Cross-border offering of digital assets in Switzerland

Digital assets are traded in a seemingly borderless world. However, the technical speed and ease should not make us forget that the legal systems of many countries provide for and enforce regulatory requirements not only for traditional financial products but likewise for digital assets (hereinafter also referred to as ""token"").

The following is an overview of the regulatory touching points that must be observed by foreign (natural or legal) persons under Swiss law, with a special focus on digital assets. The focus lies on selected, practically relevant aspects such as the indications that speak in favor of a qualification of digital assets as financial instruments or securities (section II 1), the qualification as a financial service that is deemed to be provided in Switzerland and therefore falls within the scope of application of the FINSA (section II 2), the resulting rules of conduct and organizational requirements (section II 3.1), the prospectus and basic information sheet obligations in the case of a public offering in Switzerland (section 3.2) as well as any additionally required licenses under FINIA (section II 4).

II. Regulatory overview for the cross-border offering of digital assets in Switzerland

1. Qualification of digital assets as effects and/or financial instruments

In order to fall under the regulatory provisions of the FINSA, the digital assets must qualify as securities and/or financial instruments. In other words, digital assets that do not qualify as securities or financial instruments do not fall within the scope of the FINSA.

The term ""securities"" includes standardized securities, uncertificated securities, derivatives and intermediated securities that are suitable for mass trading (cf. art. 2 lit. b of the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading («FMIA»). Financial instruments include, for example, equity securities, debt securities, shares in collective investment schemes, structured products, derivatives, and deposits whose repayment value or interest rate is risk- or price-dependent, with the exception of those whose interest rate is linked to an interest rate index, and bonds.

Referring to the three token categorizations of the Swiss Financial Market Supervision Authority (“FINMA”), the following representation results:

• Digital assets in the form of token with a payment function may qualify as financial instruments within the meaning of the FINSA (i) if they are accepted as deposits whose repayment value or interest rate risk is price-dependent and (ii) whose interest rate is not linked to an interest rate index.
• Digital assets in the form of investment token qualify as securities, which is why they are financial instruments within the meaning of the FINSA.
• Digital assets in the form of usage token are only financial instruments within the meaning of the FINSA if they fulfil, in whole or in part, the economic function as an investment.

The FINSA in general as well as the regulation of token in particular are young areas for which there is no established practice yet. Therefore, each digital asset should be analyzed precisely and individually on a case-by-case basis - also with regard to a possible qualification as a financial instrument.

2. Scope of the Federal Act on Financial Services

2.1 Material scope

Persons who provide financial services in Switzerland or for clients in Switzerland on a professional basis are deemed to be financial service providers under art. 3 lit. d FINSA. A professional activity is presumed if the financial service provider provides financial services to more than 20 clients or advertises the provision of financial services in advertisements, prospectuses, circulars or electronic media. Financial service providers may be natural persons or legal entities.

The following activities are deemed to be financial services pursuant to art. 3 lit. c FINSA:

• The acquisition or disposal of financial instruments (para. 1);
• the acceptance and transmission of orders that have financial instruments as their object (para. 2).

The concept of financial services is further specified and limited by art. 3 para. 3 of the Financial Services Ordinance («FINSO»). At this point, it seems significant to mention that, based on the implementing provisions in the FINSO, any activity upstream of the actual acquisition or disposal, which is directly addressed to certain clients and is specifically aimed at the acquisition or disposal of a financial instrument, also falls under the above-mentioned section 1 (cf. art. 3 para. 2 FINSO and Federal Department of Finance, Explanatory notes on the Financial Services Ordinance, Financial Institutions Ordinance and Supervisory Organization, of November 6, 2019, p. 19). I.e., market participants are already subject to the FINSA when marketing financial instruments (cf. Schleiffer Patrick/Schärli Patrick, Grenzüberschreitende Erbringung von Finanzdienstleistungen, GesKR 2020, pp. 24-35, p. 25).

In this context, it should also be mentioned that only end clients are clients within the meaning of the FINSA. I.e., constellations are conceivable in which indirectly – via institutions domiciled in Switzerland – (end) clients in Switzerland are addressed. Since the purpose of the FINSO is to protect investors, cases are conceivable in practice where the FINSA conduct of business obligations do not apply because the contracting party of the foreign financial services provider is not a client within the meaning of the FINSA (similarly Schleiffer/Schärli, p. 27).

2.2 Territorial scope

Foreign financial service providers are covered by the provisions of the FINSA if they serve (end) clients in Switzerland (cf. Federal Council Dispatch of 4 November 2015 on the FINSA and FINIA), BBl 2015 8901 et seq., 8947).

According to this practice, a financial service is deemed to be provided in Switzerland (1) if the financial service provider is entered in the commercial register in Switzerland or is domiciled here, (2) if, as a foreign financial service provider, it operates at least a de facto branch office or representative office in Switzerland (see Section II.4) or, for example, (3) if, as a foreign financial service provider, it sends client advisors to Switzerland on a daily basis to address clients here, for example in the form of road shows (cf. explanatory report on the opening of the consultation procedure FINSO/FINIO/SO, of 24 October 2018, p. 18).

