Further to its consultation on potential legal framework of Initial Coin Offerings (“ICOs”) (the “Consultation”), the French Autorité des Marchés Financiers (“AMF”) published on February 22, 2018 a summary of the responses received.[1]

The majority of respondents favor an optional authorization regime for ICOs, which is seen as a balanced and pragmatic approach.

  • Initiators of ICOs targeting French investors would obtain a visa from the AMF subject to satisfying certain conditions and providing guarantees to investors.
  • An offer launched without visa would not be illegal but would contain a warning informing potential investors that they have not received an authorization and that is a risky transaction. Failing such warning, tokens offers would give rise to sanctions.

1. ICO sandbox –  Key takeaways

Following the launch by the AMF of the “UNICORN” ICO sandbox in October 2017, the AMF met with 15 companies (including 14 in France from various sectors) that had already carried out an ICO or planned to do so, which has allowed it to deepen its legal and economic expertise of these transactions.  As of February 19, 2018, the total amount of contemplated or completed fund raising of the companies which contacted the AMF was c. €350 million, including €66 million for five transactions that are already completed.

The AMF notes the following;

  • ICO issuers usually use two types of documents: (i) manifesto, announcing a protocol pursuant to which certain technological projects could be developed and (ii) whitepapers, a more commercial document targeting potential investors and describing the main characteristics of the fund raising and tokens to be issued.
  • The majority of issuers that contacted the AMF have legal advisors, aware of the existing requirements applicable to traditional fund-raising transactions, such as the Prospectus Directive and some of them apply certain of those rules on a voluntary basis.
  • Whitepapers generally specify (i) tokens buyers treatments (“pre-sale” phases), (ii) the currencies accepted (legal (fiat) and/or crypto-currencies), (iii) anti-money laundering and financing terrorism rules (including, for some issuers, KYC requirements) and (iv) indicative ranges of contemplated fund raising. However, whitepapers generally do not specify the accounting treatment of the funds raised.
  • In light of the various types of tokens, the AMF suggests the following classification: (i) utility tokens (which give a right of use of the technology and/or services offered by the issuer) or (ii) tokens with economic or voting rights (which could be characterized as equity securities, but which concern few ICOs).

2. Summary of feedback on the ICO consultation

The AMF received a significant number of answers (82), including 22 from digital economy actors, 15 from law firms, 5 from institutional investors, 3 from banks and 1 from a listed company. These answers emphasized the following:

  • the respondents mostly shared the AMF preliminary legal analysis set forth in the Consultation but some referred to the possible application of other types of regulations (in particular consumer law, payment services rules and data protection rules);
  • the majority of respondents agree that defining an appropriate legal characterization for tokens is challenging and several insist on the necessity of adopting a case-by-case approach;
  • a large majority agrees with an ad hoc regulation tailored to ICOs, based on the fact that the actual regulatory framework is not suitable for ICOs.

Legal characterization

Financial instruments and derivative contracts

A majority of the respondents addressed the difficulty of determining whether a token can be characterized as a financial security.  However, in line with the AMF’s view, the majority of respondents considered that most tokens cannot be characterized as equity or  debt securities.

One respondent stressed the importance of determining whether any rights in respect of tokens would fall within the definition of derivative contracts as set forth in Article D.211-1 A of the French Monetary and Financial Code.

Intermediary in miscellaneous assets

The respondents’ observations are in line with the AMF’s analysis whereby ICOs have similar characteristics as intermediaries in miscellaneous assets (“IBD”).

They note in particular that: (i) the fact that the ICO initiator is also the issuer of the tokens is not an obstacle to the IBD qualification, (ii) the requirement pursuant to which the proposal is made to customers “on a regular basis” is applicable only for IBD 1[2] and seems to be satisfied by all ICOs as long as this expression means that the proposal is made to several people at the same time, and (iii) the technical aspects of ICOs such as the existence of a website or internet services are not inconsistent with the IBD scheme. The AMF agrees with some of the respondents that, in practice, few ICOs are likely to satisfy the conditions of IBD 1.

Concerning the IBD 2[3] regime, several respondents concluded that it is impossible for ICOs to comply with certain requirements applicable to IBD 2 such as the requirement to provide sufficient guarantees.  However, the AMF notes that the practical impossibility to satisfy this requirement does not exclude the characterization of ICOs as IBD 2.

