The issue of whether and when the sale or trading of NFTs is subject to the prospectus requirement is brand new and difficult to answer in detail. Details are very important here. For this reason, this blog cannot provide detailed information, because it depends on the specific design of NFT or token.
NFTs are mostly blockchain-based digital tokens, each of which is unique. I will be posting an article soon that addresses the current state of legal issues regarding NFT. Hint: Nobody knows yet exactly how NFT should be classified. Unlike cryptocurrencies, there is basically only one piece of NFT at a time. Even though there can be many same NFT or those that embody the similar rights.
I do not want to go into the individual blockchain-relevant technical details today. This will be the content of some further articles. The content of this first block post shall be whether “normal” NFTs trigger the obligation to prepare a prospectus in Germany.
This could be the case if NFT is exempted from the EU Prospectus Regulation would be recorded. The prerequisite for this is that NFTs according to Art. 2 lit. a) EU Prospectus Regulation by “transferable securities” within the meaning of Art. 4 para. 1 No. 44 of the Second Markets in Financial Instruments Directive (“MiFID II“). If an NFT were to be classified as a security, the consequence would be, at least in principle and subject to the occurrence of an exceptional circumstance, that in the case of a public offering a securities prospectus would have to be published in order to inform potential investors about the points relevant for a purchase decision and in particular the risks of such an action.
In the information letter of the Bundesanhalt für Finanzdienstleistungsaufsicht based on the policy statement of 18.01.2018, information letter of WA 51 and IF1 on prospectus and permission obligations, BaFin states criteria to assess whether it is a financial instrument according to § 2 para. 4 WpHG or a security pursuant to § 2 No. 1 WpPG.
According to the aforementioned letters of advice, the decisive factor is that the potential investment instrument is
(1) is transferable.
(2) by its nature is tradable on financial markets, the theoretical possibility of trading on cryptocurrency trading platforms being sufficient
(3) securities, i.e. membership rights and/or rights under the law of obligations.
Many NFTs, for example in the field of computer games, can actually be regarded as utility tokens. These are limited to use as vouchers for prepaid goods and services of the issuer. They do not involve a right directed toward the payment of money; rather, they are directed toward the provision of certain services or privileges.
In most cases, however, the prospectus requirement is likely to fail because standard NFTs do not grant any further rights, in particular no participation in company profits, other distributions and payments, but only grant access to the virtual goods just “promised”.
In most cases, however, it is still necessary to check whether the issued tokens are also not assets within the meaning of Section 1 (1) of the German Stock Corporation Act (AktG). 2 German Investment Schemes Act (“VermAnlG”). The Asset Investment Act is subsidiary to the WpPG and the EU Prospectus Regulation.
Thus, NFT could be considered as an asset investment within the meaning of sec. 1 para. 2 No. 7 German Investment Act (Vermögensanlagegesetz). This includes “other investments that provide or promise to provide interest and repayment or an asset-based cash settlement in exchange for the temporary transfer of money.” As already shown above, this is often a question of design depending on the individual case. As a rule, however, the mere acquisition of an NFT with the expectation of selling it to a third party for a higher price is not a reason for opening the scope of application of the VermAnlG. However, my advice is to always contact a specialized colleague here.
Also possible would be a conflict of NFT with market abuse provision or the Banking Act. However, I would also like to separate this question out in other articles, which you can then find via the search here on the blog.
Overall, it is important to emphasize that a lot has happened in “blockchain law” issues in the last two years. However, as BaFin is also becoming more active, I can only advise against offering blockchain instruments in your own startup without consulting a lawyer.