France established an official legal framework to encourage ICOs — a new fundraising method for innovation projects on the blockchain — to develop in France. This optional legal framework is intended to secure the issuer’s legal position and protect the investor’s investment. But what is the scope of this new legislation? What is the official position of the French regulator (AMF)? Overview of the legal issues and concepts related to this new type of fundraising.
An ICO (Initial Coin Offering) is a method of fundraising, operating through the issuance of digital assets exchangeable for cryptocurrencies during the start-up phase of a project. These digital assets, called tokens, are initially issued by the organization that created the ICO, and can be acquired by anyone at the ICO in exchange for cryptocurrency. Then, these tokens can be traded (bought and sold) on trading platforms, at a rate depending on supply and demand. These tokens are particularly liquid and are intended to be used in the project financed by the ICO in question.
Their value is therefore supposed to depend on the service ultimately provided by the company that created the ICO. Buying tokens during an ICO is ultimately equivalent to pre-paying for the product or service to be developed (creating business traction). The term “initial” is therefore key, as Myriam Quéméner explained in her book Le droit face à la disruption numérique, “it is a question of buying these tokens at the very beginning of the process, when their value is still relatively low. This method encourages ICO participants to be involved in the project (e.g. creating interest in the use of a platform). Indeed, they have a direct interest in the success of the issuer’s project in order to be able to use the acquired tokens in the long term or hope to obtain a financial value higher than their purchase value. Carriers must have a sufficiently large community of users to get their project off the ground. In most cases, a minimum investment threshold is set so that the ICO can be effectively launched. These early adopters are key to the expected success of the project.
The position of the Autorité des Marchés Financiers (AMF).
Until the establishment of the current legal framework, there was no legislation specific to ICOs in France. Aware of this legal vacuum and the risks it creates (volatility or absence of a market, fraud, money laundering, capital loss, etc.), the AMF is setting up a consultation on ICOs at the end of 2017 to gather possible guidelines for this new financing method.
Following its public consultation, the AMF carried out an initial study on ICOs and their legal implications. It concludes that the majority of transactions were outside any regulation and that current law could cover a minority of them. The complexity of the legal analysis stems mainly from the fact that these “tokens” issued can be legally qualified in different ways according to their specific characteristics (financial securities, various assets, etc.). Indeed, the economic reality of a token varies according to the project and the objective pursued by the issuer. An ICO could thus relate to the law applicable to intermediaries in various forms, to the public offer of financial securities or to alternative investment fund managers.
The need to legislate in this area was therefore justified by the fact that this legislative vacuum was likely to create strong legal uncertainty for issuers, uncertainties and sometimes incomplete information for investors and, more generally, a lack of national or European supervision that would be harmful to all those involved in this phenomenon.
In other words, the absence of a clear legal framework has the disadvantage of putting all types of issuers and projects on the same level, without providing token subscribers with sufficient means to distinguish between genuine and dishonest offers, and players who carry out due diligence in terms of information, identification and customer knowledge, from those who do not respect any rules.
The idea was therefore to develop legislation that would effectively protect investors by providing them with reliable information to enable them to assess the quality of projects and to distinguish between serious and potentially fraudulent projects.
PACTE bill: towards a regulation of Initial Coin Offering in French law.
To attract international innovators, France decides to provide a clear legal framework, both understandable and protective, in particular in terms of financing.
The French lawmaker has therefore decided to legislate at a minimum by introducing an optional regime aimed at encouraging issuers to comply with a certain number of requirements in order to guarantee investors clear information on the quality of the project to be financed.
Article 26 of the French PACTE bill provides that, prior to any public offer of tokens, issuers may apply for an AMF visa. It is therefore an optional rule.
In order to obtain an AMF visa, conditions must be met, on the one hand, regarding the disclosure document prepared by issuers and, on the other hand, regarding the issuers themselves.
First, issuers must prepare a document for the purpose of providing all relevant information to the public about the proposed offer and the issuer.
This information document (hereafter “whitepaper”) and promotional communications relating to the public offer must be accurate, clear and not misleading and must make it possible to understand the risks associated with the offer. More specifically, the issuer is required to include in its whitepaper certain specific information likely to guarantee investors’ interests, such as: a description of its project and a timetable for its launch (“roadmap”), the rights incorporated in digital assets, the court competent in the event of a dispute, the economic objective and the use of funds raised through the ICO.
Then, the issuer of the tokens must, on the one hand, be constituted in the form of a legal person established or registered in France and, on the other hand, set up any means to monitor and safeguard the assets collected in the context of the offer.
