Brazil: Initial Coin Offering (ICO) in Brazil

Last Updated: 12 October 2017
Article by Walter Stuber

On October 11, 2017 the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued a Note, published in CVM´s webpage, about this matter.

Considering the advancement of the operations known as Initial Coin Offerings (ICOs), CVM deemed pertinent to clarify that it is attentive to recent technological innovations in the global financial markets. The Brazilian regulator has been following such operations and seeking to understand the benefits and risks associated with, either through internal forums, such as the Risk Management Committee and the Fintech Hub, or discussions in the international arena, as in projects developed by IOSCO.

In line with the competences established by Law No. 6,385, of December 15, 1976 (Law 6,385/76), CVM seeks to stimulate entrepreneurship and the introduction of technological innovations in the Brazilian securities market, for the safety of investors and the integrity of the market.

Regarding the risks arising from ICOs and of their relationship with the currently prevailing regulatory regime under the Brazilian securities market, CVM clarified the following:

  1. ICOs are public funding raising, having as counterpart the issue of virtual assets, also known as tokens or coins, by the investors. Depending on the economic context of the issue and the rights granted to the investors, such virtual assets may represent securities, pursuant to article 2 of Law 6,385/76[1].
  2. In this context, certain operations can be characterized as ICO operations with securities already subject to specific legislation and regulations, and must conform to the applicable rules. Publicly or closely-held  corporations or other issuers that raise funds through ICOs, in whose economic sense corresponds to the issuance and trading of securities, incur in the same situation.
  3. The offering of virtual assets that fit the definition of securities and are in compliance with the regulations will be considered as irregular and, as such, will be subject to the applicable sanctions and penalties. No offer of ICOs in Brazil has been registered or exempted from registration until the date hereof.
  4. On the other hand, ICO operations which do not fall under the competence of CVM are not deemed public offerings of securities.
  5. Securities offered through ICO operations cannot be legally traded on specific platforms of virtual currencies trading (called virtual currency exchanges), because virtual currency exchanges are not allowed by CVM to provide securities trading environments in the Brazilian territory.
  6. As to the participation of potential investors in ICO operations, CVM alerts to the following risks inherent in such investments (in particular as regards issuers or unregistered offerings at CVM):
  1. risk of fraud and pyramid schemes ("Ponzi scheme");
  2. lack of formal processes of adaptation of the investor to the risk profile of the undertaking (suitability);
  3. risk of money laundering and tax evasion/foreign currency;
  4. service providers acting without observing the applicable legislation;
  5. advertising material to the offer that does not observe the regulations of CVM;
  6. operational risks in trading environments monitored by CVM;
  7. cyber risks (including attacks on infrastructure, systems and compromising access credentials hindering access to assets or the partial or total loss of the same) associated with the management and custody of virtual assets;
  8. operational risk associated with the virtual assets and their systems;
  9. volatility associated with virtual assets;
  10. liquidity risk (i.e., risk of not finding buyers/sellers to certain amount of assets at the price quoted) associated with the virtual assets; and
  11. legal and operational challenges in cases of dispute with issuers, which may happen in cross-border transactions and the inherent virtual character related to those virtual assets.
  1. As a way to avoid the risk of fraud, CVM recommends to potential investors that run into ICO ads to check the CVM's webpage to determine whether the offeror is an issuer registered with CVM transmitter or whether the operation was registered or exempted from registration. In addition, through its customer service channels to the investor, CVM is available to receive reports and complaints about possible irregularities in such operations.
  2. Investors should evaluate carefully the features of such operations in order to identify signs indicating irregularities such as: high guaranteed returns, pressure to participate in transactions immediately, unregistered offerors and/or offerings at CVM, absence of minimum requirements for participation in such operations, among others.

CVM remains attentive to the evolution of ICOs and, whenever appropriate, shall take, at the appropriate time, the adequate measures within the scope of its legal competence, in order to ensure the stability and continued development of the Brazilian capital market.

[1] According to article 2, the following securities are subject to the provisions of Law 6,385/76: (i) shares, debentures and subscription bonuses; (ii) coupons, rights, subscription receipts and split certificates relating to the securities indicated in item (i); (iii) certificates of deposit of securities; (iv) debentures certificates; (v) shares of mutual funds investing in securities and shares of investment clubs investing in any type of assets; (vi) commercial paper; (vii) futures, options and other derivatives agreements whose underlying assets are securities; (viii) other derivatives agreements regardless of the respective underlying assets; and (ix) when publicly offered, any other collective investment instrument or agreement that creates the right of participation on profits or remuneration, including as a result of the rendering of services, and whose profits derive from the efforts of the entrepreneur or from the efforts of third parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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