The regulatory focus on initial coin offerings (ICOs) has not diminished since our last client alert where we mentioned that the public consultation of the French Financial Markets Authority (AMF) proposed to develop an ad hoc legal framework for ICOs rather than to promote a best practices guide without amending existing legislation or extending the scope of existing provisions regulating public offerings of securities to ICOs.
The AMF had previously identified the absence of clear ICO regulation as a risk factor inherent to ICOs, together with the absence of disclosure documents, possibility of loss of capital, volatility or lack of liquidity on the secondary market, money laundering and terrorist financing scams, and concerns around the viability of the underlying projects that the ICO seeks to finance.
Consequently, the French Treasury suggested a new legislative framework – that has yet to be officially adopted – but that aims to balance the desire to encourage the development of ICO transactions with the goal of ensuring the protection of purchasers wishing to participate in ICOs
I. The New Legislative Framework
The proposed legislation would introduce a new chapter to Book V, Title V of the French Monetary and Financial Code (CMF) that will be renamed “Intermediaries in Miscellaneous Property and Token Issuers.” Chapter 2 of Title V will be titled Token Issuers and will detail the rules applicable to ICOs in articles L. 550-6 et seq.
Chapter 2 provides a definition of tokens, saying a token is intangible property representing, in numerical form, one or more rights, that can be issued, registered, conserved or transferred using a shared electronic registration mechanism that facilitates the identification, directly or indirectly, of the owner of said property. It also defines an ICO as any offer to the public, in any shape or form, to purchase tokens. However, it excludes offers made to a small number of buyers. Under the proposed legislation, the issuer should notify token buyers of the status of the project the ICO funds were used to finance and of the establishment of any secondary market for the tokens.
Chapter 2 then specifies that the rules it sets forth do not apply to tokens that share the same characteristics as financial instruments; these token offerings will have to comply with the regulations applicable to public offerings of securities. Any token issuers will be obligated to comply with the conditions and requirements set out in article L. 550-8, which discusses the role of the AMF, notably when the issuer chooses to request an approval for its ICO (a.k.a. an AMF visa).
II. The AMF’s Role Within This Framework
Under the proposed legislation, the AMF is required to provide additional guidance regarding the law’s provisions in its General Regulation (RG AMF). Moreover, the AMF will be authorized to approve ICOs. It is interesting to note that the legislation opted not to make securing AMF authorization mandatory for issuers. Instead, the issuers were provided with the right to submit a disclosure document to the AMF, allowing buyers to make an informed decision regarding the ICO. The AMF then would:
- Examine the disclosure document and any promotional or advertising material published and circulated by the issuer. The content of the disclosure document and promotional material should be (i) accurate, (ii) clear, (iii) devoid of misleading information, and (iv) detailed as to the risks faced by investors when buying tokens.
- Verify that the issuer adopted adequate procedures to track and safeguard the funds raised in the ICO.
- Ensure that the activities of the issuer of the ICO conform to the content of the disclosure document and comply with the applicable regulation. In case of a violation, the AMF can compel the issuer to cease offering and selling tokens as well as terminate any promotional campaign. The AMF can also withdraw its approval.
- Verify that the issuer is a legal entity organized under French law and registered in France. Indeed, the AMF will only issue visas for French issuers, excluding foreign corporations and entities with the objective to attract ICOs to the French market.