To date, the European Union has not passed any laws directly targeted at ICOs. Yet, some of the tokens issued via ICOs could fall within the existing regulatory framework. We identify here the various Directives or Regulations that could potentially apply to token sales. In particular, to the extent that certain blockchain-based tokens might be considered to qualify as transferable securities or other financial instruments, token issuers might be required to comply with stringent European prospectus regulations and other requirements as laid out in relevant Directives and Regulations such as MiFID II, EMIR, UCITS Directive and AIFM Directive.
Limitation of Scope
Although there exist binding Regulations which apply in a uniform fashion to all of the European Economic Area ("EEA", i.e. the European Union plus Liechtenstein, Norway and Iceland), almost all EEA-based token sales are in one or more aspects also governed by Directives on the European level. Thus, the national implementation of these Directives in both the EEA-jurisdiction where the token is sold and issued from and the EEA-jurisdictions where the tokens are being issued and sold to govern the respective token sales. Therefore, merely looking at the law on the level of the EEA will not grant an issuer the level of sufficient legal comfort needed when conducting a token sale. In the end, one cannot issue its token from a "Pan-European jurisdiction" but is inevitably bound to one EEA member-state as the ultimate issuing country. Therefore, the scope of this specific report is limited to a brief, selective overview. Accordingly, the structure as followed in the other reports (Regulatory Framework, Decisions, Regulatory Statements, Examples of ICOs, Critical Thoughts and Comparative Analysis) will not be followed comprehensively in this report.
A. European Prospectus Directive and its National Implementations
The fact that merely looking at the Directives on the European level will not be of great help, is especially due to the reason that the national implementations of EEA-level Directives vary greatly in many EEA-member states. This circumstance and the overall difficulty connected therewith shall be described below by looking at the European prospectus regime, specifically the exemption under Article 1(2)(h) of the Prospectus Directive as currently applicable185 and the great variations in the national implementations thereof.
Generally, if a token which is issued in an EEA member state qualifies as a security within the meaning of the European Prospectus Directive, i.e. referencing the term "transferable security" pursuant to Article 4(44) of EU Directive 2014/65 (MiFID), the obligation to publish and file a prospectus with a supervisory authority applies.186
Article 1(2)(h) of the Prospectus Directive carves out from its application "securities included in an offer where the total consideration of the offer is less than €5,000,000, which limit shall be calculated over a period of 12 months". However, if the issuer were to solely rely on this information pursuant to the Directive, he or she would face the risk of being non-compliant with regards to national implementations of said exemption which vary greatly between different EEA member states. This is due to the fact that Article 1(2)(h) of the Prospectus Directive does not require member states to exempt offers of up to EUR 5'000'000 (calculated over a period of 12 months) but rather permit such exemption.
In France, Article 1(2)(h) of the Prospectus Directive has been implemented with a modification according to which the shares offered may not exceed fifty percent of the share capital of the issuer in case the issuer intends to rely on the exemption. The overall threshold of EUR 5'000'000 nevertheless remains in place.187
Austria, on the other hand, has followed a different approach where the exemption according to Article 1(2)(h) which merely authorizes, but does not require the member states to implement it, was not transposed into the national law at all. Rather, the amount specified in Article 3(2)(e) of the Prospectus Directive of EUR 100'000 was increased to EUR 250'000.188
Spain on the other hand transposed Article 1(2)(h) of the European Prospectus Directive directly into national law without lowering the threshold or including any additional requirements.189
This difference in national implementations exemplifies that solely relying on Directives on the European Economic Area level will not provide sufficient legal comfort for the issuer of a token when assessing whether he or she may rely on the exemption to the prospectus requirement. Assuming the token qualifies as a transferable security within the relevant national laws, and the volume offered stays below the threshold as implemented in Spain and France, i.e. EUR 5'000'000 but above the low threshold in Austria will make the issuer non-compliant with Austrian law, leaving the issuer but with the choice to block and thus not publicly offer the security token within Austria.
Independent of this uncertainty regarding European Directives governing token sales, below shall be provided a brief overview over the important European regulations and Directives (next to the European Prospectus Directive), specifically the Markets in Financial Instruments Directive, Undertakings of Investment in Transferable Securities Directive ("UCITS"), the Alternative Investment Fund Managers Directive ("AIMF"), the European Market Infrastructure Regulation ("EMIR"), and the Fourth Anti Money-Laundering Directive ("AMLD4") and how they might affect token sales being conducted within and to the EEA.
B. Markets in financial Instruments Directive (MiFID II)
MiFID II, amongst other topics, regulates the overall environment of capital markets. The general scope of MiFID II is to establish a comprehensive regulatory regime governing the execution of transactions in financial instruments irrespective of the trading methods used."
The grade to which MiFID II is already implemented in EEA member states varies significantly. Nevertheless, it can be ascertained that several aspects of token sales will be affected by MiFID II, once it'll be fully implemented within the EEA member states. Aspects of token sales potentially governed by MiFID II will be the offering of tokens to the public with the help of third parties, such as professional investment agents, or offering specific platforms used as trading venues tokens.190
C. UCITS, AIMF, EMIR and AMLD4
If an issuer utilizes an ICO to conduct a crowd funding or other financing and/or investment objectives, overall Directives and Regulations governing such activities must be complied with, such as the UCITS Directive, in case where the ICO can be considered an undertaking in collective investment in transferable securities.191
An entity involved in an ICO where the token sale qualifies as a collective investment undertaking, may be subject to the AIFM Directive and the tokens itself would correspondingly qualify as units in such alternative investment fund.
Furthermore, a token may be a derivative if the contract governing the purchase of the token which is issued during an ICO is a financial contract linked to the fluctuation in the price of an underlying asset or a basket of assets. Common examples of assets on which a derivative contract can be written are interest rates instruments, equities or commodities. An over-the-counter (OTC) derivative is one which is privately negotiated and not traded on an exchange.192For these types of tokens, which may, e.g. be linked to a commodity, such as a right to receive a physical gold bar etc., the over the counter-trading which might ensue after the ICO has been concluded and the tokens have been distributed may be subject to the EMIR.
Furthermore, AMLD4 must be considered by issuers of tokens in certain circumstances. The Directive applies, amongst others, to UCITS and investment firms trading in securities, and requires firms to carry out due diligence on customers and to have in place appropriate record-keeping and other internal procedures. Firms have an obligation to report any suspicious activity and to co-operate with any investigations by relevant public authorities.193194
Hacker and Thomale express the relation between token sales and the aforementioned regulations aptly in their comprehensive analysis of European Securities regulation governing token sales in the following way: "While, just like MiFID II, these statutes do not directly target ICOs as such, they should be borne in mind for two reasons: First, they may be part of the general legal environment of the enterprise behind an ICO and therefore can at least have an influence on the question, if, when and how an ICO is the right business choice. Second, from a legal governance perspective, the evolutionary nature of EU investment law allows to project that sooner or later the phenomenon of ICOs will be subject to specific regulation designed to fill what will be perceived as "legal loopholes". It is really up to market actors if they want to embrace rather than evade this fact and let their voices be heard in the legislative process."195