Initial Coin Offering – ICO Spanish legal framework

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In previous entries of this blog we have seen the concept and functioning of Blockchain (see this entry) and the Initital Coin Offering (see this entry). However, we now turn to see what regulation applies to ICOs.

ICOs do not have an express regulation in Spain, nor does the Blockchain. However, depending on what an ICO is used for, it can be included in the scope of application of the Securities Market Law (LMV) and, therefore, be subject to such regulation and to the monitoring of the CNMV.

With the two mentioned entries, we already saw that both the Blockchain technology and the ICO can have different uses, quite varied. Therefore, to answer if we have to apply the LMV, we must look at the use made of both figures, but now we will only focus on the ICO. In Spain due to the broad concept of negotiable value included in art. 2 LMV, the majority of the ICOs are should be included within the scope of this law and, therefore, the issuance of cryptocurrencies is not free, requiring authorization by the CNMV. In particular, art. 2.1 LMV establishes that: "Any right of patrimonial content, whatever its name, which due to its own legal configuration and transmission regime, is susceptible to generalized and impersonal traffic in a financial market, will be considered as a negotiable value." And, then, it list several instruments considered negotiable securities in any case.

The CNMV, in its document published in February 2018 "Considerations of the CNMV on cryptocurrencies and ICOs aimed at professionals in the financial sector", highlighted the following conditions to be taken into account when considering a cryptocurrency (or tokens) issued through an ICO as a negotiable value:

That the cryptocurrency or token attributes rights or expectations of potential participation in the revaluation or profitability, or rights similar to the shares, obligations or other financial instruments of art. 2 LMV (the listings).

That, in the event the cryptocurrency or token gives the right to access services or assets (for example, the product that will be manufactured with the issuance of the ICO), such cryptocurrencies or tokens are offered with the expectation of obtaining in favor of the buyer or investor a benefit as a result of its revaluation or any remuneration associated with the instrument offered, or its liquidity or possibility of trading in equivalent or similar markets to the regulated securities markets.

Consequently, securities issued through ICOs that can be considered negotiable securities are subject to the LMV and other regulations, such as MiFID II and the Prospectus Directive.

Depending on the volume and to whom the ICO is directed, it will be regulated as a public offering, with its legal features, or as an investment service.

In accordance with art. 35 LMV, will not be considered a public offering and, therefore, will be subject to the regulation of investment services, the ICOs that:
  1. It is addressed exclusively to qualified investors.
  2. It is addressed to less than 150 individuals or legal entities by a Member State, without including qualified investors. It is aimed at investors who acquire securities for a minimum amount of € 100,000.
  3. The nominal value of the unit value is, at least, € 100,000.
  4. It is issued for a total amount in the EU of less than € 5,000,000 over a period of 12 months.

Consequently, if the ICO meets the requirements not to be considered a public offering, but the cryptocurrencies or tokens themselves must be considered negotiable securities (due to the requirements previously seen), their regulation will be that of the investment services. That is, the issuers of the ICO must be entities authorized by the CNMV to market this type of instrument. On the other hand, if the ICO should be considered a public offering, its issuance will require authorization from the CNMV, issuance of the prospectus and other regulations pertaining to public offers.

Therefore, the cases in which an ICO in Spain may not be subject to administrative control are very limited. This would be the case, for example, of an ICO in which the tokens are offered for exchange for a given product, without the requisites to be a public offering being met or offered as a way to obtain an asset that is going to be revalued or that can be traded in a secondary market of any kind.