Security Token Offerings (STOs) In The Cayman Islands

• Published date: 18 March 2024
• Subject Matter: Finance and Banking, Technology, Financial Services, Fin Tech
• Law Firm: Stuarts Humphries
• Author: Mr Chris Humphries and Megan Wright

We have experienced a rapid growth in Security Token Offerings ("STOs") over the course of the last year and we have now advised on the launch of several dozen STOs (both in relation to utility tokens and tokenized investment funds).

Whilst no specific legislation has been passed by the Cayman Islands Government in connection with STOs and cryptocurrencies, it would be incorrect to say that STOs are "unregulated". The fact is that some of the existing legislation in the Cayman Islands can, and in certain circumstances will, be applicable. We have detailed the most relevant legal considerations when structuring an STOin the Cayman Islands in a previous legal guidance note (Virtual Asset Service Providers Registration and Continuing Obligations). But below is a shorter review. We suspect that more-specific guidance will be issued by the Cayman Islands Monetary Authority very shortly and that positive legislation will eventually be created.

The Securities Investment Business Act(asRevised) ("SIBA")

SIBA is the Cayman Islands' primary legislation relating to the regulation of investments in 'securities' and associated businesses. Essentially, no person shall carry on (or purport to carry on) securities investments business unless that person is the holder of an appropriate licence or is excluded from the requirement to hold a licence.

The term 'securities' is defined in SIBA by reference to a list of particular types of security (including shares, stock, partnership interests, instruments acknowledging indebtedness, options, futures etc.). This definition is narrower than that used in the US Securities Act of 1933 as there is no corresponding concept of an 'investment contract'. There is instead just a specific list of types of security which does not specifically refer to a cryptocurrency or token.

As the definitions of 'securities' and 'securities investment business' are linked (i.e. securities investment business includes dealing in, managing and advising on securities), it is generally accepted that an STOshould fall outside of SIBA. As always, this depends on the particular circumstances of the STOand so specialist advice should be taken on this point at the outset.

Mutual Funds Act(as Revised) ("MFA")

In circumstances where the STOis related to an investment fund (tokenized or otherwise) or some other form of investment vehicle, the possible application of the MFA should be considered.

In general terms, the MFA regulates "mutual funds" which is a...