While there are no regulations specific to ICOs, existing legislation and regulatory framework may apply to an ICO. Each case is different and needs to be considered on its own facts and circumstances.

Securities

A key issue is whether the tokens issued on an ICO constitute “securities”. If they do, then the issuer must comply with securities regulations in each jurisdiction where the tokens are available. Generally, it is unlikely that utility tokens would be construed as “securities” within the remit of existing regulations, whereas it is much more likely that security tokens would be construed as “securities”.

Relevant legislation

Some of the regulations that may apply to ICOs are dealt with below.

The Prospectus Directive (2003/71/EC) (Prospectus Directive)

Under the Prospectus Directive there is an obligation to publish a prospectus if offering transferable securities to the public, unless certain exemptions or exceptions apply. The purpose of the Prospectus Directive is to ensure that companies provide necessary information which is material to an investor in making an informed assessment of the facts and it must be presented in an easily analysable and comprehensible form.

An offer of securities to the public is broadly defined but the obligation to publish a prospectus may be avoided if the offer of securities (tokens) falls within specified exemptions (eg an offer to a number of investors below a specified threshold, an offer below a certain value, an offer to qualified investors only).

The prospectus must be approved by a competent authority. The relevant competent authority tasked with approving the prospectus is determined by reference to the issuer’s home member state. Because ICO token issuers are based on-line, it can be difficult to determine the issuer’s home member state.

The Prospectus Regulation ((EU) 2017/1129) (Regulation) was published on 30 June 2017 and will be fully applicable from 21 July 2019. The Regulation expands some of the exemptions and relaxes some of the thresholds in the Prospectus Directive.

Companies Act 2014

Under Section 68, a private company is prohibited from offering securities to the public. If tokens issued on an ICO fall within the definition of securities, a private company would have to reregister as a public limited company before commencing the ICO.

European Union (Markets in Financial Instruments) Regulations 2017 (MiFID Regulations)

The MIFID Regulations apply to the provision of investment services and financial instruments, unless the issuer of these services/instruments can show that they come within one of the exempted activities.

A company involved in an ICO may be subject to these Regulations depending on the manner it creates, distributes and trades the tokens. The organisational requirements, the conduct of business rules and the transparency requirements laid down in the MiFID Regulations would then apply. The MIFI Regulations have the potential to apply to both token issuers and also token custodians (or token wallets) and token exchanges depending on the circumstances of the ICO.

Alternative Investment Fund Managers Regulations 2013 (the AIFM Regulations)

The capital, organisational, operational and transparency requirements under the AIFM Regulations may apply to ICOs where they fall into the definition of an alternative investment fund under the AIFM Regulations. Depending on how it is structured, an ICO scheme could qualify as an alternative investment fund, to the extent that it is used to raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy.

Conclusion

In order to determine the level of regulation that the ICO issuer will be subject to, every ICO should be analysed on its own facts, taking into account the particular structure, proposed business activities and any ancillary services which may accompany it, such as token custodians or exchange platforms. Given the difficulty which arises in determining the jurisdiction in which the tokens are being offered, there is significant uncertainty as to the level of regulation the ICO issuer will be subject to, especially where the national laws of member states may vary significantly.

The EU Commission have committed to reviewing ICOs throughout the course of 2018, with a view to identifying whether specific regulatory provisions are required. See here the Commission Fintech action plan, issued in March 2018.

See the first part of this article on initial coin offerings here.