Andorra -- Securities Classification Regulatory Overview

Andorra has established a comprehensive regulatory framework for digital assets through Law 15/2022, of July 21, on the Digital Economy, Blockchain, and Cryptocurrencies (Llei 15/2022, del 21 de juliol, de l'economia digital, la cadena de blocs i la criptoactius). This law adopts a functional approach, similar to the European Union's MiCA (Markets in Crypto-Assets) regulation, where the classification of a token depends on its characteristics and the rights it confers, rather than solely on its technological form.

The Legal Test for Securities Classification

Andorra does not apply a direct equivalent of the U.S. Howey test. Instead, it operates on a functional test that categorizes digital assets based on their inherent characteristics and the rights they grant. Law 15/2022 clearly distinguishes between different types of digital assets, with a primary focus on identifying those that qualify as "DLT-based securities" (valores digitales).

A digital asset is considered a DLT-based security if it:

• Represents rights typical of traditional securities: This includes shares, bonds, or other instruments that confer rights of ownership, debt, or participation in the capital or profits of an entity.
• Is issued, transferred, and stored using Distributed Ledger Technology (DLT) or similar technologies.

Essentially, if a token functions as a traditional financial instrument (e.g., granting equity, debt claims, or rights to future profits based on an investment expectation), it will be treated as a security, regardless of its underlying technology. The law defines "DLT-based financial instruments" as any financial instrument issued on DLT, and a subset of these will specifically qualify as "DLT-based securities."

Which Tokens Are Considered Securities?

Based on Law 15/2022, tokens considered DLT-based securities include, but are not limited to:

1. Equity Tokens: Tokens representing ownership stakes in a company, granting rights like voting, dividends, or a share of company assets.
2. Debt Tokens: Tokens representing debt instruments, such as bonds or loans, where holders are entitled to receive interest payments and/or the return of principal.
3. Revenue/Profit Share Tokens: Tokens that grant holders a right to a portion of the issuer's future revenues or profits, without necessarily conferring direct ownership.
4. Security Tokens Offerings (STOs): Issuances where the underlying digital asset explicitly represents a claim on an asset or stream of income, making it fall under securities law.

Tokens generally NOT considered DLT-based securities (unless hybrid or acquiring security-like features):

• Payment Tokens (Cryptocurrencies): Tokens primarily intended as a means of exchange (e.g., Bitcoin, Ethereum when used purely as currency).
• Utility Tokens: Tokens designed to provide access to a specific product or service within a DLT network or ecosystem (e.g., a token granting access to cloud storage, gaming features).
• Stablecoins: Tokens designed to maintain a stable value relative to a fiat currency or other asset, although their specific features may sometimes lead to them being classified under different regulatory categories (e.g., e-money tokens or financial instruments if they grant specific financial rights).

The key is always the substance over form – if the token gives rights analogous to those of traditional securities, it will be classified as such.

Registration/Exemption Requirements for Token Issuers

For DLT-based securities, the following requirements generally apply:

1. Authorization and Supervision: Issuers of DLT-based securities and providers of services related to them (e.g., trading venues, custodians) must be authorized and supervised by the Autoritat Financera Andorrana (AFA).
2. Prospectus Requirements: The public offering of DLT-based securities generally requires the publication of a prospectus approved by the AFA, similar to traditional securities offerings. This prospectus must contain all necessary information for investors to make an informed decision.
3. Transparency and Disclosure: Issuers are subject to ongoing transparency and disclosure obligations, including periodic financial reporting and disclosure of significant events.
4. Fit and Proper Requirements: Management and significant shareholders of entities involved in issuing or servicing DLT-based securities must meet "fit and proper" criteria.

Exemptions: Law 15/2022 and its implementing regulations may provide for certain exemptions from prospectus requirements, typically aligning with those found in traditional securities law, such as:

• Small offerings: Offerings below a certain monetary threshold.
• Offerings to qualified/professional investors: Where the investors are deemed sophisticated enough not to require the full protection of a prospectus.
• Private placements: Offerings to a limited number of investors.
• Offerings to existing employees.

The law also establishes a regulatory sandbox for innovative DLT projects, allowing entities to test their business models under AFA supervision with potentially relaxed requirements for a limited period.

Secondary Trading Rules

Secondary trading of DLT-based securities is also subject to strict regulation:

1. Authorized Trading Venues: DLT-based securities can only be traded on regulated DLT-based trading venues or platforms that have been authorized by the AFA. These venues must comply with rules regarding market integrity, transparency, investor protection, and operational resilience.
2. Market Abuse Rules: Standard market abuse regulations, including prohibitions against insider trading and market manipulation, apply to DLT-based securities.
3. Post-Trade Transparency: Rules regarding trade reporting and post-trade transparency (e.g., public disclosure of transaction prices and volumes) are expected to apply.
4. Custody: Entities providing custody services for DLT-based securities must also be authorized and supervised by the AFA, adhering to robust security and operational standards.

Enforcement Examples

As Law 15/2022 is relatively new (enacted in 2022) and the DLT-based securities market in Andorra is still nascent, public enforcement examples specifically related to the classification of DLT-based tokens as securities and subsequent penalties are not widely documented yet.

However, the AFA is the primary enforcement body. Its powers under Law 15/2022 and general financial legislation include:

• Imposing administrative fines: For violations of regulatory requirements.
• Issuing cease-and-desist orders: To stop unauthorized activities.
• Revoking licenses or authorizations: For serious breaches.
• Publicly sanctioning individuals or entities: To ensure market transparency and deterrence.
• Requiring restitution or compensation: To affected investors in certain cases.

The AFA is actively involved in supervising the financial sector and has the mandate to ensure compliance with all financial market regulations, including those pertaining to digital assets.

Specific Legislation and Regulatory Guidance URLs

1. Law 15/2022, of July 21, on the Digital Economy, Blockchain, and Cryptocurrencies:

   • Official Publication (BOPA): https://www.bopa.ad/bopa/034027/Pagines/DocumentLlei.aspx?tip=1
   • (Note: This is in Catalan, the official language of Andorra)

2. Autoritat Financera Andorrana (AFA):

   • The AFA is the primary regulator and will issue specific circulars, regulations, and guidance documents implementing Law 15/2022. You can monitor their official website for updates in their "Regulatory" or "Notices" sections.
   • AFA Official Website: https://www.afa.ad/
   • (You may need to navigate the AFA website to find specific regulations or guidance related to digital assets as they are published).

Andorra's framework aims to provide legal certainty and investor protection while fostering innovation in the digital asset space, aligning closely with international best practices and anticipating future developments like the EU's MiCA regulation.