In connection with digital assets, the focus is on online offerings via the Internet. In line with the principles laid down by FINMA for the distribution of collective investment schemes, it is presumed that a website is aimed at clients in Switzerland if indications in its overall establish a link to Switzerland. Disclaimers are often not sufficient.

However, the FINSA does not apply if the (end) client in Switzerland has taken the initiative himself and mandated the foreign financial service provider. (so-called reverse solicitation).

3. Duties for financial service providers

3.1 Rules of conduct and organizational regulations for the provision of financial services in Switzerland

If the FINSA provisions apply to the activities of the foreign financial service provider, the rules of conduct pursuant to art. 7 et seq. FINSA and the organizational regulations according to art. 21 et seq. FINSA must be complied with. The rules of conduct are based on the European rules and include, for example, the obligation to categorize clients, information obligations, documentation, and accountability obligations as well as transparency and due diligence obligations. Within the scope of the organizational duties, it is a matter of ensuring an appropriate organization, effective monitoring via internal controls, the avoidance of conflicts of interest and the disclosure of third-party compensation.

3.2 Prospectus and basic information sheet requirements for public offering in Switzerland

3.2.1 Prospectus

Pursuant to art. 35 FINSA, anyone who makes a public offer to acquire securities in Switzerland or who seeks admission of securities to trading on a trading venue must first publish a prospectus, unless one of the exceptions under art. 36 et seq. FINSA applies (cf. MME magazine article: Same purpose, different approach: the Prospectus Requirements according to FINSA). For public offerings where the need for investor protection is deemed to be limited, the FINSA provides for various exceptions. Namely, no prospectus has to be published if the public offering is only addressed to professional clients (such as regulated financial intermediaries and insurance companies as well as larger companies) or if the investors have to make a substantial investment in the offering (at least CHF 100,000). Smaller public offerings which are directed at a limited group of investors (less than 500) or which do not exceed a certain volume (CHF 8 million calculated over 12 months) are also exempt.

It should be mentioned in connection with prospectus requirements that the FINSA provides certain facilitations for prospectuses drawn up in accordance with foreign legislation. Finally, such prospectuses may be approved directly by the Enforcement Panel (1) if they have been prepared in accordance with international standards established by international organizations of securities regulators, (2) and if the information requirements, including the financial information, are equivalent to the requirements of the FINSA. Further, the act provides the possibility of automatic approval of foreign prospectuses drafted in an official language or in English and approved under certain jurisdictions by the review bodies.

Whether in a specific case a prospectus prepared in accordance with foreign law is recognized or even automatically approved in Switzerland must be carefully examined.

3.2.2 Basic information sheet

The information requirements, which were implemented with the introduction of the FINSA in accordance with the European Financial Markets Directive MiFID II, now include, in addition to the prospectus, the so-called basic information sheet («BIS») (cf. MME magazine article: The key information document – the prospectus for retail clients). This must be prepared in advance and provided free of charge prior to the conclusion of the contract if the offer for a financial instrument is directed at private clients (cf. art. 58 et seq. FINSA).

According to the wording of the law, the producer, i.e., the person at the point of production, is responsible for the preparation of this ""manual"", whereas the financial service provider who personally recommends a certain financial instrument to private clients is responsible for the delivery of the BIS, provided that such a BIS was to be prepared by the producer.

In accordance with the EU regulation, the law and the FINSO regulation recognize equivalent product information documentation prepared in accordance with foreign law. If this is the case, it is no longer necessary to prepare a BIS in accordance with the FINSA (e.g., the EU-KID for PRIIPs). Instead, these are considered equivalent. Whether this can be used in a specific case must be analyzed in detail.

4. Branch and agency issues under Federal Act on Financial Institutions

In principle, the FINIA applies to all financial institutions operating in or from Switzerland. Foreign financial institutions (i.e., domiciled abroad) require a FINMA license if they employ persons in Switzerland by carrying out activities on a permanent and commercial basis on behalf of the financial institution concerned. On the one hand, this activity may be performed by a branch office that trades securities, concludes transactions, manages client accounts or otherwise legally commits itself on behalf of the financial institution (art. 52 para. 1 FINSA; art. 76 FINIO). On the other hand, the activity may also be performed by a representative office that typically forwards client orders or represents the head office for advertising or other purposes (art. 58 para. 1 FINIA; art. 82 FINIO).

Depending on the specific arrangement with partners domiciled in Switzerland, it must be examined on a case-by-case basis whether the FINSA provisions on (de facto) branches or representative offices apply. On the other hand, activities that require a license under FINSA do not apply if the offering of digital assets takes place on a purely cross-border basis without the foreign institution employing persons who work for it in Switzerland on a permanent and professional basis, because the passive cross-border provision of financial services remains outside the scope of FINSA (cf. Bahar Rashid/Nedwed Bianca, Grenzüberschreitendes Angebot von Finanzdienstleistungen und -produkten? Die Eidgenossenschaft schlägt zurück, SZW 2019, p. 618 et seq., p. 626 et seq.).

III. Conclusion

As noted, under certain circumstances, a cross-border offering of digital assets to clients in Switzerland may be subject to the FINSA provisions, and thus to Swiss law. If you have any questions regarding the qualification of digital assets and any related regulatory consequences, such as in the case of a cross-border offering in Switzerland, please do not hesitate to contact our team.