The Central Bank of Ireland (Central Bank) is the entity responsible for financial regulation in Ireland. It has published a new consumer notice to alert investors to what it describes as the “high risks” associated with Initial Coin Offerings (ICOs). The full consumer notice can be found here.^[1]

The Central Bank wants to make sure investors are aware that they are exposed to the following risks when investing in ICOs:

• Unregulated activity, vulnerable to fraud or illicit activities

• High risk of losing all invested capital

• Lack of exit options and extreme price volatility

• Inadequate information

• Flaws in the technology

This consumer notice echoes the statement from the European Securities and Markets Authority (ESMA) to which all European national supervisory authorities contributed. The ESMA statement can be found here.^[2]

What is an ICO?

Using blockchain technology, it is possible for companies to develop their own cryptographic assets, which are commonly called “coins” or “tokens” depending on the nature of the asset.

An ICO, also called Initial Token Offerings or ITOs, is an innovative way for companies to raise finance by holding an initial sale of its newly-developed coins or tokens to the public. This is comparable to a listed company holding an Initial Public Offering (IPO) of its shares on the stock market, but, unlike IPOs, the majority of ICOs are run outside of a regulated process.

What are the implications of this notice?

First, it is important to recognise that, although regulators in some non-EU jurisdictions have taken steps to declare ICOs illegal, the consumer notice from the Central Bank and the statement from the ESMA do not prohibit investors from investing in or companies from raising money by way of an ICO. Indeed, the ESMA statement acknowledges that “an ICO is an innovative way of raising money from the public, using coins or tokens”.

We are seeing clients ranging from early stage technology companies to more established organisations operating in Ireland investigate how blockchain technology and ICOs can be used as an alternative means to obtain finance.

Second, the notice acknowledges that there are many ways in which an ICO may be structured. The notice cautions that, depending on how it is structured, the ICO and the associated tokens may not be captured by the existing rules applicable to the marketing of securities in the EU. This is particularly relevant in the case of ICOs which are based on “utility tokens” rather than “coins”.

Where an ICO does not fall within the scope of regulation, investors in that ICO cannot benefit from the usual protections that Irish and European securities laws provide, particularly information disclosure requirements. In such cases, investors must be particularly mindful of the risks which the Central Bank and ESMA have flagged.

This also means that companies who are considering an ICO must carefully consider whether they wish to structure the ICO so that it falls within or outside the scope of Irish and EU financial regulation. If an ICO falls within the scope of securities law, the company running the ICO must comply with the associated legal obligations, disclosure requirements and other investor protections. Where the coin or token is considered to be a security or other type of financial instrument, there may be implications for any intermediary, such as an online exchange, selling or offering the coins or tokens to investors.

Conclusion

The trend of companies seeking to raise alternative finance by way of ICO, sometimes with the support of endorsements from celebrities and others, looks set to continue into 2018.

The Central Bank and the ESMA have shown that they are alive to this rapidly developing area. Although they have not issued any ICO-specific regulations at this stage, it can be assumed that they will be keeping a very careful watching brief on this area. For now, ICOs remain a useful tool for innovative companies to raise money from the public but any investor considering an investment in an ICO should be mindful of the unique risks posed by novel forms of investment.

If you are considering structuring an ICO based out of Ireland, speak to one of our Blockchain team to see how we can help.

[1] Alert on Initial Coin Offerings

[2] ESMA alerts investors to the high risks of Initial Coin Offerings (ICOs)

The content of this article is provided for information purposes only and does not constitute legal or other advice.