The Bank of Lithuania has issued the Guidelines on Security Token Offering (STO) which provide greater regulatory clarity and aim at higher investor protection. The Bank of Lithuania is one of the first market regulators in the world to regulate security token offering (STO).
Clear qualification of tokens and status of STO
As states the Bank of Lithuania, Businesses are interested in this particular way of raising capital as an alternative to bank lending. As a result the Guidelines on Security Token Offering are aimed at explaining Bank’s position in this regard and decided to set rules in order to avoid any miscommunication, misunderstandings and their consequences.
First of all, the Bank of Lithuania pays the attention that the regulatory status of STOs is likely to depend on the circumstances of individual case and is of the opinion that those tokens that meet the relevant conditions should be treated as equivalent to financial instruments and regulated as such, but regulation should be technology neutral. The provision that regulation is technology neutral means that the application of financial markets legislation does not depend on the actual use of any technology or on its kind. Tokens that are qualified as equivalent to financial instruments should be treated as a financial instrument in the light of the existing relevant financial markets legislation despite technology applied to such tokens (e.g., DLT).
Recommendations related to the issue of security tokens
Setting forth the regulatory approach of the Bank of Lithuania to tokens as a financial instrument, the new Guidelines focus on their classification, what tokens should be categorised as having features of securities or other financial instruments. According to the Bank of Lithuania, the question whether a token qualifies as a transferable securities or other financial instruments under the national transposition of MiFID II is of high importance as once it is considered as a transferable securities or other financial instruments the relevant financial markets regulation shall apply.
Specific cases, recommendations related to the issue of security tokens and applicable legal provisions potentially applicable to tokens issued through STOs are provided in the Guidelines too. For example, when token is qualified as transferable securities that have features specific to shares.
Such cases as obligation to publish a prospectus, if the tokens are a transferable securities and the tokens will either be offered to the public or admitted to trading on a regulated market, how information on the issue of tokens that have features of securities should be disclosed are considered and recommendation on the disclosure of specific information and specific risk factors in relation to the issuance of tokens and their issuers are provided too.
STOs are the new way of raising capital where an entity seeking to raise its funds does not issue shares, bonds or any other traditional financial instruments. Instead, it issues tokens recorded on a public or private ledger which entitle the bearer to a variety of rights similar to the rights granted to shareholders or owners of bonds or other financial instruments.
Previously, the Bank of Lithuania has also published (and later updated) its position on ICOs.
Guidelines on Security Token Offering you can find here.