The regulatory focus on initial coin offerings (ICOs) in France continues unabated, with the French Treasury proposing a new legislative framework, yet to be officially adopted, that aims to balance the development of ICO transactions with the protection of purchasers wishing to participate in ICOs.
The French Financial Markets Authority, or AMF, recently proposed the development of an ad hoc legal framework for ICOs rather than promotion of a best practices guide, without amending existing legislation or extending to ICOs the scope of existing provisions regulating public offerings of securities.
The AMF had previously identified the absence of clear ICO regulation as an inherent risk factor of ICOs, together with the absence of disclosure documents, possibility of loss of capital, volatility or lack of liquidity on the secondary market, money laundering and terrorist financing scams, and concerns about the viability of the underlying projects that the ICO seeks to finance.
The New Legislative Framework
The proposed legislation would introduce a new chapter to Book V1, Title V of the French Monetary and Financial Code, or CMF, which will be renamed "Intermediaries in Miscellaneous Property and Token Issuers." Chapter 2 of Title V will be titled "Token Issuers" and will detail the rules applicable to ICOs in articles L. 550-6 et seq.
Chapter 2 provides a definition of tokens, indicating that a token is intangible property representing, in numerical form, one or more rights that can be issued, registered, conserved or transferred using a shared electronic registration mechanism that facilitates the identification, directly or indirectly, of the owner of said property. It also defines an ICO as any offer to the public, in any shape or form, to purchase tokens. However, it excludes offers made to a small number of buyers.2 Under the proposed legislation, the issuer should notify token buyers of the status of the project the ICO funds were used to finance, and of the establishment of any secondary market for the tokens.
Chapter 2 then specifies that the rules it sets forth do not apply to tokens that share the same characteristics as financial instruments; these token offerings will have to comply with the regulations applicable to public offerings of securities. Any token issuers will be obligated to comply with the conditions and requirements set out in article L. 550-8, which discusses the role of the AMF, notably when the issuer chooses to request an approval for its ICO (aka an AMF visa).
The AMF's Role Within This Framework
Under the proposed legislation, the AMF is required to provide additional guidance regarding the law's provisions in its General Regulation (RG AMF).3 Moreover, the AMF will be authorized to approve ICOs.4 It is interesting to note that the legislation opted not to make securing AMF authorization mandatory for issuers. Instead, the issuers were provided with the right to submit a disclosure document5 to the AMF, allowing buyers to make an informed decision regarding the ICO. The AMF would then:
- Examine the disclosure document and any promotional or advertising material published and circulated by the issuer. The contents of the disclosure document and promotional material should be (i) accurate, (ii) clear, (iii) devoid of misleading information and (iv) detailed as to the risks faced by investors when buying tokens.
- Verify that the issuer adopted adequate procedures to track and safeguard the funds raised in the ICO.
- Ensure that the activities of the issuer of the ICO conform to the content of the disclosure document and comply with the applicable regulation. In case of a violation, the AMF can compel the issuer to cease offering and selling tokens as well as terminate any promotional campaign. The AMF can also withdraw its approval.
- Verify that the issuer is a legal entity organized under French law and registered in France. Indeed, the AMF will only issue visas for French issuers, excluding foreign corporations and entities with the objective of attracting ICOs to the French market.
1 Book V: The Service Providers (Articles L500-1 et seq.).
2 The draft legislation indicates that the AMF will specify at a later time the threshold number for determining whether the offer is made to a small number of buyers. See article L. 550-8. I. CMF.
3 The AMF is the authorized governmental authority to draft the relevant ICO regulation to complement the law, to enforce this regulation and to sanction potential violations. See articles L. 621-7. I bis, L. 621-9. I al. 2 and L. 621-15. II e.
5 The draft legislation indicates that the AMF will specify at a later time the necessary information that should be included in the disclosure document. See article L. 550-8. I.
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