legal design of stock tokens depends on the respective provider and the legal tokenization options of the law chosen for the construction. Whether stock tokens are securities according to German supervisory law, in accordance with the opinion of BaFin, is still highly controversial.

Anyone who publicly offers securities within the meaning of the EU Prospectus Regulation must first prepare a comprehensive securities prospectus for the offer and have it approved by the responsible supervisory authority. The approved securities prospectus must then be deposited with the supervisory authority and published by the provider. In this way, investors receive all the information they need to be able to make an investment decision. The EU prospectus regulation initially classifies stocks as securities. It is obvious that investors in stock tokens do not purchase shares directly with the above arrangement via a special purpose vehicle. According to the ordinance, securities are also other products that are equivalent to shares or company shares. However, stock token apparently does not entitle investors to acquire shares in the special purpose vehicle. Rather, the ownership of stock tokens should only entitle investors to participate in the price development of the underlying shares.

In addition to shares and equivalent securities, the EU Prospectus Regulation also covers other financial products that give investors the right to a cash settlement based on indices or other measured values. The market value of shares is such a measure that stock tokens can be securities in the form of derivative financial products. For classification as a security within the meaning of the EU Prospectus Regulation, however, it is also imperative that the financial product in question is transferable.

According to the discussion so far, the transferability of stock tokens seems to be the decisive aspect for answering the question of whether stock tokens can be securities according to the EU prospectus regulation. In this context, the crypto trading platform argues that investors can only trade their stock tokens with a regulated German securities trading bank and that the tokens are therefore not transferable. BaFin counters this by stating that the transferability of a token can be assumed if it can be technically and legally transferred to other users. In fact, the fact that stock tokens can be purchased by investors and, if the decision is made, can be sold to the securities trading bank at any time is a strong argument in favor of transferability. For the classification of a product as a security, the EU prospectus regulation does not differentiate according to whether investors can trade the product with a large number of participants on a trading platform or only with a market maker such as a securities trading bank.