Supervision Requirements for STO in China's Legal System——Analysis of Legal Provisions

Source: Weiyang Network

Author: Jansen Ma

With the development of blockchain bookkeeping, quantum computing and other technologies, all real rights, creditor's rights, intellectual property rights, equity and other property rights and other underlying assets can be confirmed in the legal sense to form a security token ( Security Token) , which becomes a certificate of civil rights with property attributes . Security token is a secure, continuous, and invariant chain-like data structure, and has significant features such as distributed, multi-node consensus, openness and transparency, and immutability.

STO (Security Token Offering) refers to the issuance of securities tokens, and it issues securities tokens. Unlike the lack of oversight of ICOs, severe asymmetry in information between investors and project parties, and unclear rights and responsibilities, STO is supported by real underlying assets, making blockchain project investment more standardized and more sustainable. In terms of supervision, governments of various countries (especially the US government) have made many attempts to incorporate the existing token market into traditional financial supervision without introducing new supervision policies. This series of articles will explore and study the regulation of STO in French-speaking China.

In the above " Legal Meaning of Security Token (ST, Security Token)-Re-Expanding the Concept of" Securities "in Chinese Law ", I proposed that ST clearly belongs to the category of securities in a broad sense, and is the development of securities with cutting-edge technology And the latest evolution has formed specific manifestations . In the future, ST will subvert the existing securities system and become an important part of future securities . And call on the regulators to actively embrace new technological changes and new development trends, and to explicitly incorporate securities tokens into the regulatory scope in legislation or the application of laws, to give new business, new business formats and other financial innovation activities to grow and effectively address business behavior. Uncertainty in compliance promotes the development of the digital economy.

Based on the above, this article will sort out the legal provisions that may be involved in STO in China. It is worth emphasizing that although there are no proprietary provisions regulating STO in Chinese law, the application of the law is scattered in various laws. The so-called news reports believe that the interpretation of the STO without applicable laws has no factual basis.

I. For varieties that have been included in securities supervision

I have sorted out the concept of "securities" in the Securities Law and the securities regulatory system, that is, the securities recognized by China's securities law mainly include the following categories: stocks, corporate bonds, government bonds, securities investment fund shares, and securities derivatives. And other securities identified by the State Council in accordance with law. In practice, in addition to the product types specified above, private equity funds, ABS, etc. will also be included in the scope of securities. If the underlying assets of securities tokens involve the above types, they are strictly regulated by laws such as the Securities Law. If it is not involved, it is not within the scope of the securities law. This includes:

1. Company Law

Article 210: "Anyone who issues stocks or corporate bonds without the approval of the relevant competent authority stipulated in this Law shall be ordered to stop the issuance, refund the funds raised and the interest thereof, and shall be punished by illegally raised funds of more than one percent. A fine of less than five. If a crime is constituted, criminal responsibility shall be investigated according to law. "

2. The Criminal Law

Article 179: "Issuance of stocks or company or corporate bonds without the approval of the relevant competent authorities of the State, if the amount is large, the consequences are serious or there are other serious circumstances, shall be punished by imprisonment of not more than five years or detention, and shall be imposed illegally or separately The amount of funds is more than one percent and less than five percent. If the unit commits the crime mentioned in the preceding paragraph, the unit shall be fined, and the person in charge and other directly responsible persons shall be sentenced to fixed-term imprisonment of not more than five years or detention. "

Specific interpretation: Securities, stocks, corporate bonds, and other securities varieties have received strict legal restrictions. If STO is involved in assets involving the above types of securities , they may violate the law and be subject to administrative or criminal penalties.

2. For varieties not included in securities supervision

In recent years, in order to promote the development of equity (such as equity, property rights, etc.) and commodity markets, some regions have successively approved the establishment of various types of trading venues that engage in property rights transactions, cultural art transactions, and medium- and long-term transactions in commodities. Due to the lack of standardized management, the problem of violations of laws and regulations in the establishment of trading venues and trading activities has become increasingly prominent, and risks have been continuously exposed, which has caused widespread social concern. In order to prevent financial risks, regulate market order, and maintain social stability, the State Council made a decision to clean up and rectify trading venues, regulated the issuance and trading of assets involving rights and interests, commodities, cultural arts and other assets, and proposed specific regulatory rules and requirements. . In my opinion, if the underlying assets of the STO involve other assets other than "securities", such as equity, commodities, cultural arts, etc., the relevant provisions for cleaning up and rectifying trading venues should apply. This includes:

1. "Decision of the State Council on Clearing Up and Rectifying Various Trading Places and Effectively Preventing Financial Risks" (Guo Fa [2011] No. 38)

As of the date of this decision, except for legally established stock exchanges or trading venues approved by the State Council for trading financial products, no trading venue may split any equity into equal shares for public issuance, and may not take centralized bidding, Market makers and other centralized trading methods are used for trading; the rights and interests shall not be continuously listed and traded in standardized trading units, and the time interval for any investor to buy or sell the same trading product after selling shall not be less than 5 trading days; Except as otherwise provided by laws and administrative regulations, the total number of equity holders shall not exceed 200.

