How to Launch an ICO or STO in Malta’s newly regulated space!
The article was written by Dr. Justine Scerri Herrera
In this document, I shall shed light on the process and requirements for launching an ICO/STO in Malta, whitepaper requirements, the financial instrument test, and other related matters!
Due to the sudden explosion in the Blockchain and Crypto scene, the Maltese government has taken the bull by its horn and taken the necessary steps to introduce a clear regulatory framework to regulate these new industries with the aim of encouraging development and innovation whilst simultaneously protecting investors.
Remember Remember the 1st of November … On the 1st of November 2018 three bills regulating Blockchain and Cryptocurrency based business, ICOs, Cryptocurrencies, and their Service Providers became acts and are now in full force.
Due to being one of the first Jurisdictions brave enough to introduce comprehensive laws related to this new industry, Malta has gained a lot of attraction, and rightly so. As common knowledge dictates, who would not prefer to set up shop in an offer shore jurisdiction over a regulated one?
The Holy Trinity of the new Maltese Acts:
The following three Acts which are all inter-connected and complement each other quite nicely, together provide this new industry with a wholesome framework. They comprise of the following:
1. The Malta Digital Innovation Authority Act (MDIA) – This act establishes a new authority to deal with, develop and promote the innovative technology sector in Malta. The MDIA will certify DLT (Distributed Ledger Technology) platform software and the internal governance thereof. This certification will provide comfort and legal and technical certainty to users of Malta-based DLT platforms.
2. The Innovative Technology Arrangement and Services (ITAS) Act– This act applies to the registration of Technology Service Providers and the auditing and certification of technology arrangements. Arrangements include applications such as smart contracts, software, design, token architecture, token exchanges and the more alike.
3. The Virtual Financial Assets Act (VFAA) – The father of the Trinity! This Act provides a detailed legislative framework for ICOs, Crypto exchanges and other related services related to VFAs such as Custodian services and providing investment advice. The Act covers licensing, white paper requirements and other core aspects such as the appointment of a VFA Agent!
A deeper look into the Maltese VFAA
The new Maltese Regulations do not group all virtual assets into one basket, but rather segregate them into four different categories, depending on specific characteristics they pertain. Different applicable laws apply depending on the Virtual Asset’s categorization.
It is important for persons looking into Malta as the jurisdiction to set up their business in or launch their product/asset from to understand the underlying characteristics of each asset since similar terms might mean have a different meaning in other jurisdictions!
What are the 4 main DLT Assets the relevant Act speaks about?
1. A Virtual Token (VC) – This is a form of digital medium recordation that has no utility, value or application outside the DLT platform on which it was issued and may only be redeemed for funds on such platforms directly by the issuer of such DLT asset. These are commonly known as ‘utility tokens’. Incidentally, utility tokens are not traded on exchanges.
2. Electronic Money – Electronic money including magnetically stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions. This definition is different to virtual currency schemes since in the latter funds do not need to be redeemed at par value.
3. A Financial Instrument – This shall have the same meaning as the one found in the EU Markets Financial Instrument Directive (MIFID) and shall include instruments such as transferable securities, money market instruments and units in collective investment schemes, derivatives and more.
4. A Virtual Financial Asset (VFA) – The Unicorn of the group! This asset is any digital that is used as a digital medium of exchange unit or account or store value and is NOT 1 2 or 3 (a VC, E-Money or Financial Instrument).
Initial VFA Offering: ICO or STO?
Issuers who want to launch their ICO or STO from Malta and register their Whitepaper with the Maltese competent authority (MFSA- Malta Financial Services Authority) must first assess what their asset classifies as in accordance with Maltese legislation. The MFSA has introduced a Financial Instrument Test which comprises of carefully selected questions to bring out a determination as to the classification of a DLT asset.
The Financial Instrument Test: The methodology used is a 3 stage process:
1. The test would first verify whether the DLT asset falls under the category of Virtual Token (also known as utility tokens). As previously stated these have no utility outside the platform they are built on and are non-tradeable on exchanges. Such tokens are exempt from the VFAA.
2. Assets that can be traded on a secondary market would then pass to the second phase of the test where various definitions of securities and other financial instruments found in the EU Directive known as MIFID will be applied. If the token falls under this definition those assets will be governed by MIFID. These token are known as security tokens.
3. If there is a negative result in the first two stages then the ICO token would be classified as a Virtual Financial Asset (VFA) and consequently be regulated under the new Maltese VFAA.
More about the Financial Instrument Test
The Financial Instrument test is in the form of an excel sheet and comprises of 3 main stages. The first stage relates to the providing details of the User and DLT asset. The second stage is when a number of specific questions are posed in order for a determination to be made on the DLT asset. In the third stage signed declarations in relation to the truthfulness of the test are made by VFA Agent.
