On September 29 2017 the Swiss Financial Market Supervisory Authority (FINMA) published a supervisory notification on token sales and initial coin offerings (ICOs). It also announced that it was examining whether several ICOs or their corresponding business models violate supervisory provisions. A FINMA press release cited the marked increase in ICOs carried out in Switzerland in recent months as a reason for its action. According to statistics published in Coindesk, the volume of funds raised in the context of token sales and ICOs in 2017 has already risen to approximately $2 billion worldwide. The largest ICOs, in terms of capital in 2017, included:
- the Bancor ICO, with approximately $150 million in collected funds; and
- the Tezos ICO, with a volume of around $230 million.
Both are located in the so-called 'Crypto Valley' in the Canton of Zug.
FINMA recognised the innovative potential of the new approaches normally used in the context of ICOs, which are based on distributed ledger and blockchain technologies. In its press release and supervisory communication "Regulatory Treatment of Initial Coin Offerings" (4/2017), FINMA expressly pointed out that it has "for several years welcomed and accompanied the corresponding efforts in the development and implementation of blockchain solutions in the Swiss financial centre".
FINMA described a token sale or ICO as "a digital form of public capital procurement for entrepreneurial purposes", in which the buyers or investors usually send an amount of virtual currency to the address of the ICO organiser generated on a blockchain (a so-called 'wallet') and receive blockchain-based coins or other tokens "connected with a specific project or company run by the ICO organisers". It further stated that such borrowing of funds for its own purposes – without the interposition of an issuing platform or issuing house – is, in principle, not regulated under supervisory law and is therefore permitted, provided that certain conditions are met (ie, in particular if there is no repayment obligation, no means of payment issued and no secondary trading takes place).
FINMA also rightly pointed out that the specific design of ICOs – or more precisely, the design of the tokens transferred to the purchasers within the framework of an ICO – differ greatly in each case from a technical, functional and economic viewpoint. This is why each token sale or ICO – together with the respective business model, functionalities associated with the issue of tokens or the functions associated with the tokens – must be analysed individually. In this context, Switzerland and most other jurisdictions do not as yet have specific regulations regarding ICOs or related business models. However, since Swiss financial market law is principle-based and designed to be technologically neutral, the general provisions of the Swiss legal system – both in financial markets and (where applicable in other areas such as stock corporation law) foundation law or tax law – are also applicable to tokens issued to third parties and associated business models. However, in Switzerland – unlike in many Anglo-American jurisdictions – the issue of securities in the form of shares or bonds (ie, until the Financial Services Act enters into force) is only subject to a prospectus obligation. No prior review or registration obligation by or with a supervisory authority exists. Therefore, from a purely Swiss viewpoint, the mere issuance of tokens similar to shares or bonds is less problematic than in most other countries, if the disclosure requirements applicable to a prospectus – namely in a professionally drafted token sale document or, if applicable, in a correspondingly supplemented white paper – are complied with.
However, depending on the respective design of the specific business model – and thus also of the corresponding ICO – the principle-based and technology-neutral structure of financial market supervisory law gives rise to various points of contact or connections with the specific financial market laws, particularly:
- the Anti-Money Laundering Act for money laundering and terrorist financing, especially with regard to tokens that qualify as means of payment;
- banking law, especially in the case of tokens which contain or provide for a repayment obligation of any kind;
- the Stock Exchange and Securities Trading Act, especially in the case of tokens that qualify as options or another type of derivative; and
- the Collective Investment Schemes Act, especially in the case of business models that involve or provide for third-party management of funds.
At the same time as the publication of its supervisory notification on token sales, FINMA stated that it was conducting investigations in several cases in order to verify compliance with the financial market regulations. FINMA pointed out that, due to the partial economic comparability of token generating events with processes in the traditional financial market, it considered it likely that different ICO models will fall within the scope of at least one of these financial market laws, whereby, due to the different structure of the underlying business models, a conclusive regulatory assessment can be made only in specific individual cases. FINMA also announced that it would initiate enforcement proceedings in the event of indications of breaches of supervisory rights or conduct classified as circumventing financial market legislation. Accordingly, initiators intending to implement a token sale or ICO must ensure that they choose the framework conditions, business model or design of the tokens to be issued, in such a way that they either remain outside the scope of the financial market legislation or that the requirements will be complied with in accordance with the relevant financial market laws.
In the case of an offer via the Internet without corresponding restrictions of the target investor group, it is likely that the regulations in other legal systems will be affected, especially if it is not expressly pointed out to investors from these jurisdictions that they are not entitled to acquire tokens of the respective ICO at any point. The supervisory authorities of various countries (eg, Australia, Canada and Russia) have recently been increasingly concerned with the issue of tokens and their use or secondary trade and have issued or announced new guidelines or regulations specifically assessing individual cases, or have banned or announced a general ban on the issuance of tokens within the framework of an ICO and certain related activities. Against this background, the initiators or promoters of token sales or ICOs are advised to issue a timely notification rgarding the legal restrictions resulting from the structuring of the business model and token in Switzerland and important foreign legal systems, in order to take into account and implement the corresponding requirements in the business model on the one hand and the structuring and technical implementation of token sales on the other.
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