Collective investments, crowdfunding and others characterizations

Respondents’ observations converge with the AMF’s analysis concluding that ICO characteristics are incompatible with the characterization as collective investment and that the status of participatory investment advisor (PIA) and investment service provider (ISP) are not appropriate for ICOs to the extent that they do not provide advice, have no role in the valuation, selection and presentation of projects to be financed and do not offer the possibility of investing in a financial instrument.

Information to be included in whitepaper

Respondents unanimously believe that a whitepaper should be provided in connection with all ICOs and should include at least (i) the description of the project and its evolution, (ii) the rights conferred by the token, (iii) the competent court in case of litigation, (iv) the economic and accounting treatment of the collected funds.

The majority of respondents are in favor of including in the whitepaper additional information, such as (i) the identification of the legal entity responsible for the offer, its corporate officers and their skills, (ii) the validation of independent experts (expert to audit the IT code, auditors for accounting validation, economic expert for ICO sector and token offered, security experts, lawyers for documentation, etc.), (iii) a strong transparency requirement prior to the tokens pre-selling and selling phases, in light of the market abuse risks (loss of value, pre-sale with a discount, whale clubs or tokens recuperation by the initiator buying its own tokens during the ICO with the funds raised with the first sales) with the suggestions of interdiction (or strict limitation) of token repurchases and disclosure of information regarding the tokens freely granted as reserve or compensation or pre-sold, (iv) the implementation of rules or specific best practices for funds collected in crypto-currencies, which could require the use of an electronic wallet locked with multiple signatures (“multisig wallet”) and (v) the clarification of the economic and accounting treatment of the funds raised.

Further issues to be considered

Some respondents pointed out that other regulations may apply to ICOs such as consumer law[4], payment services rules and data protection rules.

In addition, respondents suggested that certain topics were not addressed in the Consultation and suggested further reflection on (i) a rating of the blockchain used for the ICO, (ii) information on blockchain governance, (iii) a clarification of the ICO tax regime and (iv) a regulation of commercial platforms.

3. Regulatory options

The conclusions of the respondents were as follows:

  • Option 1: maintaining a regulatory status quo and establishing guidelines. Almost a third of the respondent were favorable to this option, but most often “combined” with other more restrictive regulatory options: only one-tenth of respondents support relying solely on non-binding guidelines / best practices.
  • Option 2: regulating ICOs using the legal framework for prospectuses. This option was excluded by almost all respondents (only three respondents were favorable to this approach).
  • Option 3: adopting an ad hoc regulation tailored to ICOs. This option was endorsed by nearly two-thirds of the respondents, e.g., an optional authorization regime, which is seen as a balanced and pragmatic approach (Option 3B[5]).
    • Initiators of ICOs targeting French investors would obtain a visa from the AMF subject to satisfying certain conditions and providing guarantees to investors.
    • An offer launched without visa would not be illegal per se but would contain a warning informing potential investors that they have not received an authorization and that is a risky transaction. Failing such warning, tokens offers would give rise to sanction.

The AMF considers that Option 3B would protect investors while attracting innovative projects and discouraging fraudulent schemes.

4. Next steps

The next steps set out by the AMF include:

  • Continue to work on the definition of a possible legal framework specific to ICOs, by specifying the necessary appropriate information and guarantees.
  • Further consider money laundering risks and the protection of investors in the token secondary market.
  • Consider the possibility of requiring the intervention of independent experts in the framework of ICOs and the scope of their possible missions.

[1] Our FinTech blog post on the Consultation is available at https://www.clearyfintechupdate.com/2018/02/amf-consults-potential-legal-framework-icos-launches-digital-asset-fundraising-sandbox/

[2] Pursuant to article L. 550-1, I of the French Monetary and Financial Code

[3] Pursuant to article L. 550-1, II of the French Monetary and Financial Code

[4] European e-commerce Directive, the Directive 2011/83/EU on Consumer Rights and some of the provisions of the Consumer code regarding unfair Terms)

[5] Option 3A was an autorisation regime applicable to all ICOs available to the public in France.