On September 12, 2017, the Financial Conduct Authority (the "FCA"), the financial regulatory body of the United Kingdom, joined an expanding line of international regulatory authorities that have recently issued statements regarding initial coin offerings, or "ICOs."
The FCA's primary purpose in issuing its statement, entitled "Consumer warning about the risks of Initial Coin Offerings," was to caution prospective digital token purchasers about the potential risks of buying ICOs – which it described as "very high-risk, speculative investments." Specifically, the FCA warned potential purchasers to "be conscious of the risks involved and fully research the specific project if you are thinking about buying digital tokens." Among these risks, according to the FCA, are the price volatility of digital tokens, the potential for fraud, and the lack of a prospectus or similar disclosure document for these types of sales. The FCA also highlighted that "most ICOs are not regulated by the FCA" and that purchasers in ICOs and holders of digital tokens are "extremely unlikely" to have access to certain statutory investor protections under U.K. law. These points, however, are balanced against the FCA's further discussion of ways in which ICOs and digital tokens may be subject to the FCA's rules and are certainly under close FCA scrutiny at this time.
In a section of the FCA's statement that is more directed to the businesses involved in ICOs than potential purchasers of tokens, the FCA addressed whether ICOs are, in fact, subject to FCA regulation. In this regard, the FCA's statement echoes the views of the U.S. Securities and Exchange Commission, noting that: "Whether an ICO falls within the FCA's regulatory boundaries or not can only be decided case by case. Many ICOs will fall outside the regulated space.
However, depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities." The FCA specifically referred to the potential that certain ICOs may implicate the regulations that apply to initial public offerings, private placements of securities, collective investment schemes (i.e., investment funds), and the FCA's prospectus regime. Businesses involved in ICOs and groups providing assistance to them should note the FCA's admonition that they "should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments," pointing out that certain activities connected to an ICO may constitute regulated activities under relevant law. Moreover, the FCA potentially draws under its regulatory umbrella the markets that are often integral to the business plans of ICOs and digital tokens by observing that ". . . digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services."
In a related update at the end of the statement, the FCA noted that it anticipates publishing its findings regarding the potential benefits and challenges of blockchain technology based on the feedback from its discussion paper released earlier this year. In the meantime, the FCA's statement today once again underscores the importance for businesses, exchanges and other persons involved in the ICO marketplace to work with experienced counsel to ensure that token sales are structured in a manner that either complies with, or is outside the scope of, applicable regulations.
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