Initial Coin Offerings

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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 James Inness and Stuart Davis

Following our 7 November 2017 blog “Europe as a Hub for Initial Coin Offerings”, the European Securities and Markets Authority (ESMA) has published two statements on Initial Coin Offerings (ICOs). The statements underline ESMA’s interest in ICOs as a means to raise capital for enterprises, particularly given their rapid growth in recent months, as well as highlighting ESMA’s concerns for investor protection given the potentially high risks to investors.

Interestingly, one of the issues ESMA has focussed on is the requirement for ICO issuers intending to raise capital in the EU to comply with the EU Prospectus Directive in circumstances in which the ICO is structured as a security offering (as opposed to a non-security utility offering). ESMA acknowledges that the exemptions from the requirement to publish an approved prospectus under the EU Prospectus Directive would potentially be available to ICO issuers in the same manner as for issuers in relation to other types of securities offering, as noted in Latham’s earlier blog.

By James Inness and Stuart Davis

Initial coin offerings (ICOs) involve issuers offering virtual coins or tokens that are created and disseminated using blockchain or distributed ledger technology. Virtual coins resemble cash in a number of ways but may also afford holders additional rights, such as the ability to access the platform or software, or participate in the profits, of the issuer of the virtual coins or tokens. Post-issuance, virtual coins or tokens are tradeable on a secondary market.

Tokens as securities

The popularity of ICOs as a funding mechanism has mushroomed in 2017. In response, regulators in key financial centres around the globe have warned issuers that existing regulatory regimes for securities offerings may apply to the person(s) making or marketing ICOs. Some regulators have gone further, adopting a blanket ban on fundraising though ICOs.

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.