2. "Implementation Opinions of the General Office of the State Council on Cleaning Up and Rectifying Various Trading Places" (Guobanfa [2012] No. 37)

Scope of application: Equity transactions include property rights, stock rights, debts, forest rights, mineral rights, intellectual property rights, cultural arts rights, and financial asset rights and other transactions; medium and long-term transactions in commodities refer to transactions that use standardized contracts for commodities Object, adopts electronic centralized trading method, allowing traders to settle transactions by hedging and closing positions without the purpose of physical delivery or the need to deliver physical standardized contract transactions; other standardized contracts, including securities, interest rates, exchange rates, Indexes, carbon emission rights, emission rights, etc. are standardized contracts for the subject matter. Specific rules:

(1) No equity shall be split into equal shares for public offering. Any trading place uses its services and facilities to split its equity into equal shares and sell them to investors, which is an "equal share public offering". Relevant provisions of the Company Law and the Securities Law apply to the public issuance of shares of a company.

(2) No centralized trading shall be adopted for transactions. The "centralized trading methods" as mentioned in this opinion include collective auctions, continuous auctions, electronic matching, anonymous transactions, market makers and other transaction methods, but transfers by agreement and auctions conducted in accordance with law are not included in this list.

(3) The equity shall not be continuously traded in accordance with standardized trading units. The “standardized trading unit” referred to in this opinion refers to setting the minimum trading unit for other interests other than equity, and trading with the smallest trading unit or an integer multiple thereof. "Continuously listed transactions" refers to the sale of the same symbol within 5 trading days after the purchase or the purchase of the same symbol within 5 trading days after the purchase.

(4) The total number of equity holders shall not exceed 200. Except as otherwise provided by laws and administrative regulations, the actual holders of any rights and interests during the period of its existence, no matter during the issuance or transfer, shall not exceed 200. If it is held on behalf of a trust or agency, it shall be held as it is. Counting people.

(5) No standardized contract transactions shall be conducted in a centralized transaction manner. The "standardized contract" referred to in this opinion includes two cases: one is a contract that is uniformly formulated by the trading venue, with fixed terms other than price, and stipulates that a certain amount of the subject matter will be delivered at a certain time and place in the future; the other is Contracts formulated uniformly by trading venues that stipulate that the buyer has the right to buy or sell the agreed subject matter at a certain price in the future.

(6) Without the approval of the relevant financial management department of the State Council, trading venues for engaging in financial products such as insurance, credit, gold, etc. shall not be established, and no other trading venues shall be engaged for trading in financial products such as insurance, credit, or gold.

Interpretation: The State Council has clear rules for cleaning up and rectifying trading venues. No equity can be split into equal shares for public issuance, and the total number of equity holders must not exceed 200. Rights and interests include property rights, stock rights, creditor's rights, forest rights, mineral rights, intellectual property rights, cultural and artistic rights, and financial asset rights . Otherwise, it will be included in the scope of rectification.

Requirements related to illegal financial activities

The "Illegal Financial Institutions and Illegal Financial Business Activities Ban Measures" promulgated by the State Council in 1998 proposed that illegal financial business activities refer to the following activities without the approval of the People's Bank of China: (1) illegally absorbing public deposits or disguising public deposits (2) Illegal fundraising in any name to socially unspecified objects without legal approval; (3) Illegal loan, bill discount, fund lending, trust investment, financial leasing, financing guarantee, foreign exchange trading; (4) Other illegal financial business activities identified by the People's Bank of China. The concept of illegal financial activities is broad, and it is a high-pressure supervision of STO activities. Specific provisions include:

1. Criminal Law

Article 176 Whoever illegally absorbs public deposits or disguisedly absorbs public deposits and disrupts the financial order shall be sentenced to fixed-term imprisonment or detention of not more than three years, and shall be imposed a separate fine of not less than 20,000 yuan but not more than 200,000 yuan. He shall be sentenced to fixed-term imprisonment of not less than three years and not more than ten years and a fine of not less than 50,000 yuan but not more than 500,000 yuan. If a unit commits the crime mentioned in the preceding paragraph, it shall be fined by the unit, and the person in charge and other directly responsible personnel shall be punished in accordance with the provisions of the preceding paragraph.