During the second stage questions based on certain criteria to be filled must be responded. Some examples of the criteria which define the 4 DLT Assets are the following:
1) Virtual Token characteristics include:
- Limited to one DLT platforms
- Not capable of being listed
- not convertible into another DLT asset type
2) Financial Instrument / Security Token characteristics include:
- 397 days maturity
- rights to dividends
3) E-Money Asset characteristics include:
- Purpose is of a payment transaction
- Such asset is redeemable at par value
4) Virtual Financial Asset characteristics include:
- Where such asset does not have all the requirements needed to be classified as the other VFAs (virtual token, financial insturment, electronic money) they fall under this categorization.
Are STOs the way forward?
Security tokens are proving to be more and more attractive for a number of reasons but primarily because they offer a much simpler route to international financial markets. Security tokens can be used to tokenise anything from gold to real estate to debts and can be done in a more cost-efficient way through global mass funding online instead of through the traditional financial market channels which often carry certain burdens such as the use of middlemen.
The contract between the parties is executed on a Blockchain with the protocol’s consensus mechanism validating the owner’s right of ownership. Security token offerings give holders of such tokens the same rights as traditional securities such as profit or dividends (Equity Tokens). Security tokens offer many other attractive solutions or profit-making schemes such as the possibility of offering potential buyers fractional ownership of assets such as real estate.
The Holy Bible – The Whitepaper
All Whitepapers or prospective papers (for STOs) as the case may be shall be subjected to the Maltese financial instrument test issued by the MFSA for token classification and consequent determination of applicable law before being sent to the MFSA for approval and potential registration. A VFA Agent shall be the person responsible for vetting and sending such Whitepaper for approval/registration.
The Whitepaper shall be drawn up in accordance with the requirements of the VFAA and the prospective paper for STOs shall be drawn up in accordance with the EU Prospective Directive.
Both papers must explain to prospective investors and potential buyers: the nature of the token, model it is built on, financial projections, management, details of issuer and advisory team, token mechanism, a description of any applicable rights and obligations that arise from the ownership of such token, associated challenges and risks, wallet particulars, soft and hard caps for the offering, methods of payments, distribution of the tokens, timelines of past and future milestones, smart contract considerations (such as burning protocols and transfer limitations) and more!
Issuers would need to submit some additional documentation besides the legally vetted whitepaper and the financial instrument test results. These ad-hoc documents include a confirmation from a registered Systems Auditor that the issuer’s technology arrangement/s complies with the standards and guidelines issued by the MDIA and the submission of the applicable registration fee.
A white paper shall be valid for 6 months after its approval by the MFSA for offers to the public.
In short, whitepaper needs to contain sufficient enough information necessary to enable investors to make an informed assessment of the prospects of the issuer, the proposed project and of the features of the virtual financial asset. Therefore this information needs to be presented in an easy and comprehensible form.
The VFA Agent
There is a requirement for the appointment of a VFA agent. Issuers need to appoint and at all times have in place a VFA agent who shall be registered with the MFSA. VFA agents shall advise and guide the issuer as to its responsibilities and obligations to ensure compliance with the applicable legislations and shall be in charge of submitting all required documentation to the MFSA. They shall also verify all information which needs be taken into account for the purpose of registering a whitepaper.
VFA agents are independent from the issuer and act as a liaison/point of contact between the issuer and MFSA on all matters arising in connection with the registration of the whitepaper and thereafter.
Any entity that offers a VFA or wants to provide to be a Service Provider of VFA services is required to apply for a license from the MFSA through the guidance of a registered VFA agent.
Licensing requirements include: verification of issuers, registered address in Malta, fit and proper tests, licensing fees ect.
The different categories of licenses are the following:
1. Class 1 Licence holders authorised to receive and transmit orders and/ or provide investment advice in relation to one or more virtual financial assets and/ or the placing of virtual financial assets. Class 1 Licence Holders are not authorised to hold or control clients’ money.
2. Class 2 Licence holders authorised to provide any VFA service but not to operate a VFA exchange or deal for their own account. Class 2 Licence Holders may hold or control clients’ money in conjunction with the provision of a VFA Service.
3. Class 3 Licence holders authorised to provide any VFA service but not to operate a VFA exchange. Class 3 Licence Holders may hold or control clients’ money in conjunction with the provision of a VFA Service.
4. Class 4 Licence holders authorised to provide any VFA service. Class 4 Licence Holders may hold or control clients’ money in conjunction with the provision of a VFA Service.
- English Language
- Tax Benefits
- EU Passporting rights
What can we can help you with:
- Checking that your white paper is compliant with the VFA act before submitting such paper to the MFSA.
- Liaising with MFSA to register your white paper and submit necessary documents
- Categorise your DLT asset by taking the Financial Instrument Test provided by the MFSA (with your help and verification)
- Prepare all documents needed for the launching, registering and licensing of token.
- Set up any companies you may need to provide adhoc services.
- VFA Agent Services
- Other services (systems auditor, tax advice, relocation etc)