ESMA statements on high risks of Initial Coin Offerings (ICOs)

The European Securities and Markets Authority (ESMA) has issued two Statements on Initial Coin Offerings (ICOs), largely driven by ESMA’s expressed concern that firms involved in ICOs may conduct their activities without complying with applicable EU laws.

ICOs are capital-raising offerings of tokens to the public, in exchange for fiat currencies or virtual currencies. ICOs are often used to raise capital for business ventures leveraging on Distributed Ledger Technology.

Through its investor-related statement, ESMA is alerting investors of the high risk of losing their capital when participating in ICOs. ESMA characterises ICOs as very risky and highly speculative investments. Specifically, ESMA notes that:

  • the price of the coin or token is typically extremely volatile and investors may not be able to redeem them for a prolonged period
  • depending on how they are structured, ICOs may fall outside of the scope of EU laws and regulations, in which case investors cannot benefit from the protection that these laws and regulations provide
  • ICOs are also vulnerable to the risk of fraud or money laundering.

In ESMA’s statement on firms, it is noted that where ICOs qualify as financial instruments, it is likely that firms involved in ICOs conduct regulated investment activities, in which case they need to comply with the relevant legislation.

Applicable EU legislation that ESMA is referring to in issuing its two statements includes the following directives (as transposed in national legal orders):

  • the Prospectus Directive
  • the Markets in Financial Instruments Directive (MiFID)
  • the Alternative Investment Fund Managers Directive (AIFMD); and
  • the Fourth Anti-Money Laundering Directive.

ESMA stresses that firms involved in ICOs should give careful consideration as to whether their activities constitute regulated activities. Any failure to comply with the applicable rules will constitute a breach.

Contact us to discuss your requirements whether you are an investor in cryptocurrencies or a business involved in an ICO or issuing tokens, which may bring you within the EU’s regulated environment on investment and financial services.

Antoniou McCollum & Co. advises businesses and investors engaged in blockchain and virtual currency ventures, delivering legally sound solutions in an increasingly dynamic environment.

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