Acquiring Or Investing In EU Crypto-Asset Businesses: MiCA’s Impact – Fin Tech – European Union

As noted in our previous alerts “Marketing Crypto-Assets in and Into Europe:
MiCA, the EU’s New Uniform Crypto Code” and “Doing Crypto Business in Europe: MiCA, the
EU’s New Uniform Crypto Code – Part 2”, the
European Union (EU) Markets in Crypto-Assets Regulation (MiCA) was
published in the Official Journal of the European Union on
9 June 2023. MiCA is a major step toward an EU-wide uniform code
governing crypto-assets (such as Bitcoin, Ethereum and stablecoins)
and crypto-asset service providers (CASPs).

MiCA’s effect will not be limited to CASPs themselves. It
will also have an impact on anyone who wishes to acquire voting
rights or capital in a CASP above any of the thresholds identified
in MiCA. This will require regulatory approval under MiCA before an
acquisition above that threshold can completed. Prudent acquirers
will also want to use MiCA as the touchpoint for undertaking
regulatory due diligence on EU CASP acquisition targets.

Those familiar with the provisions on the acquisition of a
qualifying holding in an investment firm under the Markets in Financial Instruments Directive and
similar provisions for EU banks, insurers and mutual fund managers
will see similarities with the MiCA regime and with rules governing
the acquisition of UK crypto businesses noted in “Buying a UK Crypto Business: The New
Regulatory Hurdles”.

When do the MiCA obligations take effect?

Although MiCA came into force on 29 June 2023, there is a period
of time before its provisions come into effect:

• The provisions governing asset-referenced tokens (ARTs)
  (broadly, stablecoins) and e-money tokens will apply from
  30 June 2024.




• The provisions governing the remaining crypto-assets will apply
  from 30 December 2024.

Which types of crypto-asset business are subject to acquisition
restrictions under MiCA?

The new MiCA requirements will apply to the acquisitions of
CASPs and also to the issuers of ARTs.

Which regulatory authorities have powers under MiCA?

Although MiCA is an EU regulation which, unlike an EU directive,
does not require a member state to make laws, rules or regulations
to give it effect in that member state, the exercise of day-to-day
administrative powers under MiCA falls within the jurisdiction of
each member state’s national competent authority (NCA). The EU
supervisory authorities have legislative powers under MiCA and,
indeed, the European Banking Authority (EBA) and European
Securities and Markets Authority (ESMA) have published draft
regulations in the form of regulatory technical standards (RTS)
under MiCA on the acquisition of CASPs and ARTs. (These are
discussed below.)

How does an acquirer determine whether a target is a CASP?

The most likely way will be to identify whether the name of the
CASP appears in a register maintained by the relevant NCA, which
shows that the NCA has authorised that CASP under MiCA.

A CASP will require authorisation under MiCA where its
occupation or business is the provision of one or more of the
following crypto-asset services to clients on a professional
basis:

• custody and administration of crypto-assets on behalf of
  clients




• operation of a trading platform for crypto-assets




• exchange of crypto-assets for funds or other crypto-assets




• execution of orders for crypto-assets on behalf of clients




• placement of crypto-assets




• reception and transmission of orders for crypto-assets on
  behalf of clients




• provision of advice on crypto-assets




• provision of portfolio management on crypto-assets




• provision of transfer services for crypto-assets on behalf of
  clients

We discuss these activities in our alert “Doing Crypto Business in Europe: MiCA, the
EU’s New Uniform Crypto Code – Part 2”.

How does an acquirer determine whether a target is an issuer of
an ART?

Issuers of ARTs include any natural or legal person or other
undertaking who issues a type of crypto-asset that is not an
electronic money token and that purports to maintain a stable value
by referencing another value or right or combination of values or
rights.

What level of control triggers the acquisition approval
requirements under MiCA?

The requirements under MiCA apply when any person intends to
acquire a proportion of voting rights or capital in a CASP or an
issuer of an ART that reaches or exceeds 20%, 30%, 50% or 100%. The
requirements also apply where the thresholds are met by a group of
persons acting in concert or the voting rights or capital are
acquired indirectly.

What new requirements will be imposed by MiCA?

