ICMA publishes considerations for risk factors and disclosure in DLT bond documentation
21 November 2023 The International Capital Market Association (ICMA) has today released a paper that offers further insight into legal aspects of distributed ledger technology (DLT) and blockchain relating to the issuance of debt securities.
To promote transparency in light of the increasing frequency of tokenised securities issuance, ICMA’s DLT Bonds Legal Subgroup analysed the offering documents of DLT-based debt securities across a sample of jurisdictions globally. The main objective was to identify any potential areas of convergence related to the scope and nature of risk factors and other disclosure.
- We have reviewed the offering documents of DLT-based instruments issued by major institutions under Australian, English, French, German, Hong Kong, Luxembourg, Spanish and Swiss law
- The review showed that additional risk factors feature in bond documentation and can broadly be divided into three categories: (i) technology risks, (ii) the evolving legal and regulatory environment, and (iii) the limited liquidity for DLT-based debt instruments
- The number and scope of such risk factors will largely depend on the structure of the transaction, particularly the type of DLT infrastructure. Additional disclosure may depend, but is not limited to, the type of issuer, listing considerations, and the choice of governing law
- It will continue to be necessary to take a "case-by-case" approach to risk factors and other disclosure in each transaction as this is an innovative area where certain structures provide more complexity than others
- Transaction parties will need to carefully consider how to address such points in offering documents, the extent to which risk factors will need to be adapted, and whether other disclosure needs to be modified or added
Bryan Pascoe, CEO of ICMA, commented “Fostering the development of DLT-based bond markets as a reliable source of funding for the real economy is a strategic focus for ICMA. In an evolving legal and regulatory landscape, our paper marks an important step for this emerging market segment.”