5 minute read 16 Aug 2021
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Security token offering: a snapshot in Switzerland as of August 2021

Authors
Darko Stefanoski

Partner, Law Leader in Financial Services | EY Switzerland

His heart belongs to two places: one is Macedonia, where he has his roots, and the other is Switzerland, where he was born and lives.

Orkan Sahin

Senior Manager, Digital Law in Financial Services | EY Switzerland

Interface between technology and law. Passionate about emerging technologies and early- and growth-stage as well as non-traditional financial services. Loves to visit new places.

5 minute read 16 Aug 2021

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The rising popularity of asset tokenization is bridging the gap between traditional and new capital markets.

From Disruption towards Regulation

The rising popularity of asset tokenization is bridging the gap between traditional and new capital markets. A STO enables new opportunities for a token-based fundraising in a regulated environment. Following the principle of technology neutrality, the Swiss regulation of the token economy builds on existing financial market law, both of which are constantly evolving.

Financing through an STO has significant structural differences compared with traditional fundraising methods. Essentially, in contrast to traditional sources of financing (e.g. IPO) a STO does not necessarily require a financial intermediary. 

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STO – a snapshot in Switzerland 

This brochure provides an overview as of August 2021 of STOs in Switzerland from both a regulatory and transactional perspective.

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Every STO must be analyzed, on a case-by-case basis, in view of the application of the Swiss financial market law. Relevant provisions are, for example, the regulations for banks and securities dealers, the prospectus requirement or the collective investment schemes act. In September 2020, the Swiss parliament has approved the Federal law to developments in distributed ledger technology (Swiss DLT Bill). In line with the technology-neutral approach by the Swiss legislation, selective adjustments were made to existing laws:

  • As of February 2021, the so-called “register uncertificated security” (Registerwertrecht) has come into force. Notably, the newly introduced register uncertificated security does not require a regulated institution such as a bank, securities firm or central securities depository for its creation and transfer. Instead, the creation of such register uncertificated security is subject to the so-called “registration agreement” via a ledger-based register that must fulfil certain material requirements (Art. 973d para. 2 items 1 – 4 Swiss Code of Obligations). In addition, the segregation of crypto-based assets has been clarified in the case of bankruptcy.
  • In June 2021, the Federal Council brought the Swiss DLT Bill fully into force as of 1 August 2021. Namely, a new authorization category for DLT trading systems has be established in financial market infrastructure law, thus creating a flexible legal framework for new forms of financial market infrastructure.

Security tokens under Swiss financial market law

  • Regulatory classification: Instead of “security token”, the Swiss regulator FINMA uses the term "asset token”. Such tokens represent assets like debt or equity claims on the issuer, and promise, e.g. a share in future company earnings or future capital flows. In terms of their economic function, they are thus analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the DLT/Blockchain also fall under this category. A token that qualifies as an asset token is classified as a security under Swiss financial law.
  • Application of prospectus requirements: The Swiss Financial Services Act (FinSA) has introduced a general duty to publish a prospectus for securities. However, there are numerous exemption provisions, e.g. for offerings to (i) professional investors, (ii) less than 500 investors, (iii) investors that invest more than CHF 100’000, or (iv) which are limited to total amount of CHF 8 Mio calculated over 12 months.
  • KYC/AML requirements: According to FINMA, issuers of asset tokens do generally not fall under the Swiss AML regulation. However, this must be asse

Key Advantages of STOs in Switzerland

Switzerland is one of the most advanced countries in the world in terms of DLT adaption and is an international hub for innovative companies comprising a wide network and profound expertise. The strong collaboration between the DLT ecosystem and the conventional finance industry helps to promote a sustainable growth of STOs in Switzerland.

  • Lower cost: By eliminating numerous intermediaries and processes, the administrative burden and cost of each step is significantly lower, thus resulting in cheaper access to capital
  • Easy and swift transferability: DLT-based settlement drastically increases transaction speed so that tokens and shares can be transferred within a minute - without paperwork and even digital/written signatures
  • Full automation: Automated processes, such as fully automated execution of corporate actions (e.g. dividends or interest payments) or approval processes from existing investors
  • Global investor reach: Digitized shares can be easily transferred globally 24/7 and location-independent with a simple investor onboarding, allowing investor outreach beyond established networks
  • Enforceable rights: Token holders act as shareholders with enforceable rights, incl. dividend and voting rights
  • Opening of market access and opportunities: Lower entry barriers to capital markets and access to new investment opportunities with options for smaller ticket size as well as portfolio diversification (incl. previously hardly investable assets)
  • Fast incorporation: The whole procedure is accelerated by digitization of the processes as well as lighter regulatory requirements (FINMA no-action letter or tax ruling not required)
  • Optimized corporate housekeeping: Digital corporate housekeeping including real-time token holder/ shareholder registry for optimizing the investor communication

Summary

A security token offering (STO) enables new opportunities for a token-based fundraising in a regulated environment. We offer a snapshot in Switzerland as of August 2021.

About this article

Authors
Darko Stefanoski

Partner, Law Leader in Financial Services | EY Switzerland

His heart belongs to two places: one is Macedonia, where he has his roots, and the other is Switzerland, where he was born and lives.

Orkan Sahin

Senior Manager, Digital Law in Financial Services | EY Switzerland

Interface between technology and law. Passionate about emerging technologies and early- and growth-stage as well as non-traditional financial services. Loves to visit new places.