ICOs

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By Andrew Moyle and Stuart Davis

Growth in applications for blockchain and tokenisation, combined with an increasing number of initial coin offerings (ICOs), mean that buyout firms should note developments in this sector.

Why Should PE Be Interested in Blockchain?

A shared blockchain ledger could drive a single interface between a PE fund and its investors, increasing transparency and efficiency, providing real-time updates for LPs on investments, and enhanced investment analytics. Blockchain technology could also be used to automate fund administration — traditionally a manual and time intensive process. However, back- and middle office process at PE houses are typically low volume, low margin activities, in our view limiting any cost and efficiency savings for a PE fund. Furthermore, investors and regulators will scrutinize any blockchain solution and the operational risks inherent in new technology implementation.

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A more interesting development for PE is the trend towards tokenisation of financial assets. Tokenisation refers to the manufacture, issuance, storage, and transfer of digital assets on a blockchain infrastructure. Digital assets can take any form, e.g., shares or bonds, profit participation rights, fund interests, or a hybrid instrument that automatically converts from one instrument to another on the occurrence of a pre-defined trigger.

Swiss regulator offers assistance in navigating the regulatory framework.

By Andrew Moyle, Stuart Davis and Charlotte Collins

The Swiss Financial Market Supervisory Authority (FINMA) has published a set of guidelines, setting out how it intends to apply its financial markets legislation in the context of initial coin offerings (ICOs).

Despite the growing trend for ICOs globally, FINMA is the first national regulator to provide such helpful clarity for ICO participants, who are typically left to work out for themselves whether and how their structure fits into existing regulatory frameworks. ICOs, in which investors receive blockchain-based coins or tokens in exchange for funds, were not envisaged when many existing frameworks were developed. Further, the increasing deployment of ICOs has not given rise to ICO-specific rules and regulations in most jurisdictions, although a minority of regulators such as the Gibraltar Financial Services Commission have announced that they are creating regulatory regimes specifically targeting ICOs. Consequently, the application of current regulation and legislation to ICOs is in many cases unclear, with the legal analysis depending very much upon the way in which a particular ICO is structured.

By Stuart Davis and Charlotte Collins

Following on from the Financial Conduct Authority’s (FCA’s) consumer warning on Initial Coin Offerings (ICOs) in September, the FCA has announced a deeper examination of this area in its Feedback Statement on Distributed Ledger Technology (DLT) and related press release. The FCA stated that it will consider whether regulatory action beyond the consumer warning is required.

The earlier Discussion Paper on DLT had asked for feedback on the legal and regulatory risks associated with ICOs (see Latham’s related Client Alert). According to the FCA, many respondents considered ICOs as having the potential to “dynamise innovation”, although others raised concerns about potential risks and possible investor harm.

By Andrew Moyle, Wenchi Hu, Simon Hawkins and Stuart Davis

Initial Coin Offerings (ICOs) involve issuers offering virtual coins or tokens that are created and disseminated using distributed ledger or blockchain technology. The capital raised from the offer will fund the development of a digital platform, software, or any other project. Holders of virtual coins or tokens may have additional rights over and above those of a cryptocurrency, such as rights to access the platform, use the software, or otherwise participate in the project. In some cases, holders may also have rights to a return on their investment, or rights to participate in a share of the returns provided by the project or by the company backing the project. Post-issuance, holders may resell virtual coins or tokens in a secondary market on virtual currency exchanges or other platforms. ICOs are typically announced on cryptocurrency forums and websites through a white paper describing the project and key terms of the ICO, subscription details, timeline, etc.

To date, an estimated 100 ICOs have raised over US$1.2 billion, with a plethora of prospective ICOs frequently reported in industry publications. In June and July this year, ICO funding surpassed that of angel and early-stage VC funding combined.