On October 26, 2017, the French Autorité des Marchés Financiers (“AMF”) launched a consultation on Initial Coin Offerings (“ICOs”) and the potential regulation of such offerings (the “Consultation”). The Consultation was opened as of October 26, 2017 until December 22, 2017. It is expected that responses to the Consultation will be published during the first quarter of 2018 and a final position will be issued thereafter. In addition, the AMF advises all market participants contemplating an ICO offering to inform and liaise with the AMF with respect to the ICO project and white paper in advance of the launch.
In parallel with the launch of the ICO consultation, the AMF announced the launch of a new sandbox called UNICORN (for “Universal Node to ICO’s Research & Network”), which is a support and research program focusing on digital asset fundraising and, specifically, financing based on blockchain technology. The program aims to provide a framework allowing initiators to develop transactions while ensuring the protection of buyers and other market participants. The AMF will meet with initiators (French or foreign entrepreneurs and their advisors) as well as academics and intends to publish an initial impact analysis of these new forms of financing by the end of 2018.
The Consultation describes (i) the ICOs and their three main steps (announcement, white paper publication and the sale of the tokens), (ii) the main risks associated therewith, (iii) their potential legal qualifications, and suggests three options for future regulation of ICOs.
Definition of the ICOs
The Consultation defines the ICOs as a new funding method involving an issuance of tokens, in order to launch or develop a project that has been predefined by its initiators. The ICOs are based on the blockchain technology, which is carried out via a decentralized ledger technology application shared between users and without any financial intermediary.
A typical ICO is composed of three phases: (i) its announcement, by the publication on the Internet of an executive summary, in order to collect feedbacks and comments from the users, (ii) its publication via a “white paper” usually containing a presentation of the project (including the necessary funds, its objectives and roadmap), the number and category of tokens to be issued, the payments accepted (legal and/or crypto-currencies) and the ICO duration and (iii) the token sales, via an automatic wire system.
The tokens bought by the users represent an “interest” (or a “value”) in the issuer or the users community, without conferring rights given by shares (no classic financial or political rights). the AMF emphasizes that tokens are likely to give right to (i) fruits, i.e., a portion of profits or a rise in value in case of sale on the secondary market, and/or (ii) governance or voting rights as decentralized network participant and/or (iii) a right of use of the services or rights offered by the issuer.
The ICOs involve a public offering on the Internet, which is cross-border by nature. In addition, the initiators might not disclose their localization, implying international or “stateless” ICOs without any specific applicable regulation.
In the Consultation, the AMF provides a warning to potential investors, in light of the current uncertainty surrounding the regulations applicable to ICOs. In particular, the AMF cites the lack of regulation, the risks associated with information documents which, thus far, undergo no form of verification, the risk of capital loss due to the absence of guarantee of the capital invested, volatility or market risks, the risk of scams or money-laundering practices and the risks associated with funded projects, as their business plan may not have been verified and their completion or success cannot be guaranteed.
Legal qualifications and framework
The Consultation considers the various options for regulating ICOs.
The AMF takes the view that tokens cannot be characterized as equity securities within the meaning of article L.211-1 of the French Monetary and Financial Code (unless they bestow the same economic and governance rights as those traditionally attached to shares or preference shares) or as debt securities within the meaning of article L. 213-0-1 of the French Monetary and Financial Code. Based on such analysis, the rules applicable to public offerings of securities should not apply to ICOs.
The Consultation also excludes their characterization as financial instruments or minibonds and thus concludes that French crowdfunding rules should not apply to ICOs.
The Consultation also excludes their characterization as Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs).
The AMF considers retaining the following characterization for initiators:
- intermediaries in miscellaneous assets within the meaning of article L. 550-1, I of the French Monetary and Financial Code, if they arrange for token acquirers not to perform token management or make a token buyback facility available to acquirers; or
- intermediaries in miscellaneous assets within the meaning of article L. 550-1, II of the French Monetary and Financial Code, if they highlight the possibility of direct or indirect financial returns.
In particular, a characterization as intermediaries in miscellaneous assets would entail an obligation to maintain a professional indemnity insurance, minimum guarantees with regard to integrity, qualifications, experience and organization, and, most importantly, to prepare a disclosure document prior to any communication to investors. However, this characterization would only apply in specific circumstances; other cases would remain unregulated.
Finally, the Consultation raises the question of how ICOs should be regulated going forward and suggests three options:
- Option 1: maintaining a regulatory status quo and establishing guidelines. In this case, only ICOs covered by existing legal provisions would be regulated, and the AMF would develop best practices / guidelines that any ICO originator in France could voluntarily apply. Such guidelines would include inter alia (i) drafting a white paper for the offering and circulating it to all potential token investors, (ii) identifying the ICOs actors (by specifying a person responsible for information contained in the white paper and providing information on the main persons involved in the project), (iii) defining the category of subscribers targeted, (iv) providing information regarding the project, its evolution, the use of proceeds, risks and the competent court in case of litigation, (v) implementing rules and process to ensure the fair valuation of tokens, absence of conflicts of interests and robust mechanisms to avoid any fraud or money laundering risks and, (vi) during the token pre-sale and sale phase, holding collected funds in an escrow account.
- Option 2: regulating ICOs using the legal framework for prospectuses. This would imply heavy regulation as ICOs would fall under the existing rules relating to public offerings of securities, as adjusted and expanded for this purpose.
- Option 3: adopting an ad hoc regulation tailored to ICOs.
- 3A: an authorization regime applicable to all ICOs available to the public in France. In this case, a regulation to safeguard investor rights could be based on a marketing authorization regime, and this authorization regime could be modelled on the rules arising from the miscellaneous assets intermediary regimes. Offers of tokens to investors would therefore constitute a new “intermediation in miscellaneous assets” activity. ICOs not approved by the AMF would be prohibited in France.
- 3B: an optional authorization regime. An alternative to Option 3A would be that non formally authorized offerings not be banned but, if they are presented in France, be required to contain an obligatory disclaimer clearly stating the absence of AMF approval.