Public Offering in Estonia: Regulatory framework
With increase of popularity for Security token offerings, we are receiving requests for information with regards to legal framework in Estonia. As we have analysed in our articles before, STOs in Estonia are regulated with the same legislation as Initial Public Offerings. The goal of this article is to illustrate the procedure for public offerings in Estonia from legal perspective. The article provides brief analysis of prospectus and “simplified prospectus” documents in Estonia.
Public offerings in Estonia are regulated by Securities Market Act which stipulates that all offers of securities are deemed public if the following requirements are precluded:
An offer of securities is:
· addressed solely to qualified investors;
· addressed to fewer than 150 persons per Contracting State, other than qualified investors;
· addressed to investors who acquire securities for a total consideration of at least 100,00 euros per investor, for each separate offer;
· with the nominal value or book value of at least 100,000 euros per security;
· with a total consideration of less than 2,500,000 euros per all the Contracting States in total calculated in a one-year period of the offer of the securities.
The prerequisite of each public offering is the prospectus which contains all information which is presented in an easily analysable and comprehensible form and, according to the particular nature of the issuer and of the securities offered to the public, it is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attaching to such securities.
A prospectus may consist of one document or several separate documents which consist of a registration document containing information on the issuer, a securities note containing information concerning the securities to be offered to the public and a summary provided regarding relevant warnings. The document must include a summary in the same language as the prospectus expressing the main information in a brief manner and in non-technical language.
The summary with the prospectus has to provide information regarding the main characteristics of the relevant securities providing aid to the investors to make the investment decision. The summary must also include several warnings presented as an introductory with a purpose that the investment decision should be made based not only on summary, but taking the whole prospectus into consideration, and other outline provisions regarding court dispute related information. The length of prospectus document obviously differs from case to case; however, the issuer of securities should count that the document will contain 100+ pages and usually it takes at least 2 months to draft it. Important notice is that prospectus document must include audit report about company’s financial standing, therefore one should take in to consideration this aspect as well, when calculating time for public offering. Above mentioned requirements are stipulated by Prospectus Directive and are applicable in all Member States of EU for public offers above national threshold (more info about national thresholds see in paragraph 4 here).
The prospectus must be registered with the Supervision Authority, which in Estonia is the FSA- Financial Supervision and Resolution Authority, prior to being made public and the offer being announced. In order to register a prospectus with the FSA, an application shall be submitted, also if the home Contracting State of the issuer of offered securities is not Estonia, an application for the registration of a prospectus may be submitted to the FSA by the securities market supervisory agency of another state. In situation where the FSA finds that documents submitted upon filing the application does not meet the requirements foreseen in the legislation and does not include all the necessary information taking into consideration of the interests of investors, the FSA shall demand amended and legally compliant documents within ten working days after the filing of the application. The decision-making process by the competent authority falls under the same term, i.e. ten working days.
According to § 455 of the Financial Supervision Authority Act the processing fee for application, regarding registration of a prospectus for the public offer, trading or listing securities, is EUR 600.
Upon a public offer begins, the issuer or the offeror shall announce the offer. In order to announce an offer, the issuer or the offeror shall publish a relevant notice in at least one national daily newspaper. A notice of an offer and any other advertising pertaining to the offer disclosed orally or in writing, including information not disclosed for advertising purposes, may not be incorrect or misleading in character and may only contain information to be found in the prospectus. Also, there is a requirement that thenotice of an offer and any advertising materials pertaining to the offer shall be submitted to the Supervision Authority prior to being made public. However, an offer may be advertised only after registration of the prospectus. The planned date of disclosure and the place or manner of making it available to the investor shall be indicated in the advertising published before the disclosure of the notice of offer.
Simplified prospectus in Estonia
National threshold below which the obligation to publish a prospectus does not apply in Estonia is EUR 5M. For public offers between EUR 2,5M and EUR 5M the issuer must publish a simplified prospectus in accordance with rules established by Minister of Finance. According to the rules established by Minister of Finance, with regards to information which is relevant to STO issuers, simplified prospectus must include following information: 1) information on responsible persons: names, contact details, positions in the company; 2) information about the auditors who audited the company; 3) names and addresses of persons who are providing legal aid to the issuer; 4) specific information about shares issued in public offering – most importantly all rights arising from the shares; 5) the amount of income tax withheld in the country of registration of the issuer and in the country of residence of the issuer when the dividend is paid out; 6) information whether issuer retains income tax on dividend.
When analysed White Papers of current ICOs launched under Estonian legislation, none of the companies have provided so significant amount of information as required in “simplified prospectus” rules. According to publicly available information on registered and approved prospectuses in Estonia, it is possible to see that until May 2, 2019 there are 0 registered prospectuses with regards to issue of tokenized securities.
In conclusion it is possible to state that STOs, as they are regulated at the moment, are suitable for companies with decent amount of capital, because company will spend around EUR 30 000 in legal fees alone in the process of drafting prospectus, auditing company, preparing investor agreements, setting up corporate structure, etc. We have noticed several ICOs who are launched in Estonia, Latvia, Lithuania and according to the legislation they have issued security tokens (instead of utility tokens) and should register properly with National Competent Authorities, however, none of them have done it. It has caused several Court proceedings which are still in the process. We certainly don’t recommend organizing an ICO where company offers securities in hopes that it will slide by regulators and it won’t be noticed. There is a very high risk of legal action and penalties from regulators. Therefore, we recommend contacting legal professionals (hopefully us) before launch of STO.