If a holding reaches or exceeds a threshold, then the acquirer
must notify the relevant NCA of the proposed acquisition,
disclosing relevant information, as discussed below. The NCA will
then assess the notification and may either oppose or approve the
acquisition.

What information must be included in the notification for an
acquisition of an issuer of ARTs or a CASP?

A notification of proposed acquisition of an issuer of ARTs or a
CASP should include an indication of the size of the intended
holding, as well as information prescribed in RTS issued by the
EBA, for ARTs, and ESMA, for CASPs. Following the initial
notification, the NCA has wide discretion to request additional
information.

Both the EBA and the ESMA published draft forms of their
relevant RTSs in consultations published on 12 July 2023. The
current form of the draft RTSs envisions reduced information
requirements where the proposed acquirer has been assessed by the
same NCA within the previous two years or is subject to ongoing
supervision by the NCA. In these situations, the notification
should only include information specific to the acquisition in
question. If this is not applicable, then the information
identified in the RTS is required. (We set this out in Appendix 1
below.)

What will the NCA consider when assessing a proposed
acquisition?

Whether an acquisition is approved will be based on the
NCA’s assessment of:

• the reputation of the proposed acquirer




• the reputation, knowledge, skills and experience of any person
  who will direct the business of the issuer of ARTs or the CASP as a
  result of the proposed acquisition




• the financial soundness of the proposed acquirer




• whether the issuer of ARTs or the CASP will be able to comply
  with the requirements of MiCA




• whether the acquisition could increase the risk of money
  laundering or terrorist financing

What is the expected timeframe for approval/denial of
permission for an acquisition?

The NCA will acknowledge receipt of a completed application
within two working days and assess the proposed acquisition within
60 working days of the acknowledgment.

As discussed above, the NCA may request additional information,
which will allow them to suspend the assessment period until the
additional information has been received (and not by more than 20
working days for EU applicants or 30 working days if the proposed
acquirer is situated outside the EU).

If the NCA chooses to oppose the acquisition, it must notify the
proposed acquirer within two working days.

In total, then, the maximum period for the assessment of a
proposed acquisition will not exceed 94 working days from the date
the NCA is notified.

Will MiCA have an impact on due diligence?

Even now, member state laws implementing the Fifth EU Anti-Money
Laundering Directive (AMLD5) provisions on crypto firms will be
relevant when buying a CASP because the AMLD5 imposes regulatory
obligations on a CASP. These include obligations connected with
standard and enhanced customer due diligence and reliance and
record-keeping, which an acquirer will need to include as part of
its regulatory due diligence in addition to related items under the
general law, such as provisions governing anti-bribery.

MiCA, however, extends the type of CASP subject to regulatory
obligations. It also imposes additional obligations, such as a
general obligation to act honestly, fairly and professionally and
to act in the best interests of clients. It also includes ongoing
disclosure requirements, stringent prudential requirements, and
various organizational and governance requirements. There are also
requirements around outsourcing of operational functions. In
addition to these general obligations, there are also specific
obligations depending on a CASP’s specific business, e.g., for
crypto custodians. For further discussion, see our alert “Doing Crypto Business in Europe: MiCA, the
EU’s New Uniform Crypto Code – Part 2”.

These additional regulatory obligations will necessarily
increase the regulatory obligations and corresponding risk under EU
law for CASPs. From this, it will follow that acquirers of and
investors in EU CASPs will be required to undertake more thorough
due diligence than is currently the case.

