The small European Union country Estonia is one of the world’s top jurisdictions for initial coin offerings (ICO). The application of digital infrastructure and blockchain technologies as well as guided regulation make Estonia a smart choice for carrying out ICOs. The clear and favourable legal and tax environment (e.g. official crypto licenses, 0% corporate income tax) in combination with low costs and simple administration make Estonia a strong competitor to jurisdictions such as Singapore or Switzerland.
ICO in Estonia, compliance for token offering
ICO in Estonia: top jurisdiction for token offering
Our services for ICO in Estonia:
White paper legal analysis to determine if the token is classified as utility or security and whether it complies with the Estonian and the EU legal framework.
Amendments to white-paper and recommendations how to comply with both local and European regulations, including token sale agreements, terms & conditions and privacy policies.
Corporate services including ICO company formation in Estonia, local agent services with on-going legal support and crypto services licensing.
Every ICO project is unique and should be assessed on its own characteristics. For more information contact us for a free case evaluation and a detailed price quote »
Legal framework for ICO and token classification in Estonia
Conducting an ICO in Estonia requires consideration of several applicable laws for compliance. The first step is to analyse the rights granted by the token to identify whether it classifies as a security or utility token, while keeping in mind that substance should be considered over form. In case the token is classified as a security then the ICO project shall be registered with the Estonian Financial Supervision Authority (EFSA). However, in case the token conforms to utility token characteristics such registration is not required in most cases. It may be noted, that the majority of the ICOs conducted in Estonia have been classified as utility token offerings by their issuers.
Security vs Utility: token type classification basics
Tokens are classified as securities (financial instruments) if they can be transferred on the basis of an at least unilateral expression of will; or if they provide voting or decision making rights in the issuer; or give the investor a certain cash-flow expectation.
Utility tokens, on the other hand, do not promise profits or monetary claims and only provide an access to platforms or rights to use products or services.
Every ICO project is unique and should be assessed on its own characteristics. Our legal team provides token and white paper analysis and legal opinion services for ICO projects in Estonia. We analyse the project within the scope of the applicable laws and provide our legal opinion about the most optimal path forward. We have covered some of the appropriate regulating laws and key points below.
Estonian laws and regulations that need to be considered for ICO projects.
Law of Obligations Act (LOA)
The main regulation for ICOs is the legislation of the Law of Obligations Act. In most cases the tokens offered grant their purchasers access to a product or service, which in essence is a prepayment for a product or service. As the contracts entered into within an ICO use means of communication (a computer network) then they are subject to the provisions of the LOA.
Pursuant to § 54 and § 62 of the LOA, the entity organising an ICO must inform the investors of the main characteristics of the object of the contract, the total price of the object of the contract, including the taxes, the duration of the contract or conditions for terminating the contract and other rights and obligations arising from the contract and its technical stages.
Law of Obligations Act (LOA) in English.
Advertising Act (AA)
It is important to consider the use of terms in the advertisement and the general requirements for advertising stipulated in the Chapter 2 of the AA. The advertising must provide a clear and true presentation of the product or service to the consumer. In particular, advertising must not be misleading concerning the characteristics of the offered product or service.
For example, advertising something as an investment service could be unlawful without the required authorisation (as stated in the provisions § 3 (4) 11) and 16); § 4 (1) and § 29 (1) and (3) of the AA). Hence, a utility token must not be advertised as an investment or an investment object.
Advertising Act (AA) in English.
Securities Market Act (SMA)
Provided that tokens offered within an ICO qualify as securities, the provisions of the SMA regulating offerings of securities and the provision of investing services apply. It is important to assess whether it is a public offer of securities in terms of § 12 (2) of the SMA. If the offer is deemed to be a public offer, a prospectus must be prepared and registered with the EFSA.
Securities Market Act (SMA) in English.
Investment Funds Act (IFA)
Depending on the specific structure and objective of an ICO, the IFA may be applicable for example if investors’ capital is raised in an ICO with the aim of further investing it in accordance with the determined investing policy for the benefit of the investors and in common interests. Pursuant to § 2 (3) of the IFA, this fund must have a fund manager.
Investment Funds Act (IFA) in English.
Credit Institutions Act (CIA)
A company that offers tokens may also be subject to the CIA and the requirement to have a credit institution authorisation pursuant to the Act. This applies if the company is constantly granting loans in its own name and account and if the financing of this activity is gained from ICOs by raising repayable funds from the public. Such an activity may qualify as that of a credit institution or a bank, for which authorisation must be applied for at the EFSA.
Credit Institutions Act (CIA) in English.
Money Laundering and Terrorist Financing Prevention Act (MLTFPA)
In case the tokens are intended to be exclusively used as a means of payment for acquiring goods or services or as a means of money or value transfer, they shall be considered as payment tokens. Such tokens do not give rise to any claims on their issuer. The definition of payment tokens corresponds to that of a virtual currency in the provision § 3 point 9 of the MLTFPA, being a value represented in the digital form, which is digitally transferable, preservable or tradable and which natural persons or legal persons accept as a payment instrument, but that is not the legal tender of any country or funds
Money Laundering and Terrorist Financing Prevention Act (MLTFPA) in English.
Disclaimer: this information does not constitute legal advice. Before embarking on a funding campaign, please conduct a thorough due diligence to comply with all relevant regulation.
What are the consequences of non-compliance with the law?
If the applicable legal framework is not pursued or if false information is presented during an ICO it may be classified as fraud. In particular, investment fraud in terms of § 211 of the Penal Code (PC) or as conducting an economic activity without a relevant licence as stated in § 372 of the PC. In addition, several financial sector misdemeanours may apply.
What requirements exist for crypto exchange service and/or for crypto wallet service?
Companies who aim to operate in the field of providing a service of exchanging a virtual (crypto) currency against a fiat currency or providing virtual (crypto) currency wallet service require appropriate licenses. Please see page Cryptocurrency Exchange License in Estonia for more information.
In order to analyse a specific ICO project and the laws applicable to it we first ask a set of questions to identify the specific case.
- Timeline of the project: timeline of fundraising, project implementation milestones;
- Description of the developed/offered product/service (main characteristics);
- Which investors does the ICO target?
- Will there be any restrictions for the investors?
- Which technological solutions will be used in the project/ICO?
- In which (virtual) currency and how is it possible to invest into the project?
- What is the volume of the ICO?
- How and where will the funds be allocated?
- Will a new token be created within the ICO? How?
- When and how is the token transferred to the investor?
- What are the characteristics and functions of the token?
- What rights does the token grant to the investor?
- How and where is it possible to sell or buy the token later?
- Can the token be used to buy products/services or to make payments to third persons?
- Does the token issuer plan to repurchase the tokens?
ICO project support with legal opinion and further information
We would be glad to provide a step by step overview with detailed timeframes and cost break-down after gathering some information about your project. The cost for our services are specific to the case. In most cases legal hours required for preliminary legal analysis remain in the range of 30-40 hours per preliminary legal opinion. Please contact our legal department through the contact form below and we will get back to you with further information.