Is an ICO a Financial Promotion?
The UK’s FCA, like much of the rest of the world, is seeking to enable an ecosystem that provides positive economic benefits without excessive risks of fraud. Most regulators have determined ICOs are securities and thus must abide by local and international disclosure requirements.
In the UK, if an ICO is considered an investment (IE purchasers expect a return on their purchase), it is regulated and not following the rules of disclosure and promotion is a criminal offense.
So, what does this mean?
ICO issuers (and firms acting for the issuer) will need to consider if promotional materials issued in relation to an ICO amount to a communication which is an invitation or inducement to engage in investment activity (i.e., a financial promotion). ICO issuers must not issue a financial promotion unless the content has been approved by an FCA authorised person, or the firm issuing the promotion is an FCA authorised person itself. Authorised firms communicating or approving a communication which amounts to a financial promotion in relation to an ICO will need to comply with the financial promotion provisions in the COBS sourcebook (see COBS Chapter 4).
Simply put, promoting of an ICO will undoubtedly fall under the FCA’s restrictions on financial promotions and require Section 21 approval.
A section 21 approval requires a FCA “authorised” firm to conduct a detailed due diligence on the statements made in the investor documentation. In essence, everything must be checked and verified by supporting documentation. This can be a time consuming and detailed process with every substantive statement in the ICO documentation being checked against supporting third party evidence. For an ICO this detailed due diligence can be complicated.
In addition, some tokens may also constitute transferable securities (as defined in the Markets in Financial Instruments Directive) and therefore may fall within the prospectus regime. A prospectus is required in the circumstances laid down by the Prospectus Directive as implemented by sections 85 and 86 of FSMA. Under these provisions, unless an exemption applies, an approved prospectus is required when transferable securities are offered to the public in the UK or are admitted to trading on a regulated market in the UK. Various exemptions from the requirement to produce a prospectus are available in relation to public offers or an admission to trading. Contravening sections 85(1) or (2) of FSMA is a criminal offence. Those contemplating involvement in the issuance and distribution of tokens should carefully consider whether the tokens constitute transferable securities and whether the prospectus regime will apply
Blue Water Capital & Compliance have developed their services to specialise in this area. For those considering an ICO we can provide the section 21 guidance and approval that will ensure any resulting promotions are compliant.
Here we explore this relatively new – but increasingly popular – means of financing and explore the compliance considerations you need to bear in mind.