10 Dec MiCA – Offering of Crypto-Assets and Admission to Trading
1. Present Regulatory Environment
With the exception of a few European national jurisdictions that have adopted domestic crypto-assets regimes, such as Malta and France, the admission and offering of crypto-assets on European capital markets is subject solely to the listing rules of individual trading platforms. The Markets in Crypto Assets draft Regulation is bound to change that by imposing uniform disclosure and investor protection requirements on crypto-asset issuers similar to those that apply to issuers of financial instruments. This part of the series will look at the provisions envisioned by MiCA in relation to all crypto-assets that are not asset-referenced or e-money tokens. The latter types of stablecoins will be considered in a follow up article.
2. Primary Requirements for the Offering of Crypto-Assets and Admission to Trading
Once MiCA enters into force, crypto-asset issuers offering their tokens to the EU public or seeking their admission to trading platforms must comply with three primary requirements. The first of those stipulates that issuers must be registered as legal entities in an EU Member State. Having a centralized institution responsible for pursuing the assertions made to investors at the time of offering makes it much easier to obtain accountability in cases of misrepresentation and fraud. Therefore, the obligation of incorporation serves as incentive for issuers to be objective in their public claims, refrain from making unrealistic declarations regarding the future prospects of their coins, and act in the best interest of token holders.
Second, crypto-asset issuers will have to draft and publish whitepapers that publicly disclose essential marketing information regarding their products. Pursuant to MiCA, whitepapers will be expected to describe the issuing company and team involved in designing and developing the crypto-asset. The document will also have to clearly outline the rights and obligations attaching to the crypto-assets on offer, the reasons for the offering, planned use of the proceeds, and all risks related to the issuer, product, and project implementation. And finally, whitepapers should include further technical details regarding the underlying technology and mechanisms that allow the holding, storage, and transfer of tokens as well as the number of crypto-assets to be issued, their price, subscription terms and conditions. Issuers should take great care in ensuring the truthfulness of all required information as they will bear legal liability for every statement made in such documents.
And third, crypto-asset issuers should notify their whitepapers to their respective national competent authorities (NCAs), such as the Autoriteit Financiële Markten in the Netherlands or BaFin in Germany, at least 20 working days before publication. The notification must explain why the tokens do not constitute financial instruments under MiFID II and may require that the NCA extends the notification to a list of Member State authorities where the issuer also plans to make the offering. Unlike prospectuses concerning the offering of financial instruments, crypto-asset whitepapers will not need to be approved by NCAs. Nevertheless, competent authorities will be tasked with certifying the compliance of planned crypto offerings with MiCA provisions and will have the power to prohibit or suspend trading in case of irregularities.
3. Additional Responsibilities
In addition to the three principal obligations outlined above, issuers must also adhere to principles of honesty and fairness when dealing with purchasers and must establish administrative systems to prevent internal conflicts of interests. Storing funds, collected as a result of the offering, with certified credit institutions or crypto custodians and maintaining security systems and protocols to protect the crypto ownership of investors are also the responsibility of issuing companies. And lastly, in order to ensure a maximum level of consumer protection, MiCA further mandates issuers to provide a 14 days right of withdrawal to token purchasers as long as the crypto-assets are not already admitted on a trading platform.
Following MiCA’s adoption, whitepapers are likely to become the most expensive component of crypto-asset public offerings due to the likely need to involve legal, financial, and IT experts in preparing such documents. However, the cost for issuers could be dramatically decreased if any of MiCA’s exemptions from drafting, notifying, and publishing of whitepapers applies. According to the provisions in the draft Regulation, whitepapers will not be required when crypto-assets are offered for free, as would be the case with crypto airdrops used to advertise new projects, when the public offering is considered small – available to less than 150 people per Member State or for a total consideration of less than EUR 1 million – and when the crypto-assets are offered solely to qualified (professional) investors. In addition to those instances, whitepapers will not be necessary for crypto-assets issued as reward for the maintenance of DLT networks, such as coins created through the process of validating transactions popularly known as “mining”. And finally, the distribution of unique, non-fungible tokens (NFTs), like the ones used to sell digital artworks online, will also fall under the exemptions. This latter category may prove to cover some of the most substantial crypto transactions, since NFT markets have exploded in recent months with pieces such as “EVERYDAYS: THE FIRST 5000 DAYS” by Mike ‘Beeple’ Winkelmann, selling for record-breaking $69.3 million and several “CryptoPunk” pictures, selling for over $7 million each. As stated in MiCA’s preamble and accompanying EU Commission Impact Assessment, the exemptions are meant to introduce a degree of proportionality for public offers limited in value or reach and avoid discouraging startups and SMEs from engaging in small scale projects, which can often prove to be the drivers of innovation, due to heavy administrative costs.
5. Expected Effects
The rules on offering and admission to trading that MiCA is expected to introduce in relation to crypto-assets other than asset-referenced and e-money tokens, demonstrate best how the draft Regulation will increase consumer protection and contribute towards establishing the credibility of the crypto sector. Probably the biggest shift from current practice that MiCA will cause is to attach civil liability to all statements and material omissions made in crypto-asset whitepapers. Post adoption issuers will need to be very careful in describing their products thoroughly, without including any misleading information or making assertions about the future value of tokens when unable to guarantee it, which should increase investor confidence in official marketing documents related to crypto offerings. Of course, some of these improvements will come at the expense of decentralized finance (DeFi) projects. For example, the obligation of legal incorporation, which has the purpose of guaranteeing issuers’ accountability, will essentially prohibit crypto-assets with unidentifiable issuers from EU trading platforms. Similarly, the compulsory drafting of whitepapers, necessary to increase transparency, will add to the administrative costs for issuers. Yet such expenses will be offset by the EU-wide passporting regime for crypto-assets, which will create efficiency by removing the need to seek admission separately in each Member State. Ultimately, MiCA’s adoption is a balancing exercise that will sacrifice some of the freedom and flexibility associated with crypto projects in order to weed out illegal activities that such digital assets have enabled to proliferate.
Series of blogs ‘MiCA’
The draft Markets in Crypto-Assets (MiCA) Regulation was released by the European Commission in September 2020. As with most markets-focused regulations, one of MiCA’s priorities is to limit the potential risks to the consumer. But the EC’s proposal also aims to address certain issues that it sees as hindering the EU crypto-asset sector.
Watsonlaw will publish a series of blogs about MiCA over the coming weeks.
The following topics are covered:
MiCA – Introduction to the Markets in Crypto-Assets Regulation
MiCA – Reasons and Objectives
MiCA – Choice of Legislative Instrument and Scope
MiCA – Offering of Crypto-Assets and Admission to Trading
MiCA – Offering and Admission to Trading of Asset-referenced and E-money Tokens
MiCA – Regulation of Crypto-asset Service Providers
MiCA – Market Abuse Prevention under MiCA
If you have any questions about the MiCA, please contact new tech expert Willem-Jan Smits or Camiel Vermeulen. Our cryptoteam has extensive knowledge of the crypto- asset sector and are ready to help you.