Appendix 1

Information about the proposed acquirer

Where the proposed acquirer is a natural person
	Personal details (e.g., name, DOB, address, CV, etc.).
	A statement containing specified information about the suitability of the acquirer and any undertaking controlled by it in the last 10 years (e.g., past criminal convictions/investigations, civil or administrative decisions or sanctions, bankruptcy/insolvency procedures, etc.).
	Details of the person’s current financial position, business activities, financial interests and financial information on undertakings directed or controlled by the person.
	Description of the financial and non-financial interests in the target or any current members of the management body, shareholders or holders of voting rights in the target.
	Any interests/activities that may conflict with the interests of the target and any proposed methods for managing these conflicts of interest.
	Links to any politically exposed person.
Links to any politically exposed person. Where the proposed acquirer is a legal person
	Name of legal person, legal entity identifier, address of registered office and contact details for communications regarding the notification.
	Name and contact details principal professional adviser used to prepare the application.
	Any public registrations or authorisations within the group of the proposed acquirer, with registration numbers or equivalent means of identification.
	Corporate documents/agreements governing the legal person and a summary explanation of the legal form of the legal person and its business activities.
	Anti-money laundering and counterterrorist financing policies and procedures.
	Details of the persons who effectively direct the business of the proposed acquirer and ultimate beneficial owners.
	A statement containing specified information about the suitability of the proposed acquirer (e.g., past criminal convictions/investigations, civil or administrative decisions or sanctions, bankruptcy/insolvency procedures, etc.).
	Details of the legal person’s business activities, financial interests and financial information on undertakings directed or controlled by the applicant.
	Description of the financial and non-financial interests in the target or any current members of the management body, shareholders or holders of voting rights in the target.
	Links to any politically exposed person.
	Any interests/activities that may conflict with the interests of the target and any proposed methods for managing these conflicts of interest.
	Shareholding structure of the proposed acquirer and the identity, shareholding and voting rights of all shareholders exerting significant influence. Should include a detailed organisational chart of the group structure where relevant.
	Annual financial statements for the last three financial years.
Where the proposed acquirer is a trust
	Details about the trustees who manage assets under the terms of the trust document (e.g., name, DOB, address, contact details, CV, etc.).
	Details about each person who is a settlor, beneficiary or protector of the trust property (e.g., name, DOB, address, contact details, etc.).
	Copy of the document establishing and governing the trust.
	A description of the main legal features and functioning of the trust.
	A description of the investment policy of the trust and possible restrictions on investments.
	Applicable anti-money laundering and counterterrorist financing policies and procedures.
Where the proposed acquirer is an alternative investment fund
	Details of the investment policy and any restrictions on investments.
	Details about the identity and position of the persons responsible for making investment decisions (e.g., name, DOB, address, contact details, CV, etc.).
	Applicable anti-money laundering and counterterrorist financing policies and procedures.
	Description of the performance of qualifying holdings previously acquired by the alternative investment fund manager (AIFM) or UCITS (undertakings for the collective investment in transferrable securities) management company on behalf of the AIFs or UCITSs they manage.
Where the proposed acquirer is a sovereign wealth fund
	Details of the investment policy and name of ministry, government department or other public body in charge of determining the investment policy.
	Details of the names and positions of individuals in high-level administrative positions in the ministry, government department or other public body in charge of determining the investment policy (e.g., name, DOB, address, contact details, CV, etc.).
	Details of influence exerted by the ministry, government department or other public body on the day to day operations of the sovereign wealth fund.
	Applicable anti-money laundering and counterterrorist financing policies and procedures.

Information about the proposed acquisition

Information required by all qualifying acquisitions
	Identification of the target entity.
	Details of the proposed acquirer’s intentions with respect to the proposed acquisition.
	Specified information regarding the shares of the target entity owned before and after the proposed acquisition.
	Any action in concert with other parties.
	Content of intended shareholder’s agreements.
	The proposed acquisition price and the criteria used when determining such price.
	A copy of the contract of acquisition.
	Analysis of the perimeter of consolidated supervision of the group.
	Analysis of the impact of the proposed acquisition, including on the ability of the target entity to provide timely and accurate information to the NCA.
	Specified information on the sources of funding for the proposed acquisition.
	Identification of the target entity.
	Details of the proposed acquirer’s intentions with respect to the proposed acquisition.
Additional information for qualifying holdings of up to 20%
	Document on the strategy of the proposed acquirer regarding the proposed acquisition, intentions toward the target entity and the financial position of the proposed acquirer.
Additional information for qualifying holdings between 20% and 50%	Document on the strategy of the proposed acquirer, including the same information as above as well as (i) details on the influence the proposed acquirer intends to exercise on the financial position, strategic development and allocation of resources and (ii) a description of the proposed acquirer’s intentions and strategy toward the target entity.
Additional information for qualifying holdings of more than 50%	A three-year time horizon business plan, including strategic development plan, estimated financial statements and the impact of the acquisition on the corporate governance and general organisational structure of the target.

The content of this article is intended to provide a general guide
to the subject matter. Specialist advice should be sought about
your specific circumstances.