On November 13, the European Securities and Markets Authority (ESMA) published two statements (statements) in relation to initial coin offerings (ICOs); one was made in relation to the risks of ICOs for investors and the other is in relation to the rules for firms involved in ICOs. ICOs are a way for businesses or individuals to raise finance by issuing coins or tokens, the features and purposes for which can vary substantially.
ESMA stated that it has observed a rapid growth in ICOs, globally and in Europe, and is concerned that investors may be unaware of the high risks that they are taking when investing in ICOs. Additionally, ESMA is concerned that firms involved in ICOs may conduct their activities without complying with relevant applicable EU legislation.
In relation to investors, ESMA noted the high risk of losing all invested capital due to the fact that ICOs are very risky and highly speculative investments, adding that the price of the coin or token is extremely volatile and may not be redeemable for prolonged periods. ICOs are also vulnerable to fraud and money laundering.
For firms, ESMA stated that where ICOs qualify as financial instruments, regulated activities are likely to occur, at which point a range of European legislation can apply. Such legislation would include the Prospectus Directive, the Markets in Financial Instruments Directive, the Alternative Investment Fund Managers Directive and the Fourth Anti Money Laundering Directive. ESMA stressed that firms should give careful consideration to such requirements.