Review of the securities of tokens for a performance ticket pre-order and NFT purchase platform and safe business operation plans.
Article posted in 2024-11-15 10:28:43 | VEAT
Law firm Veat received a request from a WEB 3.0 blockchain company (hereinafter referred to as "client") to review the token white paper's securities status.
Recent advancements in blockchain and NFT technology have created new digital service ecosystems such as performance ticket sales and NFT trading platforms. However, the possibility that blockchain-based tokens may be classified as financial investment products or securities under the “Act on Capital Markets and Financial Investment Business” (hereinafter referred to as “Capital Market Act”) poses a complex legal challenge to many businesses.
Law firm Veat, based on its expertise in blockchain and the Capital Market Act, is providing legal advice to help businesses operate stably even in these complex situations.
Definition and criteria for financial investment products under the Capital Market Act
◾ Capital Market Act
| Article 3(Financial Investment Products) ① As used in this Act, “financial investment product” means a right acquired by agreeing to pay money, other property of value, or something like that (hereinafter referred to as “money, etc.”) at a specific point in time, either now or in the future, for the purpose of obtaining a profit or avoiding a loss, where the total amount of money, etc. paid or to be paid to acquire the right exceeds the total amount of money, etc. that may be recovered from or recoverable from the right (including the amount determined by presidential decree, such as cancellation fees). However, this excludes the following: |
In order to be designated as a financial investment product under the Capital Market Act, (1) there must be the purpose of obtaining a profit or avoiding a loss, (2) it must agree to pay money, other property of value, or something like that at a specific point in time, now or in the future, as compensation, and (3) the total amount of money, etc. paid or to be paid to acquire the product must exceed the total amount of money, etc. that may be recovered from or recoverable from the product, that is, there must be “investment risk.”
Law firm Veat thoroughly analyzed the client’s white paper, the Capital Market Act’s provisions, and regulatory agency press releases, based on its expertise, to review whether the token presented by the client corresponds to a financial investment product under the Capital Market Act.
Definition and criteria for investment contract securities under the Capital Market Act
◾ Capital Market Act
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Article 4(Securities) ⑥ As used in this Act, “investment contract security” means something that represents a contractual right to receive an allocation of profits or losses from a joint business undertaken by a specific investor and others (including other investors) who performed the joint business primarily. |
Securities under the Capital Market Act are divided into (1) debt securities, (2) equity securities, (3) profit-sharing securities, (4) investment contract securities, (5) derivative-linked securities, and (6) securities depository certificates (Article 12, Paragraph 2 of the Capital Market Act).
Law firm Veat thoroughly reviewed, at the client’s request, the securities status, particularly whether it corresponds to an investment contract security, for blockchain tokens used in performance ticket sales and NFT trading platforms, and suggested alternatives to reduce the possibility that the token may be deemed a security in the future.
Necessity of securities status review
◾ "STO to be permitted within the Capital Market Act regulatory framework" - press release by the Financial Supervisory Service on Feb. 2, 2023.
According to the Financial Supervisory Service’s press release on Feb. 2, 2023, whether something is a security must be assessed comprehensively taking into account the specific facts and circumstances, and based on the substantive nature of the right. The responsibility for reviewing and determining securities status and complying with securities regulations if the token is deemed a security rests with the party issuing, distributing, or handling the security.
Since failing to review the securities status of a token in advance can expose you to serious legal risks, if you plan to issue a token, you need to review whether the token falls under the Capital Market Act before issuing the token.
Safe token issuance with Law firm Veat
Law firm Veat, based particularly on its deep expertise in blockchain and IT areas, reviewed, in this case as well, whether the token presented by the client corresponds to a financial investment product or security subject to the Capital Market Act’s regulations and suggested alternatives to reduce the possibility that the token would be deemed a security.
If you need legal advice to minimize legal risks and operate a token-based business stably before issuing a token, we recommend that you seek expert assistance from Law firm Veat at any time.
Thank you.
Law firm Veat