The term ICO has been at the epicentre of discussions in the FinTech industry, being the main method of fundraising used by startup companies to develop innovative ideas on the Blockchain technology or other applications using Distributed Ledger Technology (“DLT”).

B. STOs — Security Token Offerings

Unlike ICOs, STOs are as their name suggests, securities and are treated as securities from day one[4]. They are digital assets that are subject to security regulations and need to be compliant with any registration and/or authorisation requirements before being issued.

C. Security Tokens — Definition

Although there is not a widely approved definition or legislation interpreting what deems a token to be a “Security Token”, ‘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”), means those classes of securities which are negotiable on the capital market, with the exception of instruments of payment, such as:

D. The Obligation

As per the EU Prospectus Regulation 2017/1129 (the “Regulation”)[8], any public offering of securities is prohibited without the prior publication of a prospectus[9], which has to be approved by the appropriate authority under a certain procedure, unless such public offering falls under the exemptions of the Regulation. However, such exempted offers of securities to the public should not benefit from the passporting regime[10]. This means that the issuer of the STO has to ensure that it complies with every Member State’s national requirements on the ‘offering of securities’ before the issuance of the STO. Below that threshold, Member States are able to require other disclosure requirements at national level.

E. Which are the exemptions to the obligation to draw up a prospectus provided under the Regulation?

The obligation to publish a prospectus under the Regulation shall not apply to any of the following types of offering of securities to the public:

F. Listing of Security Tokens on Secondary markets

Certain countries have started collaborating with token exchanges in an effort to build the infrastructure allowing Security Tokens to be legally traded on a “centralised” regulated security token exchange[11].

G. Final Remarks — Comments

Yet, despite the extraordinary success of ICOs, there is already a new model taking prominence, this being the STO. The latter seems to be the future of the industry, possibly because it represents a sale of securities, rather than mere coins or utilities. Needless to say, this attracts the more serious investors who want the comfort and guarantees of investing in a security (whether it is a share, debt or other financial instrument) structured in the form of a token.

H. Disclaimer

This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.

I. References

· Anthony Pompliano, The Official Guide To Tokenized Securities

K. Citations

[1] ‘Security Tokens Set To Take Center Stage in 2019’,


Lawyer — Managing Partner
Kinanis LLC

Our Firm

Kinanis Law Firm is a Law and Fiduciary Firm and advises for over 35 years international investors and private clients offering legal and consulting services since 1983.

Mr. Kinanis is a practicing Lawyer in Cyprus with 35 years experience in the Law profession. Author of various articles on Legal and Tax matters.