While security tokens are gaining popularity, the regulatory framework for Security Token Offerings (STO) can still be complicated. In this article, we will explore the legal aspects of issuing a security token in Malta.
On top of its reputation as an important financial center and a comfortable place in which to do business, Malta is among the first countries in the world to adopt clear and favourable crypto legislation.
Last July, Malta’s Parliament passed three bills establishing the regulatory framework for cryptocurrency, blockchain and distributed ledger technology (DLT):
- The Virtual Financial Assets Act (VFAA), which covers initial coin offerings (ICOs), VFA service providers and VFA agents.
- The Malta Digital Innovation Authority Act (MDIA Act), which is designed to support technological innovation, including DLT.
- The Innovative Technology Arrangements and Services Act (ITAS Act), which sets up requirements for registration of technology service providers and certification of technology arrangements.
Today, Malta is one of the world’s first and only countries to offer a legal framework for the issuance of security tokens and taxation of operations in the crypto market.
VFAA, MDIA Act and ITAS Act entered into force on November 1, 2018. However, Malta’s crypto legislation is not limited to these laws. The Malta Financial Services Authority (MFSA) regularly publishes instructions and guidelines covering various aspects of token circulation and requirements for market participants.
All digital assets can be placed in one of four categories:
- Virtual tokens (utility tokens) are outside the scope of VFAA.
- Financial instruments (including security tokens) are defined under the Malta Investment Services Act.
- Electronic moneys are defined under the Financial Institutions Act.
- Virtual financial assets (VFAs).
Passing the Financial Instrument Test (FIT)
The first step is to understand whether your token will be recognized as a security token. Under VFAA, before offering DLT assets to the public, issuers are required to pass the Financial Instrument Test (FIT).
This procedure helps to determine the legal nature of the issued token. FIT is divided into three main sections:
- Inputting issuer data and token-related details.
- Determination of legal nature of the token.
- Declaration that the test was prepared in accordance with VFAA and its guidelines, in a truthful and complete manner.
Tokens with characteristics of shares in companies/debt instruments should normally be considered as financial instruments, and fall outside the scope of VFAA. The results of FIT must be signed by the issuer’s board of administration and endorsed by the issuer’s VFA agent (the issuer is obliged to appoint a VFA agent, which could be a private individual or legal entity registered with the MFSA, and have one in place at all times).
Security token offerings fall outside the scope of VFAA. The reason for that is that FIT is regulated under the EU Prospectus Directive (2003/71/EC), the Malta Investment Services Act and the Malta Companies Act.
Therefore, if you want to launch an STO in Malta, you will have to prepare a prospectus compliant with requirements of the Prospectus Directive and other applicable laws of Malta.
The content of the prospectus should include information that allows investors to make an informed assessment of the rights attached to and characteristic of such securities (security tokens), issuers’ assets and liabilities, its financial position, etc.
The Malta Companies Act establishes more detailed specifications required for inclusion in the prospectus. A draft of the prospectus should be submitted to the Malta Registry of Companies for approval and registration.
If all applicable legal requirements are fulfilled, the Registry of Companies will approve and register the prospectus. Upon approval, the prospectus might be published and made available to investors, and the issuer of security tokens can proceed with the STO. The prospectus is valid for 12 months after approval.
If it is intended to offer security tokens across EU member states, the issuer may prepare a single EU prospectus and approve it in Malta.
Upon the issuer’s request, the Malta Registry of Companies might issue a certificate of approval to other EU members (known as “host member states,” while Malta is considered the “home member state”), allowing the issuer to use the prospectus approved by Malta for offering security tokens in the host member state.
Issue Your Token
Using Tokenomica, you can issue a security token free of charge. If you choose to have the paperwork completed by a lawyer specializing in STOs, you should be prepared to pay legal fees.
With our security token issuance platform, you can determine the most appropriate instrument and parameters for the token issue. We can then connect you with experienced lawyers who can complete the paperwork based on the information you provide. You negotiate conditions directly with them; we are not involved in this stage.
Once your paperwork is finished, you can return to the platform, issue your token in a few clicks and have it listed on our exchange.