Article 192 For the purpose of illegal possession, using fraud to raise funds illegally, if the amount is large, he shall be sentenced to fixed-term imprisonment of not more than five years or imprisonment, and a fine of not less than 20,000 yuan but not more than 200,000 yuan; Shall be sentenced to fixed-term imprisonment of more than five years and less than ten years, and a fine of more than 50,000 to less than 500,000 yuan; if the amount is particularly large or there are other particularly serious circumstances, the term of imprisonment of more than ten years or life imprisonment shall be imposed and 50,000 yuan Fines above 500,000 yuan or less or property confiscated.

2. Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases of Illegal Fundraising [2010] No. 18

Article 1 In violation of national financial management laws, the act of absorbing funds from the general public (including units and individuals), while satisfying the following four conditions, shall be deemed to be 176 of the Criminal Law, except as otherwise provided for in the Criminal Law. Article "Illegal absorption of public deposits or disguised public deposits":

(1) Absorbing funds without the approval of relevant departments in accordance with the law or borrowing legal operations;

(2) Publicity to the public through media, promotion meetings, leaflets, mobile phone text messages, etc .;

(3) Commitment to repay the principal, interest or return in currency, kind, equity, etc. within a certain period;

(4) Absorb funds from the public, that is, from unspecified objects in society.

If the fund is not publicly disclosed to the society, it is not illegal to absorb or disguise assimilation of public deposits if it absorbs funds against specific objects within relatives or friends or within the unit.

Article 2 Whoever commits one of the following acts and meets the conditions specified in Article 1, paragraph 1 of this Interpretation shall be convicted and punished for the crime of illegally absorbing public deposits in accordance with the provisions of Article 176 of the Criminal Law:

(1) illegally absorbing funds without the real content of real estate sales or the main purpose of real estate sales by means of return sales, after-sale charter, agreed repurchase, and sale of real estate shares;

(2) illegally absorbing funds by transferring forest rights and acting as management and protection;

(3) illegally absorbing funds by means of substituting cultivation (breeding), rented cultivation (breeding), joint cultivation (breeding), etc .;

(4) It does not have the true content of selling goods or providing services, or does not take the sale of goods or providing services as its main purpose, and illegally absorbs funds by means of product repurchase, custody sales, etc .;

(5) It does not have the true content of issuing stocks and bonds, and illegally absorbs funds by such methods as falsely transferring equity and selling fictitious bonds;

(6) It does not have the true content of the fundraising, and illegally absorbs funds by falsely borrowing overseas funds or selling fictitious funds;

(7) It does not have the true content of selling insurance and illegally absorbs funds by impersonating insurance companies or forging insurance documents;

(8) illegally absorbing funds by means of investment and shares;

(9) illegally absorbing funds by means of entrusted financial management;

(10) Using non-governmental organizations such as "societies" and "societies" to illegally absorb funds;

(11) Other acts of illegally absorbing funds.

Article 3 Any illegal deposit or disguised public deposit shall be investigated for criminal responsibility in accordance with the law in any of the following circumstances:

(1) if an individual illegally absorbs or disguisely absorbs public deposits of more than 200,000 yuan, the unit illegally absorbs or disguisedly absorbs public deposits of more than 1 million yuan;

(2) if an individual illegally absorbs or disguisedly absorbs more than 30 public deposits, the unit illegally absorbs or disguisedly absorbs more than 150 public deposits;

(3) Where an individual illegally absorbs or disguisely absorbs public deposits and causes direct economic losses of more than 100,000 yuan to the depositor, the unit illegally absorbs or disguisedly absorbs public deposits and causes direct economic losses to the depositor of more than 500,000 yuan ;

(4) causing bad social impact or other serious consequences.

Illegal absorption or disguised absorption of public deposits is mainly used for normal production and operation activities. The absorbed funds can be promptly returned and criminal penalties can be exempted; if the circumstances are significantly minor, they should not be treated as crimes.

Interpretation: STO involves possible offenses including the crime of illegally absorbing public deposits or disguised assimilation of public deposits, the crime of fraudulent fund raising, etc. The above provisions give specific judgment standards and determination standards.

In the above, I have sorted out and analyzed the regulatory requirements for STO in China's legal system and related legal provisions. It is worth emphasizing that the above is only an analysis of the possibility and consequences of STO's violation of the law on the basis of the provisions. It does not mean that STO is illegal, and it does not mean that STO will definitely violate the law. Regarding how to judge whether the STO is legal, I will explain in detail below, and give specific judgment standards, and give compliance recommendations for future STO projects.

About the author: Jansen Ma focuses on emerging technology and fintech compliance. He graduated from Tsinghua University and has worked for many years in national financial regulatory agencies and top fintech companies. Provide legal services and advisory services to financial institutions, investment institutions, technology companies, etc. on innovative products, compliance and licensing. WeChat public account: Fintech Legal Review.