This is the third article of our comprehensive review of the European Union Markets in Crypto-Assets Regulation ("MiCA"), a crucial regulatory development in the crypto-assets industry. We will closely scrutinize MiCA with crisp and clear elaboration over a course of six weeks, with an article in each week dedicated to essential aspects of MiCA.
For a better understanding, we recommend that you read the previous articles, as well.
- Overview of Other Crypto Assets and Related Terms
MiCA is an important set of rules governing the issuance, public offering, and admission to trading on crypto-assets trading platforms in the European Union ("EU").
As we previously mentioned, MiCA categorizes crypto-assets into three distinct categories,
- Asset-Referenced Tokens ("ART"),
- Electronic Money Tokens ("EMT"), and
- other crypto assets.
MiCA imposes different specific rules applicable to such crypto assets depending on the risks they potentially pose. This article will only focus on the requirements for "other" crypto assets.
The term "ther crypto-assets" encompasses those which do not fall under the categories of ARTs or EMTs. Unlike ARTs and EMTs, these crypto-assets do not strive to maintain their value by pegging to a fiat money (an official currency), or another value, interest (right), or a combination thereof. In this regard, utility tokens and payment tokens, for instance, will be subject to the same regulations as "other crypto assets".
In the context of MiCA, issuing a crypto-asset refers to the process of creating a new crypto-asset by a natural or legal person or other undertaking, and offering of a crypto-asset to public refers to a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the crypto-assets to be offered, so as to enable potential holders to decide whether to purchase those crypto-assets. As the term "offeror" includes the issuer, we will use the term "offeror" throughout the remainder of this article to ensure the ease of reading and understanding the requirements.
MiCA also governs the process of "admission to trading" of a crypto-asset on a crypto-asset trading platform, which entails the listing of a crypto-asset on an exchange and the subsequent application and authorization procedures. For the sake of clarity, we will refer to this process as "listing" throughout the remainder of this article.
- What are the requirements for other crypto-assests?
Under MiCA, three fundamental requirements must be fulfilled for the issuance, offering, or listing of crypto-assets on a trading platform:
- Establishment in an EU member state: The entity involved in issuing, offering, or seeking to list crypto-assets must be a legal entity established within an EU member state.
- Compliance with whitepaper and marketing communication requirements: The offeror must draft a whitepaper that provides clear and concise information about the crypto-assets. Both the whitepaper and marketing communications should be published in advance on the crypto-asset's designated website, no later than the offering or listing start date. The published versions of the whitepaper and related marketing communications must be identical to the versions notified to the competent authority. Any modifications to these documents must be time-stamped, and previous versions should be accessible on the website for a duration of ten years, with a hyperlink to the latest version.
- Notifying the whitepaper to the competent authority: The offeror is required to notify the competent authority of the whitepaper and publish it before initiating any offering or listing.
To ensure the protection of funds or other crypto-assets obtained during an offering, offerors must adhere to specific rules. If a time limit is set for the offering, the results of the offer must be published on the website within 20 working days after the subscription period. In cases where there is no time limit, the number of crypto-assets in circulation must be published at least once a month. If there is a time limit for the offering, funds or crypto-assets should be held by a credit institution or a crypto-asset service provider that offers custody and administration services for crypto-assets on behalf of clients.
If the offering is canceled, the offeror must return all the funds collected from holders or potential buyers within 25 days of the cancellation.
Detailed requirements for whitepapers and marketing communications, as well as exemptions, are outlined in further detail below.
- The Whitepaper
MiCA provides detailed requirements regarding the content of the whitepaper. Consequently, the whitepaper should primarily encompass information about the issuer, the persons offering or requesting listing, the platform operator (in cases where a crypto-asset trading platform prepares the whitepaper), the related project, the crypto-asset, the rights and obligations associated with the crypto-asset, the underlying technology, and the relevant risks.
It is important for offerors to accurately classify the crypto-assets they are offering and clearly communicate to competent authorities that these assets do not fall under the category of ART or EMT, nor can they be classified as MiCA-excluded crypto-assets such as financial instruments.
Furthermore, the whitepaper must address the main negative environmental and climate-related impacts of the consensus mechanism utilized, such as proof of concept or proof of work. It is essential for whitepapers to be clear, concise, easily understandable, and free from any misleading information. Additionally, whitepapers should refrain from making claims about the future value of the crypto-assets.
To comply with regulations, the opening page of the whitepaper must contain two mandatory statements. The first statement should indicate that the whitepaper has not been approved by any competent authority in any EU member state and that the offeror is solely responsible for the content. The second statement must be provided by the governing body of the offeror, the person requesting listing on the trading platform or the operator of that trading platform and must confirm the relevance, accuracy and completeness of the information provided in the whitepaper.
Moreover, the whitepaper should contain a summary of essential information regarding the crypto-asset offering and its characteristics, accompanied by a warning that it does not constitute a prospectus and that individuals should not make decisions based solely on it.
Additionally, the whitepaper must contain several other warnings, including the potential for partial or complete loss of value, restricted transferability, and the possibility of illiquidity. If the offering involves utility tokens, the whitepaper should explicitly state that these tokens may not be exchangeable for the goods or services mentioned in the whitepaper, particularly in the event of project failure or discontinuation. Furthermore, if relevant, a clear warning must be included that crypto-assets are not backed by investor compensation schemes or deposit guarantee schemes.
