I have two news for you. First the bad ones: To do a legal and compliant public offering of securities on blockchain under German law you will have to file a prospectus. The good news is: Neufund got you covered. In this series I will demystify the prospectus step by step. You won’t need an army of lawyers to successfully create such an innocent catalog. Instead, I will answer all the questions ranging from requirements and content, to planning and budget. I promise that with our prospectus template the whole job will be a lot easier. And if you’re still left with questions you can raise them in my Ask Me Anything session at the end of this series.

To kick things off and prove that the meme above is outdated I will first answer the most obvious question:

What on earth is a prospectus?

To answer this question we need to first of all talk about what is a security.

“A security is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.” (Investopedia)

To be able to publicly offer and later on trade securities every lawmaker requires that the issuer of the security registered it with the financial authorities. And there it is: you register your securities with the so called prospectus:

“In order to make well-informed investment decisions, investors need to be informed about the issuer and the relevant security or investment. In Germany, we recommend that you choose a prospectus.” — Bafin

Why do you need to file a prospectus you ask?

The role of the prospectus in the legal ecosystem is to inform investors about the terms and conditions of an offer. The prospectus informs the investors — it is a legal commitment and promise made by the issuer towards the investors. By this regulators make sure that both your and your future investor’s rights are being protected.

Image by ETHNews

Using Blockchain technology to issue more efficient and liquid securities in form of tokens does not change the fact that you are issuing securities. Offering those tokens to investors in an ICO (Initial Coin Offering) or STO (Security Token Offering) does not make it any less of a public offering. Therefore also in this case you are required to register your security tokens with the financial authorities. So yes, if you’d like to tokenize your company’s equity with Neufund and issue equity tokens, you have to comply with the same regulation. However…

Security types

In Germany there are two security classes which we need to distinguish: Wertpapiere (securities such as stock) and Vermögensanlagen (investment assets e.g. shares). The main difference between securities and investment assets lies in the transferability on capital markets.

Securities such as stock are freely transferable on the capital market. This essentially means that those securities hold a bearer certificate and can be transferred to another party through a handover. Based on the bearer certificate the new owner of the stock does not need to prove ownership of his new asset. The ownership is transferred with the handover.

Investment assets such as private equity on the other hand are not transferable on capital markets. These assets do to not hold a bearer certificate and can be only transferred to another part through an assignment (Abtretung). The new owner of the asset has to prove his ownership. The re-assignment of shares to a new party requires notarisation.

Equity Tokens represent some rights of shares in your company and therefore are structured as investment assets. Registering a public offering of investment assets with German Financial Authorities (BaFin) is much easier, quicker and cheaper than registering stock (Wertpapiere)…

Don’t be scared of the black eagle

German authorities are quite protective, that’s why they have some strict regulations in place when it comes to how the prospectus needs to be set up. However you shouldn’t be scared of them. It is not BaFin’s role to evaluate your business model or investment offer. They merely check if you disclose all crucial information regarding your company and investment offer. If they miss something, they will contact you for additional information. But that’s it. More than anything you should consider BaFin being your guardian angel.

On top of that as we said: We got you covered!

Standardised prospectus template

To enforce transparency and therewith security of the public offering we standardised the writing process and created a template which takes you by the hand and helps you to prepare your filing in a more “human” way. The template includes some proposals for the legal disclaimers and descriptions already.

Low effort for VC-backed companies

If you are a VC-backed company you’re lucky because you’re nearly set. You already have a pitch deck, a business plan and a financial audit. In that case the prospectus does not impose much more effort than preparing a detailed VC pitch deck.

Say goodbye to the white paper

Filing a prospectus eliminates the need of writing a white paper. In the crypto world white papers are a common tool to provide potential investors with in depth information. Here potential investors are informed about the terms and conditions under which they can buy a token. The white paper is however only a marketing tool and not legally binding. The prospectus on the other hand is legally binding and equally informs potential investors. A prospectus can be filed by any company, whether it is blockchain based or not, whereas the white paper was so far only written by on-chain companies. With the prospectus companies can inform their future investors and drop the white paper.

Configure your term sheet to choose the correct type of the prospectus

Before you start with the prospectus the first step is to define the terms of the upcoming public offering (here: Equity Token Offering). For the prospectus specifically you have to decide on:

The amount you want to raise,

The investment ticket size,

The type of investor you want to address (accredited or/and retail investors),

The localisation of those investors (globally, country-specific)

And on the type of placement — public (public sale) or private (pre-sale)

The best way to formalise all those terms is with the good old term sheet. Based on the term sheet you can choose the right type of prospectus. In most cases, this will be the Investment Prospectus — or as I came to call it the Prospectus Light…

Coming up

I hope you are already less scared of the prospect of filing a prospectus (excuse the pun). In the next post which I will publish in the coming weeks I will talk about the different types of prospectuses and investors and how you can achieve your investment goal with the right prospectus for your business.

Disclaimer

However, one thing we need to clarify and state: You will remain responsible for the content of the prospectus and running the process with the regulator. All we provide in this series or on our website is some support and help. Since we do not know your company and not the detailed structure of your offering and in particular not the challenges and risks your company is exposed to, you must not perceive the content of this series as legal advice or any kind of service provided by Fifth Force GmbH specifically to you, but rather a general guidance and framework for prospectuses to be issued for investment assets offered in Germany.