Most EU securities legislation is clustered around the Markets in Financial Instruments Directive (MiFID II), which defines “financial instrument,” “transferable securities,” regulated market,” and “multilateral trading facility.” It also provides the scope of EU law in this field, which generally adopts a territorial and market-focused approach. If a security gets offered or traded in a market located within the EU, it will be subject to EU securities regulation. With regard to countries located outside the EU, the EU seeks coordination with relevant authorities. While the legislation only applies to regulated secondary markets “situated or operating within a Member State,” the primary market in the EU is entirely covered by EU regulations even if there is no intended listing on a regulated secondary market inside the EU. Third country issuers get assigned a “home Member State” based on where the securities are intended to be offered for the first time, so whoever intends to offer securities on the primary market inside the EU has to follow EU prospectus legislation.
Unlike in the US, where the US Securities and Exchange Commission has very clear rules for prospectus regulation, no comparable report has been published by any European regulatory agency to offer guidance for token sales. Basic EU prospectus regulation is outlined here. While the Market Abuse Regulation, MiFID, the UCITS Directive, and EMIR all regulate securities, looking at prospectus regulation is of most relevance to token sales.
Since there are consequences for selling a security without a prospectus, it is important to determine whether tokens are qualified as securities under EU prospectus regulation. This can be answered by comparing the characteristics of the issued units to a list of exemplary securities (such as shares, bonds, etc). Whether tokens qualify as securities will depend on their features, so issuers will have to decide on a case-by-case basis whether the tokens they intend to sell are designed in a way that makes EU securities regulation applicable or not applicable. To determine what types of tokens are subject to this regulation, lawyers would have to look at their transferability, ease of trading on a capital market (negotiability and standardization), and functional comparability with shares or other forms of securitized debt. It is typically advised that pure investment tokens must typically be considered securities, while pure currency and utility tokens are exempt from EU securities regulation. Since many tokens exhibit components that make them fit in various categories, it is important to pay close attention to the details of each individual token.
There is no court judgment or official guidance on the EU level that serves as the equivalent to the Howey Test in the US, which means all doubts as to whether a token counts as a security or not are determined at the member-state level. Since there is very little certainty as to how to apply EU securities law to tokens and ICOs, the national laws of member states play a large role in determining this issue.
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