The whitepaper does not need to be approved by the competent authority but must be notified to the competent authority twenty working days in advance, unless an exemption applies.
- Marketing Communications
Offerors should draft and publish marketing communications, where appropriate. To ensure transparency and fairness, all marketing communications related to crypto-assets must be clearly identifiable, not misleading, and consistent with the information provided in the whitepaper, including contact details of the offerors or persons seeking admission to trade the crypto-assets.
Although competent authorities do not explicitly require notification regarding marketing communications, they may request such notification on occasion.
Marketing communications should state that they have not been reviewed or approved by any competent authority within any EU member state, and that the offeror assumes sole responsibility for the content.
It is essential to note that no marketing communication should be shared before the whitepaper is published. Furthermore, the competent authority of the EU member state where marketing communications are shared is entitled to monitor and enforce compliance with MiCA regarding marketing communications related to the offering of crypto-assets or their listing on a crypto-asset trading platform. Consequently, companies must ensure that their marketing communications fully adhere to the requirements outlined in MiCA, avoiding any violations of applicable rules and regulations.
- Exemptions
A person offering the cryptoassets discussed herein, may benefit from certain exemptions. No MiCA requirements apply to the issuance, offering, listing of other cryptoassets:
- crypto-assets that are offered for free,
- crypto assets as a reward for maintaining the DLT through activities such as staking, mining, or for validating transactions in a consensus mechanism,
- the offering of a uility token related to an existing or operational good or service,
- where holders of the crypto-asset have the right to use it only in exchange for goods and services in a limited network of traders who have contractual arrangements with the issuer.
However, there are details specific to these exemptions. For instance, the exemption does not apply to crypto-assets offered for free if purchasers are required to provide personal data or if the offeror receives fees, commissions, monetary, or non-monetary benefits from the crypto-asset holders in exchange for crypto assets. Similarly, the exemption for utility token offerings of goods or services does not apply to crypto-assets representing stored goods that cannot be collected after the purchase. Furthermore, if utility tokens are offered for goods or services that are not yet operational or available, the whitepaper must have been published at least 12 months prior to the offering. The limited network exemption does not apply to crypto-assets intended for a continuously growing network of service providers.
On the other hand, there are certain offerings for which the obligations to prepare, publish, and notify whitepapers, as well as to publish marketing communications, will not apply. These exemptions include:
- Offerings made to fewer than 150 natural or legal persons, each acting on their own account, in each member state.
- The total offering amount within the EU does not exceed €1,000,000 or its equivalent in other currencies or crypto-assets within a 12-month period after the offering commences.
- Offerings exclusively targeted at qualified investors, where the crypto-assets can only be held by qualified investors.
In addition, if the crypto-asset is already listed on another trading platform, the obligations to prepare, publish, notify and publish whitepapers and marketing communications do not apply. Importantly, for the above exemptions to apply, the offeror or any person acting on its behalf must not indicate in any communication that it intends to list the crypto-assets on a crypto-assets trading platform.
If an offering is exempt from the whitepaper requirement, the offeror may still choose to draft a whitepaper. However, if a whitepaper is submitted to the competent authority, the offeror will become subject to all the rights and obligations outlined in MiCA and will no longer be treated as exempt.
- The Rights of The Crypto-Asset Holders
MiCA grants crypto-asset holders the ability to seek compensation for losses incurred due to an incomplete, unfair, or unclear whitepaper, or misleading information. If an offeror, person seeking admission to trading, or operator of a trading platform violates MiCA by providing incomplete, unfair, unclear, or misleading information in their crypto-asset whitepaper or a modified version of it, they, along with the members of their administrative, management, or supervisory body, shall be held liable for any losses suffered by the holders of the crypto-assets resulting from such infringements.
Furthermore, holders possess a 14-day right to withdraw from the offeror or from a crypto-asset service provider placing crypto-assets on behalf of that offeror, except under certain circumstances. Holders can exercise this right without incurring any fees or costs and without the obligation to provide reasons. All payments received from a retail holder including any charges, if applicable, must be promptly reimbursed within 14 days after exercising the right of withdrawal. It's important to note that the right of withdrawal does not apply if the crypto-assets have already been listed on an exchange platform before the purchase by the retail holder, or after the subscription period in cases where there is a time limit for the offering.
- Non-Compliance
In the event of non-compliance with these requirements, the competent authority has the authority to take several enforcement measures. These measures include:
- Requesting a public explanation: The competent authority may require the responsible natural or legal person to provide a public explanation regarding the breach.
- Order to cease infringing conduct: The competent authority can issue an order to stop the infringing conduct immediately.
- Imposing administrative fines: In cases of non-compliance, the competent authority may impose administrative fines. For natural persons, the maximum administrative fine is set at €700,000. For legal persons, €5,000,000 or 3% of the total annual turnover of the legal person, based on the last available financial statements approved by the governing body. In the case of a group of companies, the turnover will be calculated based on the latest consolidated accounts approved by the governing body of the ultimate parent undertaking.
- MiCA Dissected
MiCA introduces a comprehensive set of guidelines for those seeking to issue, offer, or list crypto-assets. It is crucial to have a comprehensive understanding of these requirements as non-compliance could result in significant consequences.
In the upcoming articles, we will provide detailed insights into various aspects of MiCA, including the requirements for issuing, offering, and listing ARTs and EMTs and significant ARTs and EMTS, authorizations and obligations of CASPs, and measures to prevent market abuse.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
