Initial coin offerings could face regulation under EU crowdfunding rules

UK MEP Ashley Fox has recommended that ICOs should be regulated under proposed new EU crowdfunding rules.

In a draft report prepared for the European Parliament's Committee on Economic and Monetary Affairs, Ashley Fox recommended that crowdfunding service providers "be permitted to raise capital through their platforms using certain cryptocurrencies" as long as they comply with certain regulatory requirements.

Fox's recommendations seek to amend a draft new Regulation on European crowdfunding service providers for business that the European Commission published in March.

Fox said: "Initial coin offerings (ICOs) offer new and innovative ways of funding but can also generate substantial market, fraud and cyber security risks to investors. Therefore, crowdfunding service providers that wish to offer an ICO through their platform, should comply with specific additional requirements under this Regulation."

Bringing ICOs within the scope of the proposed new rules would force crowdfunding service providers to ensure prospective investors in ICOs are provided with a "key investment information sheet" from those behind ICOs – the 'project owner'.

That information sheet would need to contain certain information, including details of the identity, legal status, ownership, management and contact details of project owners, their principle activities and products or services offered, a link to their most recent financial statement and a description of the crowdfunding project, its purpose and main features.

Project owners would also have to make a range of further disclosures, including how much money they hope to raise, the number of previous offerings they have completed, and what would happen if the fundraising target is not reached.

A presentation of the main risks associated with financing the crowdfunding project, with the sector, the project, the project owner and the investment instrument, including geographic risks, where relevant, would also need to be disclosed on the information sheet.

The information provided to prospective investors would need to be fair, clear and not misleading.

According to Fox's proposals, crowdfunding service providers would be responsible for ensuring omissions, mistakes or inaccuracies in the information sheet are notified to project owners and that they "complement or amend that information" where those omissions, mistakes or inaccuracies "could have a material impact on the expected return of the investment".

Where it is not possible to make corrections to the information, the crowdfunding service providers could be forced to cancel the crowdfunding offer.

Private placements, ICOs raising in excess of €8 million or ICOs that do not use a counterparty would not be subject to the proposed new requirements.

The amendments suggested by Fox would give national regulators powers to conduct on-site inspections of crowdfunding service providers to help them determine "the size and complexity of the activities" they provide and therefore how frequent and detailed their compliance assessments of the provider should be.

Crowdfunding service providers that fail to comply with the proposed new EU rules could be hit with a range of sanctions from regulators. These include 'naming and shaming' as infringers, a cease and desist order, an administrative fine and even potential criminal penalties.

Luke Scanlon, an expert in financial services and technology at Pinsent Masons, the law firm behind Out-Law.com, said: "We all know the lengthy process and time it takes for EU legislation to come in force, but alternative forms of raising capital through cryptocurrencies and tokens has been happening for some time now. It is therefore essential that member state governments and regulators coordinate closely with the relevant bodies acting at EU level in order to ensure some consistency is achieved both in the short and long term."

"It is also an opportunity for more established players within crypto markets to work towards providing recommendations for industry standards, best practice and data that may be helpful in analysing risk and forming appropriate regulatory responses," he said.

The proposals tabled by Fox are at an early stage of the law-making process. They would need to be endorsed by the Committee on Economic and Monetary Affairs and then by the European Parliament as a whole to have a chance of becoming law.

Only if the European Parliament and the EU's other law making body, the Council of Ministers, which contains representatives of the national governments of EU countries, both agree on the wording of legislation can that text become EU law.