Regulation
Regulation
or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime.
Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services.”
What, therefore, should an issuer consider? Is it a regulated activity? Section 19 of the Financial Services and Markets Act 2000( FSMA) prevents anyone from carrying out a regulated activity unless they are either an authorised or exempted person. Does the offering being made therefore constitute a regulated activity? For example, does the offering really constitute an Alternative Investment Fund or a Collective Investment Scheme, both of which are examples of regulated activities which are heavily regulated by FSMA? Whether an offering is captured or not will turn on the facts, despite what an issuer calls it; if it falls within the tight definition of what constitutes regulated activities the FCA will treat it as such.
“ Despite the hype to the contrary, often from within the industry itself, ICOs in the UK are still quite heavily regulated, just not in the same direct, targeted way that traditional securities are governed”
Is a prospectus required? Just because an issuer is not applying for the tokens to be admitted to trading on a regulated exchange doesn’ t mean a prospectus will not be required. It is a criminal offence in the UK to make an offer of transferable securities to the public in the UK. Now, the debate here centres on whether a token could be considered a transferable security or not( as defined under MiFID II).
The reality is that this will likely be decided on a case-by-case basis; voucher-based tokens that offer a right to discounted access to a service are more likely to be acceptable than security-based tokens which mirror the rights of traditional securities and are tradeable on a platform that creates an active secondary market. There are certain other exemptions to the requirement for the issuance of a prospectus for offers, even for offers of actual transferable securities. These include exemptions such as offers made to authorised persons or offers made to fewer than 150 people.
Is the offer being made a financial promotion? Section 21 of FSMA states:“ A person must not in the course of business communicate an invitation to engage in investment activity unless he is an authorised person, or the content of the communication has been approved by an authorised person, or the communication is covered by an exemption.”
Again, there are certain established exemptions to this general prohibition, including financial promotions made to exempt persons such as professional investors. However, the ramifications for ignoring or not addressing these exemptions in the way in which an issuer frames its offering could be severe.
The FCA’ s current and likely future views Regulators the world over have been playing catch-up and have taken differing views on how to approach the regulation of ICOs. China has banned them altogether, while the chairman of the SEC, John Clayton, has said that he wants“ to go back to separating ICOs and cryptocurrencies. ICOs that are securities offerings, we should regulate them like we regulate securities offerings. End of story”.
The FCA has so far taken the approach that it views its rules as technologically ambivalent. The fact that ICOs don’ t fall under the strict, direct framework that traditional securities fall under does not mean that the existing regulations are insufficient. For the time being its view is that the existing system is sufficient.
However, in its most recent statement in late 2017, the FCA described ICOs as“ very high-risk, speculative investments” and that there is a“ good chance” of investors losing their entire investment. The statement amounted to little more than a warning on the nature of these types of investments and falls short of a declaration of the FCA’ s desire to create specific regulations and rules to deal with ICOs.
Given its ability to provide a cheaper and more streamlined solution, distributed ledger technology( DLT) looks set to become a much more integrated part of the financial services industry. Take the example of SETL, a start-up seeking to adopt blockchain technology to streamline settlement services. Computershare has recently increased its holding in the company and appointed its CEO to the board.
In addition, given the strong synergies between ICOs as a mechanism for raising finance and the underlying type of issuer utilising them( as well as the nature of the product or project that they support) it is unlikely that they will now disappear completely, even if they are further regulated. It is even more unlikely that they will be banned as they have been in China, a decision seemingly motivated more by the issues of political and economic control than anything else.
Certainly in the short term, ICOs therefore seem set to be a part, albeit a niche one, of the corporate financial landscape and to offer a certain demographic of issuer another option when it comes to raising finance. Whether or not their popularity( real or perceived) will wane given the mounting regulatory attention that ICOs are receiving remains to be seen.
140 iGamingBusiness | Issue 111 | July / August 2018