Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Securities and Markets Authority Issues Alerts to Firms and Investors on Initial Coin Offerings
Financial Regulatory Developments Focus
  • European Securities and Markets Authority Issues Alerts to Firms and Investors on Initial Coin Offerings
    The European Securities and Markets Authority has published a statement alerting investors about the high risks of investment in Initial Coin Offerings, including the risk of total loss of their investment. The statement is accompanied by an alert to EU firms involved in ICOs reminding them of their regulatory obligations.

    ICOs are a means of raising money from the public, whereby the issuer issues coins or tokens to be purchased by investors in exchange for traditional currencies or, more often, virtual currencies such as Bitcoin or Ethereum. The coins or tokens are typically created and distributed using distributed ledger technology (DLT). In its statement to investors, ESMA cites the key risks of ICOs as: the fact that their structure may mean they are unregulated instruments; some recent ICOs have been fraudulent; ICOs are often used by start-ups with an inherent risk of failure, meaning a high risk of loss of invested capital; it may not be possible to trade the coins or tokens to exit the investment; there is a risk of extreme price volatility; information provided to investors can be limited; and the DLT technology underpinning ICOs is largely untested and may therefore potentially contain flaws.

    In its alert to EU firms involved in ICOs, ESMA reminds firms of the need to consider whether their activities constitute regulated activities within the EU regulatory regime. Where activities constitute regulated activities, firms must comply with the relevant legislation. The coins or tokens issued in an ICO may, depending on their structure, classify as financial instruments and, where this is the case, firms engaged in placing, dealing or advising on ICOs, or managing or marketing investment schemes investing in coins or tokens are likely to be conducting regulated activities. Where ICOs are securities, then prospectus publication requirements and distribution restrictions may apply under the Prospectus Directive. Firms therefore have a duty to consider the regulatory framework, in particular the Prospectus Directive, the Prospectus Regulation, the Markets in Financial Instruments Directive, the Alternative Investment Fund Managers Directive and the Fourth Money Laundering Directive. Firms must meet the applicable requirements and seek any necessary permissions.

    View the Alert to Investors.

    View the Alert to Firms.