Are ICOs the future of fund raising?
With credit institutions still reluctant to provide financing to start-ups, many companies are looking for new ways to raise funds. Others are exploring ways to integrate new technology such as Distributed Ledger Technology (DLT), Blockchain and SmartContracts into their existing business models. Either way, initial coin offerings (ICO) or initial token offerings (ITO) are currently trending.
Coins and tokens may serve various functions: They can be structured similar to equity (shares) or debt instruments (loans), they can serve as types of vouchers (utility tokens) or they can be "naked" tokens ("cryptocurrencies") striving to become the "new" Bitcoin or Ether.
Depending on how coins or tokens are legally set-up, certain legal aspects need to be considered:
- If coins or tokens serve as equity or debt instruments (eg if they convey voting rights, claims for repayment after a certain maturity or if holders have the right to receive interest or profit participation etc), there is risk - depending on the laws of the jurisdictions where these coins and tokens are offered - that prospectus requirements may be triggered. Certain jurisdictions (such as the USA) tend to treat coins and tokens as securities, in others there is risk of such coins and tokens being qualified as investments. In both cases, applicable regulations must be complied with.
- If coins and tokens are structured as "vouchers", ie instruments that allow holders to access certain services or products of the issuer and or even third parties (utility tokens), payment services legislation (PSD and PSD II) needs to be observed. In many cases, exemptions under PSD and PSD II for limited networks may be applicable, but issuers should carefully scrutinise potential legal requirements.
- If coins and tokens are set-up to serve as cryptocurrencies (ie "naked" tokens that do not have an intrinsic value), this is currently probably the least likely set-up to trigger financial services regulatory requirements - as such coins and tokens do not grant the holder any rights other than the right to trade the coins or tokens in market standard wallets. However, such coins and tokens are probably also the least likely to attract investors.
While currently regulators in Europe are - with the exception of the German BaFin - silent on many legal questions in connection with ICOs / ITOs, the US SEC has already qualified coins and tokens as securities. German BaFin has qualified them as financial instruments, subjecting the trade with such coins and tokens to MiFID II requirements.
In addition to regulatory aspects, civil law aspects, such as mandatory consumer protection or laws on General Terms and Conditions, must be carefully observed when structuring an ICO or ITO.
Soldiers of fortune will thus continue to explore new ways of raising funds or market their existing portfolio to customers eager to participate in new technology or the praised "future of banking and finance".
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