While the use of DLT-based financial services is rapidly transforming the whole picture of financial markets for both market investors and market infrastructure providers (payment systems, stock exchanges, trading venues, securities custodians, issuing companies), these raise specifically challenges for both regulators and market participants due to the uncertainty on how the existing regulatory framework can be applied toThe Law "On financial markets based on the technology of Distributed Ledgers", (the "Law") in additional to what we have explained thus far, also regulates two very important steps for the system organization and functioning, in particular the Initial Coin Offering ("ICO") and the Security Token Offering ("STO").
In simple words, the Initial Coin Offering is the cryptocurrency industry's equivalent to an initial public offering (IPO) whilst the Security Token Offering is a type of public offering in which tokenized digital securities, known as security tokens, are sold in cryptocurrency exchanges, or security token exchanges. The Law applies to STOs and ICOs issued by an issuer in or from Albania. An STO or ICO is considered to be launched in or from Albania, if the issuer is an individual/entity registered in Albania (according to the definition of the Law).
Initially ICOs were the first crowdfunding option to surface in the Blockchain ecosystem. This method of fundraising enabled anyone, from anywhere, to finance the development of a company or project. In exchange for their investment, the investor will receive a number of utility tokens, or, user tokens in other words. These tokens represent future access to a company's product or service. There's no entry barrier for neither sellers nor buyers, it's open to crowd investing. Once the ICO is launched and has a defined timeline, the investors can buy the tokens. Compared to STO, it's a short-term investment. The teams have the liberty to use the funds in the way they deem most beneficial. Later, the tokens are distributed in a simple automated way via smart contracts1.
The Law defines ICOs as: "...method for raising funds, different from an STO, in which a Digital Token and/or Virtual Coin issuer offers them in Albania or abroad, in exchange for capital, in accordance with this law". When the offer to the public is expected to have a total equivalent value of, or higher than 8,000,000 (eight million) euros or the equivalent of this amount in ALL, within a period of 12 months, inter alias, the issuer has the obligation to publish a prospectus.
For ICOs in which the offer to the public is expected to have a total value of less than 8,000,000 (eight million) euros, the issuer will be required to publish an information document regarding the offer, the form and content of which is determined through regulation of the Albanian Financial Supervisory Authority ("AMF"), albeit it has less obligations to fulfill (i.e. authorization, presentation of whitepaper, etc., do not apply).
As a general concept, an STO is in its essence similar to an ICO. STOs surfaced as a reaction to the lack of oversight when it comes to ICOs, to bring regulation to Blockchain based crowdfunding and offer more guarantees in the space of raising funds using tokens issued on a Blockchain. When ICOs are more commonly used to raise funds for a tech product, STOs are more linked to financial services. Therefore, before the launch of the idea and announcement, the company has to come up with a scalable business model, which makes the projects more mature and trustworthy. To launch an STO, it takes more time to get the regulators on board and carry out the necessary tokenization of the assets. Generally, it's limited to accredited investors only and the amounts of money required are bigger. Later on, the securities tokens are going to be traded via broker-dealers supervised by regulatory bodies.
The Law defines an STO as: "...a public offer, where the issuer of DT of securities offers them in Albania or abroad, in exchange for funds, according to the provisions of this law".
According to the Law, when the offer to the public is expected to have a total equivalent value of, or higher to 1,000,000 (one million) euros or the equivalent of this amount in ALL, within a period of 12 months, inter alias, the provisions of the legislation in force for capital markets, regarding the terms of the offer and prospectus and the provisions of the legislation in force for collective investment undertakings (in case the issuer of DT of securities is an alternative investment fund offered to professional clients) shall apply. These provisions shall be applicable to the extent they do not run counter to the Law. When the offer to the public is expected to have a value of less than 1,000,000 (one million) euros or the equivalent in ALL, within a period of 12 months, STOs are exempted from the obligation to publish a full prospectus. For these STOs, the publication of an offer will be required, according to the provisions of the Law no. 62/2020 "On Capital Markets"2.
As a general rule, legal entities that seek to launch an ICO (with an expected value above 8,000,000 Euro) or a STO, must obtain a prior authorization by the competent authorities.
1 "Smart Contract" is a technological agreement, essentially dependent on or linked to a DLT, which contains a set of rules and conditions, which set in motion predetermined reactions and which are automatically implemented in case of fulfillment of the conditions set out in it. Smart contracts fall under the definition of "innovative technology agreement", within the meaning of the Law.
2. Law no. 62/2020 "On Capital Markets" has entered into force on September 1, 2020.
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