On November 26, 2018, the Austrian Financial Market Authority (FMA) approved the capital market prospectus of Hydrominer IT-Services GmbH for the public offering of up to EUR 75 million tokenized H3O profit participation rights. This appears to be the first prospectus-based offering of securities within the European Union executed on the basis of blockchain technology. This breakthrough in security token offerings shows that Austria is the first choice for issuers considering offering tokenized securities publicly in the European Union.
What is a Security Token Offering?
A Security Token Offering (STO) connects the classic world of capital markets with blockchain technology. For classic issues on the capital market, an issuer offers its securities to interested investors for subscription. Such transactions usually involve a large number of actors. In addition to arranging the structure of an offer, banks also have various other functions such as providing custody or payment services through which all payments are made. It is also common for banks to act as underwriters for larger issues, being the first subscribers to acquire the securities and resell them.
In the case of STOs, an issuer also offers its securities to interested investors for subscription. The special feature, however, is the use of blockchain technology to process the issue and to manage subsequent obligations. The technical prerequisite for this is a programmable blockchain such as Ethereum. Smart contracts created specifically for the securities issuing accept subscription orders from investors, pass on the proceeds of the issue to the issuer, and manage the issue of the securities to the investors as well as the distribution of payments. Instead of physical paper certificates, the blockchain serves as a securities register, and instead of transferring money via bank accounts, the sums owed are first exchanged for payment in cryptocurrency and transferred via the blockchain.
The buzzword here is tokenization. By using the blockchain as a register, the rights otherwise embodied in a physical certificate may be represented in a token on a blockchain. When rights are tokenized, such as interest or repayment of borrowed capital, tokens become transferable securities. The transfer of tokens from one investor to another then also causes the transfer of the tokenized right.
Details about Hydrominer's Security Token Offering
The tokenized securities offered by Hydrominer, the H3O token, are qualified subordinated profit participation rights. The holders of profit participation rights have a right to participate in the profit and loss and in the hidden reserves and goodwill of Hydrominer. This is also called Substanzgenussrecht, a common form of financing in Austria. In addition to these financial claims, holders of H3O tokens have the right to actively participate in the business decisions of Hydrominer. This right goes well beyond regular shareholder rights and allows investors to participate actively in decision-making processes. In addition, the securities provide for a sort of tag-along right in the event that a qualified majority of the owners of Hydrominer sell their shares.
From a technical point of view, the issue—from subscription to issue to settlement of payments and repayment—is handled by the Ethereum blockchain. The H3O tokens issued comply with the ERC20 standard and are used by Hydrominer as a key to identify a person as a security holder. This applies to payments made by Hydrominer as well as to the exercise of the decision-making rights associated with the H3O tokens.
A subscription is possible from February 1, 2019. The offer is made in Austria and Germany solely on the basis of the capital market prospectus approved on November 26, 2018, which is available on Hydrominer's website.
The law firm on the project
Oliver Völkel, founding partner of Stadler Völkel Attorneys at Law, has legally structured the issue: "The H3O token project is one of the most important legal challenges our firm has faced in the past year, with nearly a year of preparation time before the final approval of the capital market prospectus by the Austrian Financial Market Authority. There was no comparable offer in the industry so far, so we had to work in close coordination with the regulator, and we also had to clarify fundamental issues, such as whether the blockchain would even be a suitable register for securities.
Another factor contributing to the complexity was the business purpose of the issuer. Hydrominer is a company that operates virtual currency mining farms and also sells mining packages to customers. The Austrian regulator adopted the legal view that mining is a financial service subject to a license, which is why a classification as an Alternative Investment Fund threatened the business model of the issuer and also other companies in the industry. Due to this obstacle, we had to first find a solution in coordination with the regulator.
We have learned a lot about the blockchain in the course of this project. The technology has the potential to usher in a whole new era for the capital markets in continental Europe. The result shows that Austria is the first choice when it comes to issuing tokenized securities in the EU."
"The approval of the prospectus related to this Security Token Offering within the EU does not only set a milestone for the industry, but also for Austria as a business location. We are especially delighted that we are able to constantly work on the legal fine-tuning of blockchain applications and to enjoy the trust of the community as a highly specialized partner in the blockchain sector," says Arthur Stadler, founding partner of Stadler Völkel.
Stadler Völkel Attorneys At Law
The law firm Stadler Völkel specializes in capital markets law as well as cryptocurrencies and digital assets. The firm advises renowned Austrian and international corporations and banks on legal issues related to blockchain technology on a regular basis.
Stadler Völkel is actively committed to increasing the acceptance of the technology. For example, the law firm regularly publishes online recordings of events that provide a view on the technology from different legal perspectives, has contributed to the development of the Blockchain Roadmap of the Federal Ministry of Science, Research and Economy, and regularly organizes lectures at the law faculty of the University of Vienna.
In the past, the law firm has already played a pioneering role in the area of capital markets and crypto law. For example, the first simplified capital market prospectus in Austria was prepared by the law firm. In the crypto sector, it was also Stadler Völkel that successfully supported the first Initial Coin Offering in Austria.
The consulting team of Stadler Völkel consisted of Dr. Oliver Völkel, LL.M. (CLS), founding partner of the firm specializing in banking, finance, capital markets and cryptocurrency law, Bryan Hollmann, Esq., LL.M., counsel practicing capital markets law and U.S. securities law (admitted in New York) and Mag.a Leyla Farahmandnia and Lorenz Marek, LL.M. (WU), both associates of the firm.