On 19 April 2019, the House of Representatives passed Law No. 57(Ι)/2019 amending the Public Offering and Prospectus Law No. 114(I)/2005, (the “Prospectus Law”).
By this amending law No. 57(Ι)/2019, the Republic of Cyprus has exercised its discretion to exempt offers of securities to the public from the obligation to publish a prospectus, provided that the total consideration of each such offer in the European Union is less than €5.000.000 calculated over a period of 12 months.
This discretion of the Republic of Cyprus was exercised pursuant to the European Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (the “EU Prospectus Regulation”).
B. NEW OPPORTUNITIES FOR OFFERING OF SECURITIES IN THE FORM OF TOKENS UP TO €5.000.000
The possibility for a public funding up to €5.000.000 without the obligation to approve and publish a prospectus, is an important development which will be particularly attractive to small scale offerings and to start-ups seeking to raise financing in a cost efficient and fast way.
The benefit of the increase of the minimum threshold to €5.000.000 is evident for small sized companies and start-ups seeking to attract funding especially for innovative projects in the fintech space where the procedural costs approving and publishing a prospectus in accordance with the Prospectus Law is likely to be disproportionate.
Start – ups in the blockchain sphere, may now issue and offer to the public their security tokens for a total value up to €5.000.000 without any procedural restraints related to the approval and publication of a prospectus.
This development is welcomed in the sphere of offering of tokenized securities as new financing opportunities are widely opened as well for this category of securities.
C. OFFERING OF SECURITIES IN THE FORM OF TOKENS OVER €5.000.000
The offering of securities in the form of Tokens over €5.000.000 currently faces procedural restraints and lacks clear guidance on the part of the regulating authority, Cyprus Securities and Exchange Commission (CySec).
Even if the regulating authority has not yet identified what constitutes a “Security Token”, the identification lies within the meaning of “transferable securities” as per Art. 4(1)(44) of the Directive 2014/65/EU of 15 May 2014 on markets in financial instruments (“MiFID II”) – Implemented in Cyprus as per Art. 2 of the Law 87(I)/2017 which provides for the provision of investment services, the exercise of investment activities, the operation of regulated markets and other related matters (the “Investment Services Law”).
As per the provisions of these Articles, “transferable securities” means those classes of securities which are negotiable on the capital market, with the exception of instruments of payment, such as:
a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;
b) bonds or other forms of securitised debt, including depositary receipts in respect of such securities;
c) any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.
It can be argued that Security Tokens conferring similar rights to shares, such as dividends, voting rights, participation in profits, ownership of assets, could fall within the meaning of “other securities equivalent to shares in companies” under sub-paragraph (a) above, of Art. 4(1)(44) of the Directive 2014/65/EU of 15 May 2014 on markets in financial instruments (“MiFID II”), interpreting Transferable Securities and the relevant Article of the Cyprus legislation, above.
CySec should consider whether it is time to issue relevant guidance towards this direction identifying what it considers a Security Token to be, as such guidance is reasonably justified based on the provisions of Art. 4(1)(44) of the Directive 2014/65/EU of 15 May 2014 on markets in financial instruments (“MiFID II”), and the relevant Article of the Cyprus legislation, above.
Changes in this sphere of the law are extremely quick and there is not any room for further delay.