​The European Securities and Markets Authority Warns Firms and Investors of the Perils of an ICO

Charles Kaufman and Michael B. Saryan |

As Initial Coin Offerings (ICOs) roar across the globe with billions of dollars flowing into new coins embedded in blockchain technology, regulators in every financial center struggle to police the cryptocurrency and blockchain token market. Increasingly they are resorting to warnings to ICO issuers, insiders and potential investors that existing regulations apply to this emerging technology. In the United States, the Securities and Exchange Commission (SEC) has issued several statements warning issuers, investors, and even celebrities about the risks associated with their involvement in ICOs. For an analysis of the recent SEC statement, see here. The most recent warning came on Monday, November 13, 2017 from the European Securities and Markets Authority (ESMA), which cautioned investors of the risks of ICO investments while it reminded firms involved with ICOs of the regulations that may impact their activities. See this press release and the accompanying statements to firms here and to investors here.

Because cryptocurrencies and other blockchain tokens generally reside on the internet, offers and sales cross borders with ease and promise to accelerate the development of global capital markets. In the face of tightening US restrictions, some issuers based in the US or targeting US capital have flocked to other jurisdictions like Europe in search of more flexibility. But ESMA is following suit with the SEC, issuing its own warnings to firms involved with ICOs and ICO investors.

ESMA’s statement to firms involved in ICOs reminds them that they must meet relevant regulatory requirements and provides a summary of key applicable European Union (EU) legislation. ESMA warns: “Firms involved in ICOs must give careful consideration as to whether their activities constitute regulated activities. If their activities constitute a regulated activity, firms have to comply with the relevant legislation and any failure to comply with the applicable rules would constitute a breach.” Although it would appear to be common sense that current laws still apply, ESMA’s statement is likely motivated by the fact that many ICOs simply ignore current regulations.

Monday’s statement to ICO issuers and participants highlighted four areas of EU law that may apply:

The second part of ESMA’s statement targets investors, alerting them of the inherent risks in ICOs. ESMA notes that ICOs are “extremely risky and highly speculative investments” and warns investors to be aware of the following five risks when investing in ICOs:

Despite warnings from the SEC and now ESMA concerning the risks of investing in an ICO, the cryptocurrency market continues to boom, and new tokens are launched every day. The ease of raising capital in an ICO is a double-edged sword as new technologies allow for fast and easy capital formation but with little regulatory oversight to protect investors. “Virtually anyone who has access to the Internet can participate in an ICO,” presenting ICO issuers with billions of potential buyers worldwide. Although regulators are charged with protecting investors, they must simultaneously avoid mistakenly overregulating this new market to avoid having their own jurisdictions fall behind the rest of the world. As the SEC, ESMA and regulators across the globe continue to watch and devise plans for more robust regulations tailored to ICOs, today’s issuers and investors have only these broad statements of guidance that current laws still apply in the virtual currency realm.

By Charles Kaufman and Michael B. Saryan

Charles Kaufman is an attorney and shareholder of Homeier Law PC, a leading law firm advising clients in both traditional and non-traditional financing. With over 23 years of experience advising growing businesses, providing leadership in crowdfunding, corporate finance, legal and strategic affairs and global compliance, Charles is a key advisor in the cryptocurrency and ICO space helping companies navigate the ever-changing regulatory landscape.

Michael B. Saryan is an attorney and counsel at Homeier Law PC, where he advises clients in securities law matters and corporate transactions, including cryptocurrency transactions and ICOs with a focus on keeping at the forefront of new regulations for compliance and best practices in the ICO space.

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