Initial coin offerings (ICO), also known as ‘token sale’ or ‘coin sale’, is a digital way of raising funds from the public using cryptocurrency.

Tokens are issued in exchange for cryptocurrency, like Bitcoin or Ether. The token issued relates to a specific firm or project and may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all. ICOs are therefore very high-risk, speculative investments.

The lack of regulatory barriers is considered to be one of the primary attractions of carrying out ICOs. However, this is a common misconception and, although there is no ICO specific regulatory regime in the UK, some ICOs may fall within the Financial Conduct Authority’s (FCA) regulatory boundaries.

Whether or not an ICO falls outside the regulated space depends on how the ICO is structured. ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities, such as dealing, arranging transactions or advising, by way of business in the UK in relation to specified investments.

In addition to the risk of being regulated investments, a token issuer must consider if their token offer is an offer of transferable securities to the public in the UK. If it is, the publication of a prospectus would consequently be required unless any relevant exemptions apply.

A token issuer must also give consideration to the method of promotion of an ICO. This is because, a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless the promotion has been made or approved by an authorised person or it is directed at a person who falls into one of the exempt categories of recipient and meets a series of tests.

A further consideration relates to criminal liability in respect of untrue or misleading statements. A token issuer will commit a criminal offence if it knowingly or recklessly makes a materially false or misleading statement, or dishonestly conceals any material facts, with the intention of inducing, or it is reckless as to whether it might induce, another person to enter into, or to refrain from entering into a relevant agreement, for example, an agreement to subscribe for tokens.

A similar offence exists whereby a token issuer will commit an offence if, among other things, it creates a false or misleading impression as to the market in, or the price or value of, a relevant investment in order to induce another person to acquire or subscribe for investments such as tokens.