Equity Capital Markets Update: ICO Mania - A View from New York

24 October 2017

The emerging message from securities regulators around the globe in 2017 is that promoters of Initial Coin Offerings (ICOs) will have to learn to play by the rules. Funds raised in ICOs – a form of online fundraising that uses a cryptocurrency platform to market assets in “tokenized” form – surged past all previous bounds in 2017. Nearly $800m was estimated to have been raised by ICOs in Q2 2017, while the estimated figure for Q3 exceeds €1.2bn (source: Coindesk).

The reason that securities regulators have begun to pay attention is that in numerous cases the tokens offered in an ICO fit the definition of a security under relevant securities laws. The Securities and Exchange Commission (SEC) was the first to bite – in July it issued an investigative report which found that the tokens offered for sale by an unincorporated entity known as “The DAO” were securities and subject to federal securities laws.

Securities regulators in jurisdictions such as Canada, the UK and Hong Kong have issued similar statements warning of the risks of investing in ICOs and indicating that digital tokens may constitute equity or debt securities, which are subject to regulation. 

For promoters of ICOs in Europe, who are awaiting comprehensive guidance from the European Securities and Markets Authority (ESMA), the key questions are as follows:

  1. Does the token fit the definition of a transferable security under EU law? If so, obligations regarding the approval and publication of a prospectus will apply, together with the requirements highlighted below.
  2. Will the tokens be made available for secondary trading on a platform that brings together multiple buyers and sellers?  If so, the issuer will be within the scope of EU rules on market abuse, including rules on insider dealing and the obligation publish inside information.
  3. Has the secondary trading platform been authorised as a multilateral trading facility or securities exchange in the jurisdictions where it is established and/or operates?  If not, then it may not be possible to use the platform to establish a liquid secondary market for the tokens.
  4. Has the issuer been incorporated with limited liability? If not, there is a risk that the tokens may be deemed to be interests in a partnership, potentially exposing holders to unlimited liability for the issuer’s debts and obligations.
  5. What statements are issued in conjunction with the ICO? The general law relating to fraud, misrepresentation and misstatement applies to the sale of any asset.  However, an enhanced regime of civil and criminal liability applies to the sale of securities. The informal language used in ICO whitepapers and the unruly discussions on promotional Slack channels and subreddits indicate the naïve attitude of some ICO promoters to the potential for investor claims.


ICOs are only the most exuberant demonstration of a technology that promises to transform securities markets by revolutionising payment, settlement, title recording and reporting. This potential is indicated in ventures like the DTCC’s project to implement blockchain settlement in derivatives trades and the State of Delaware’s initiative to implement blockchain technology in corporate records. How the unruly world of ICOs fits into this scheme, and whether the mania of 2017 turns out to be a flash in the pan, remains to be seen.

For more information on fundraising, contact a member our Equity Capital Markets team.

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

Discuss your fundraising queries now with David Mangan.


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