EU Parliament proposing regulation to facilitate ICOs conducted through crowdfunding platforms
A much-needed step towards imposing standards and protections in place for what is an excellent funding stream for tech start-ups?
18 July 2019
In an interesting development, a recent draft report from the ECON Committee of the European Parliament on the Commission's proposal for a new EU Crowdfunding Regulation would seek to introduce provisions facilitating the use of ICOs as a means of capital-raising on a pan-European basis.
In the explanatory memorandum, the Rapporteur states:
"This regulation is an opportunity to provide regulation for initial coin offerings. At present initial coin offerings are operating in an unregulated space and consumers are at risk from fraudulent activity taking place in this market. This Regulation gives the opportunity to ICOs that want to prove their legitimacy to comply with the requirements of this regulation. Whilst this regulation may not provide the solution for regulating the ICO market, it takes a much-needed step towards imposing standards and protections in place for what is an excellent funding stream for tech start-ups;"
Under the proposal, an ICO would be defined as "a means raising funds from the public in a dematerialised way using coins or tokens that are put for sale for a limited time by a business or an individual in exchange for fiat or virtual currencies;". The Regulation would establish an authorisation and EU-wide passporting regime for crowdfunding platform providers who "act as an intermediary between an entity issuing tokens via an ICO using a counterparty and investors." (ICO platform providers).
Other key points
- The proposal does not yet feel fully developed and the ICO proposals have not been fully-tracked through the Regulation, there are, nonetheless, a number of interesting points to note: The Regulation is intended to introduce an "opt in" regime for platforms – in other words, platforms may continue to operate under national frameworks or choose to opt into the European-wide framework under the Regulation; in other words, the Regulation would not automatically apply;
- Only primary sale of coins or tokens would be within the scope of the Regulation (it does not purport to regulate secondary market trading of coins or tokens);
- The Regulation does not appear to consider the position of coins or tokens within any existing taxonomy of regulatory financial products (e.g. financial instruments including transferable securities and units in collective investment schemes) but rather treats them as sui generis;
- Although it is not clear what is meant by "issuing tokens via an ICO using a counterparty", it seems to envisage that there must be a single legal person who "issues" the token and is a contractual (?) counterparty to the purchaser/investor;
- ICOs where coins/tokens are issued without a counterparty, private placements and ICOs raising in excess of EUR 8m (ref. the prospectus exemption under the revised Prospectus Directive) would fall outside the ambit of the Regulation;
- ICO platform providers would need to conduct an "appropriateness assessment" of investors taking into account knowledge and understanding of risk in investing in general and in the types of investments offered on the platform or, if such information is not provided, the ICO platform provider would need to disclose to investors that the investments may not be appropriate for them. ICO platform providers would also have to provide investors the ability to simulate their ability to bear loss, calculated as 10% of their net worth, based on the following information:
(a) regular income and total income, and whether the income is earned on a permanent or temporary basis;
(b) assets, including financial investments, personal and investment property, pension funds and any cash deposits;
(c) financial commitments, including regular, existing or future.
- Whilst not clear, it would seem that the requirements under the Regulation relating to the provision of a key investment information sheet would apply to ICOs offered on a platform (with ICO platform providers having an obligation to take steps to verify the completeness and the clarity of information);
- Separately, the Regulation would introduce a regime for third country ICO platform providers, permitting such platforms to offer their services into the EU where an equivalence assessment has been made by the Commission.
Whilst the Regulation and the proposed amendments are at an early stage in the legislative lifecycle, it is rather an interesting proposal and perhaps gives a broader indication of where we may end up on ICOs in Europe – regulated but not prohibited.