After examining the information document, draft promotional communications intended for the public after the issue of the visa and supporting documents for the guarantees provided, the AMF may issue its visa. Subsequently, the AMF may withdraw its approval if it finds that the proposed offer is no longer compliant or no longer offers the guarantees provided for. It should be specified that tokens with the characteristics of a financial guarantee would remain subject to the regime of the public offer of financial securities. This last clarification is unfortunate. Indeed, no token offers all the rights associated with equity securities. In particular, their holding does not offer the possibility of sharing a bonus in the event of liquidation, nor the right to request the registration of a draft resolution at the general meeting, nor the right to vote or participate in general meetings. (See in particular: https://www.esma.europa.eu/press-news/esma-news/esmahighlights-ico-risks-investors-and-firms)
On 14 June 2018, the Council of State gave its opinion on this draft law and noted the innovative nature of the draft by creating this national regime “which is not required by European Union or international law and which is optional”.
However, he insists on the temporary nature of this new legal framework since he considers that “this regime is likely to evolve in the future according to technological and economic developments as well as the European and international normative context. »
On 18 June 2018, the PACTE bill was presented to the Council of Ministers. The French legislator seems aware that effective regulation in this area can only be conceived on a supranational scale.
Pending the adoption of European and international rules, which are necessary on these transnational issues, it seems desirable, in order to better protect token purchasers and “legitimate” project holders, to allow the AMF to issue a visa to players who wish to issue tokens intended in particular for the French market to finance a project or activity, provided that they comply with certain rules designed to avoid manifest abuses and to inform and protect investors.
French lawmakers therefore decided to establish a relatively flexible regime that is optional. The objective is to encourage and stimulate French entrepreneurship in the Blockchain area by establishing a certain legal security in this area. Consequently, this transitional legal framework meets the interests of both ICO promoters and their investors.
This new legal regime will probably allow legitimate projects with an AMF visa to have easier access to traditional financial services (banks and accounting audits), which has hitherto been difficult due to the regulatory uncertainty in this sector.
The list of companies meeting the criteria of the French financial regulator (known as the “whitelist”) will provide a valuable benchmark for investors who wish to finance serious and creative projects of value.
Bruno le Maire recently published a comment on twitter: An ad hoc legal framework for ICOs is therefore being created. The AMF will be able to issue a visa to players who meet investor protection criteria.
Pierre Noizat, CEO of blockchain.io, a cryptocurrency trading platform for ICO issuers, has already applied for an AMF visa and said that “the French government does not hide its ambition to make France an ICO capital, because it does not want to miss the block chain revolution. They regularly meet with French Blockchain entrepreneurs and crypto entrepreneurs in France in order to gain a better understanding of the market.”
In addition, French legislation has legally defined the notion of tokens, which is specific to ICOs. The new article L.552–2 provided in the PACTE bill defines a token as “any intangible property representing, in digital form, one or more rights, which may be issued, registered, retained or transferred by means of a shared electronic recording device enabling the owner of the said property to be identified, directly or indirectly,”.
Furthermore, the new article L.552–3 provided for in the PACTE bill stipulates that “an offer to the public of tokens consists in proposing to the public, in any form whatsoever, to subscribe to these tokens”. The scope of the public offer of tokens excludes the offer of tokens open for subscription by a limited number of persons, set by the AMF General Regulation, acting on their own account.
The idea is to develop legislation in line with the proper development of technology. The notion and designation of a shared registry remains deliberately broad and neutral in order not to exclude further technological developments. The French legislator is acting wisely, as the Blockchain technology has not yet reached a sufficiently advanced level of maturity.
Bibliography
Articles
Quéméner M., “ Le droit face à la disruption numérique”, Gualino 2018.
Legeais D., « Regards sur une opération juridique non identifiée : les ICOs », IP/IT 2018, Dalloz.
L. Leloup, Blockchain : la révolution de la confiance, Eyrolles, 17 février 2017
D. Legeais, « Fascicule 534 : BLOCKCHAIN », Jurisclasseur Commercial, Lexis Nexis, 7 Mars 2017
S. Drillon, « La révolution Blockchain », RTD Com., Dalloz, 2016
B. Le Maire, « Tribune : Cryptoactifs, blockchain & ICO : comment la France veut rester à la pointe », Numerama, 19 mars 2018
Law text
Etude d’impact, Doc. Ass. nat. du 20–6–2018, p. 345.
Projet de loi relatif à la croissance et la transformation des entreprises (ECOT1810669L), 18–06–2018