How to judge whether the STO project is compliant? ——Based on public or private equity

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.

Dividing securities issuances into public and non-public offerings (that is, private placements) is a common practice in the securities laws of various countries. Public offerings usually involve the public interest and are therefore subject to more government regulation; private placements are less regulated because they are less involved in the public interest, and issuers and investors engage in autonomy through contractual agreements. In conducting STO, public and non-public offerings (ie private placements) have become the basic criteria for judging the compliance of STO projects.

I. Securities Products Under the Supervision of Securities Law

The securities recognized by the China Securities Law mainly include the following categories: stocks, corporate bonds, government bonds, securities investment fund shares, securities derivatives, and other securities recognized 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 asset of a securities token involves the above types, it is strictly regulated by the Securities Law and other laws; if it is not involved, it does not fall within the scope of the securities law.

For securities that have been included in the regulatory system, Article 10 of China ’s “Securities Law” stipulates that the public issuance of securities must meet the conditions stipulated by laws and administrative regulations, and be reported to the securities regulatory authority of the State Council or a department authorized by the State Council for approval according to law; In accordance with the law, no unit or individual may issue securities publicly. Under any of the following circumstances, it is a public offering:

(1) issuing securities to unspecified objects;

(2) issuing securities to specific targets with a cumulative total of more than 200 people;

(3) Other issuances as required by laws and administrative regulations. Non-public issuance of securities shall not adopt advertising, public solicitation, or disguised publicity.

On the specific standards, the public and private boundaries of securities issuance have been established, namely: (1) whether the issue object is a "specific object"; and (2) whether the specific object exceeds 200 people. Article 10, paragraph 3, establishes a third criterion: private placements must not use advertising, public solicitation, and disguised publicity. However, the "Securities Law" and related regulations and rules have not clearly explained what constitutes a "specific object", "public persuasion", and "disguised publicity".

For private equity products, although it is not mandatory, it has also been included in the regulatory system and needs to perform procedures such as the filing of associations. For example, Article 2 of the "Administrative Measures for the Recording of OTC Securities Business" clearly states that OTC securities business refers to securities business carried out outside the Shanghai, Shenzhen Stock Exchange, Futures Exchange and the national SME stock transfer system, including but not limited to the following OTC securities business: OTC securities sales and recommendation; OTC securities asset financing business; OTC securities system technical system, registration, custody and settlement, third-party interface and other back-office and technical service outsourcing services; OTC proprietary and City business; OTC securities intermediate introduction; OTC securities investment consulting business; OTC securities financial consulting business; OTC securities brokerage business; OTC securities product credit rating; Private equity crowdfunding; OTC securities market credit enhancement business; OTC securities information service business; OTC financial derivatives; other OTC securities businesses that securities regulatory agencies or self-regulatory organizations deem necessary for filing based on the development of OTC securities business. OTC securities business shall be filed in accordance with the "Administrative Measures for the Record OTC Securities Business Records".

It can be seen that if the STO involves the public issuance of securities, it will violate the relevant provisions of the Securities Law and the Criminal Law and can be directly judged to be illegal. If it involves private placement, it will need to perform procedures such as association filing.

Products not covered by securities laws

"Implementation Opinions of the General Office of the State Council on the Clean-up and Rectification of Various Trading Places" (Guobanfa [2012] No. 37) regulates the issuance and trading of equity and other assets.

The Opinions clarify that equity transactions include property rights, stock rights, debts, forest rights, mineral rights, intellectual property rights, cultural arts rights, and financial assets rights and other transactions; medium- and long-term transactions in commodities refer to standardized contracts for commodities. As the transaction object, the electronic centralized trading method is adopted to allow 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 rate, index, carbon emission right, pollution right, etc. are standardized contracts for the subject matter.

In the specific rules of the issuance transaction, it is explicitly required that no equity be split into equal shares for public offering . And the total number of equity holders must 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.

In addition, it should be noted that in the Criminal Law, the standards for criminally absorbing or depositing public deposits in accordance with the law should be investigated for criminal responsibility. That is, if an individual illegally absorbs or disguisedly absorbs more than 30 public deposits, the unit illegally absorbs or disguisedly absorbs public deposits. 150 More than people.

It can be seen that the State Council's regulations for the rectification of trading venues are clear. No equity can be split into equal shares for public issuance, and the total number of equity holders must not exceed 200. If the STO violates this standard, it will be included in the scope of cleanup and rectification; if it meets this standard, the project can be simply identified as compliant.


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.