e-Residency and Security Token Offerings
Both concepts, the e-Residency program and the token offerings have similar underlying principles. To simplify, bring down the costs, and to enable doing everything online, remotely. It’s no surprise that they also complement each other.
For example, if you’re an Asian company or a US company, you can use the Estonian e-Residency to register your European SPV (special purpose vehicle) to raise capital in the European Union. Surely, there are nuances that need to be clarified first, i.e what sort of offering is planned and which legal structure is required (and can you use the e-Residency for the registration of such entity), but in principle, it’s doable.
There’s no doubt that you know about the ICOs, as otherwise, you’ve lived under the rock for the past few years, which in turn makes it unlikely that you’re reading this post. However, as much as we like the concept of the ICOs, we at Comistar and TokenizEU, and the market in general is now going full steam ahead towards STOs – security token offerings. Security tokens are securities on the blockchain or digital securities. It also means that any offering of such tokens is a regulated offering.
The regulations can be quite demanding, and for the past few months, we’ve been working on the legal structures and details on how security token offerings can be done under Estonian regulations. The good news is that it can be done, the bad news is that it’s difficult to provide a clear one-size-fits-all solution in this market, as the needs of the companies differ. However, we are working on models, which perhaps are not 100% plug-and-play solutions, but at least provide a framework to follow. And registering the Estonian company plays a big role in that, as it’s the starting point.
If you, as an e-Resident, have decided to raise capital via Estonian SPV, then we would like to outline some of the steps that you have to go through:
- Work on your documentation. Really, work on it – write out your plans in as detailed way as possible. Think about details of the venture, the business idea, the team, the processes, the rights that the token holders will receive, the features and benefits of the token, expected timetable, the use of the capital you raise, risks related to the business and underlying technology etc. Try to be as detailed as possible, as this allows you to create a document which we can work with. The better you’ve done it, the less expensive it tends to be. You should do this even before you register the company, as the company registration takes no time. Quality of the counsel is extremely important.
- Decide on the type of the security – equity (share), debt instrument (bond, convertible bond, debt), or just some sort of revenue share token, which does not provide rights for the underlying assets of the company. The decision here can affect which type of entity you should register. This step is done in accordance with the first step, as it’s important to describe the token in the prospectus that you’re preparing. Quality of the counsel is extremely important.
- Register the company (SPV). Can be done earlier as well.
- Finalize (the drafted documentation is turned in to a compliant document with the help of the lawyers) and register the prospectus (including notifying the other Member States).
- Publish prospectus and start marketing.
- Token offering event.
In reality, it’s more nuanced and it requires an investment of time and money, but that’s the high-level description of what needs to be done to raise capital via STO in Europe. As it’s a new concept, then more innovative and perhaps smaller countries are faster to react and easier to work with. Bureaucracy does matter, and doing the STO in the right jurisdiction can end up saving you months. Though Europe seems like a museum from time to time, the Fintech industry is booming. in July 21st this year, the EU will simplify the requirements for starting companies. There is some positive momentum.
While we can’t predict what will happen and how the market will evolve, we can surely prepare.
Have any questions? Let us know by writing to us.
Comistar provides business, legal and tax support for e-residency companies. Our core focus is on Fintech licensing, e-commerce companies, blockchain industry and affiliate marketers. We’ve been operating for over 5 years and have helped more than 300 companies to get started in Estonia