The below overview of regulatory matters in different countries is provided for information purposes. KOOS has engaged top tech law firms in Europe, including Ellex and Goodwin Procter to advise it on legal and regulatory matters, so that KOOS can ensure compliance itself and also to inform issuers of legal matters relevant for distributing virtual shares. The law firms who have advised KOOS have not assumed responsibility to anyone other than KOOS. KOOS therefore recommends that each issuer engages their in-house lawyers or external legal advisors to handle these matters.
Please note that the below description is: (i) limited to financial regulatory requirements and does not cover any other matters, including tax, intellectual property or data protection law matters; and (ii) subject to change as the laws, especially those governing crypto-assets, in most jurisdictions are developing and evolving quickly. Also, should the characteristics of the virtual shares or the activities of the issuer or KOOS be different or change, the regulatory implications on the issuers and KOOS need to be re-assessed and taken into account under the Applicable Laws.
Based on the legal analysis made, we are of the opinion that from the perspective of the laws of in the EEA and UK (“Applicable Laws”), the activities performed by KOOS, as a software developer, do not qualify as any of the regulated financial or crypto asset services. Firstly, virtual shares (as described above) are not deemed neither as financial instruments, e-money, or virtual currencies and they do not therefore fall under the scope of respective Applicable Laws. Secondly, the services by KOOS in assisting the issuer with the issuance of virtual shares, and making available the application for keeping the register, do not qualify as regulated financial activities (i.e., investment service, payment service, virtual currency service) requiring an authorisation or registration by a respective competent authority.
Being registered and operating in Estonia, KOOS is subject to certain obligations under the Estonian International Sanctions Act which means that KOOS must ensure compliance with the financial sanctions’ regime applicable in Estonia. KOOS is exercising due care to ensure that its services and the platform is not used for breaching or circumventing financial sanctions and will notify the competent authorities accordingly of any such circumstances. In order to apply appropriate checks, KOOS collects and processes information about the issuers and the recipients. Provided that KOOS is registered and operating in Estonia, similar regulations in other EEA countries or in the UK do not apply to KOOS.
Below we have described certain regulatory aspects in some countries that could be relevant for issuers.
There are no regulatory requirements applicable to an issuer for reserving, allocating and issuing virtual shares to the recipients, provided that the virtual shares are issued in the form and substance as explained above. Companies raising capital through the issue of equity or non-equity (e.g., debt) securities to the public are subject to prospectus registration and disclosure requirements under the EU Prospectus Regulation unless exemptions apply. Some countries within the EEA have established domestic requirements for small-scale securities offerings falling outside the scope of the Prospectus Regulation (e.g., Estonia Latvia, Lithuania, Finland). None of these requirements apply to issuers as virtual shares are not transferable and issuers are actually not raising funds from the contributors / recipients. As no funds are raised and money paid, virtual shares also do not qualify as e-money (as defined in the respective domestic laws) and issuers do not undertake other activities in relation to virtual shares that would qualify them as e-money institutions.
Regulations requiring authorisation for the provision of investment or virtual currency services normally do not apply to the issuers who arrange the issue of financial instruments or virtual currencies for their own purposes. Virtual shares are issued by issuers themselves in connection with their commercial or professional activities.
Domestic laws and regulations of issuers’ home countries regarding international financial sanctions apply to the issuers as they do for any other person in the respective country. Should the characteristics or the terms of the virtual shares or the issuer’s activities change (e.g., issuer intends to raise capital through the issue of virtual shares or they transferable) the regulatory implications on the issuers need to be re-assessed under the Applicable Laws.
The virtual shares in question are likely to be deemed shares or instruments giving entitlements to investments and therefore considered securities by the FCA, however, so long as the issuer is the only entity performing actions in connection with the virtual shares then it is likely that the issuer will not be undertaking any activities that are regulated in the UK when it issues the virtual shares. This is because there are various exemptions that apply where a body corporate issues its own shares or share warrants. Furthermore, there is no requirement to publish a prospectus as long as the virtual shares are non-transferable.
If it becomes possible to decouple the virtual share from the issuer (for example, if the recipient can exchange their virtual share for (an actual) shares in the issuer and those shares are transferable) then the activities of the issuer may be subject to UK financial services regulation as the issuer may be issuing transferable securities to the public without having first published a prospectus. Furthermore, if the characteristics of the virtual shares change then the activities of the issuer may fall within the UK regulatory perimeter.
Assuming that some of the instruments registered through KOOS platform may become registered on blockchain and these could qualify as utility tokens, we also analyse the regulatory approach towards such instruments. The FCA Guidance on Cryptoassets identifies utility tokens as a form of tokens that are not regulated with the result that an issuer would not have to be FCA authorised and would not require an approved prospectus. The FCA Guidance defines a utility token as a token that provides the holder with access to a current or prospective service or product and often grant rights similar to pre-payment vouchers. This is not an absolute definition and it is clear that virtual shares or other instruments under the issuer’s program with similar characteristics could be treated as utility tokens.
The issuer is also not required to apply for FCA supervision under money laundering and terrorist financing prevention regulation (including due diligence and KYC requirements) when issuing the utility instruments because virtual shares or other instruments are not secured using cryptographic technology and therefore are not ‘cryptoassets’ under the Applicable Laws. The fact that the issuers may request KOOS to store backup copies of the register at a certain interval using distributed ledger technology (DLT) does not change the above conclusion. Furthermore, only entities that operate a cryptoasset exchange or safeguard cryptoassets (or private keys) on behalf of others by way of business in the UK are required to apply for FCA supervision and the issuers here are not carrying out either of these activities by way of business.
Moreover, on the current definitions, the rules on “financial promotions” which require an issuer to appoint an FCA authorised firm to approve any marketing materials do not apply to the utility tokens. (Exclusions from the requirement apply virtual shares because any promotion would be a promotion about the issuer’s own instruments). It is expected that, in early 2024, the UK’s financial promotions rules will be expanded to cover almost all cryptoassets apart from non-fungible tokens and mean that nobody will be able to promote such cryptoassets in the UK without appropriate authorisation from the FCA.