New CNMV Criteria for ICO Issuance

New CNMV criteria for ICO issuance.

The CNMV —jointly with the Bank of Spain— issued a statement dated February 8, 2018, which we have already referenced in previous publications, warning that numerous actions are taking place to raise funds from investors to finance projects through so-called “initial cryptocurrency offerings” or ICOs (Initial Coin Offering, an acronym that evokes the expression IPO or Initial Public Offering, used in relation to stock market listing processes).

The aforementioned statement was based on the commonly accepted premise that the term ICO may refer to:

1. Cryptocurrency Issuance

2. Issuance of rights of various types called “tokens” (“vouchers” could be the Spanish translation). These assets are offered for sale in exchange for
“cryptocurrencies” such as bitcoins or ethers or official currency (for example, euros). The uses and characteristics of these “tokens” vary, with the most common classification being the one that
distinguishes between two types or categories:

a. “Security tokens”: generally grant participation in future income or the increase in value of the issuing entity or a business.

b. “Utility tokens”: grant the right to access a service or receive a product, notwithstanding which, during the offering, reference is usually made to expectations of appreciation
and liquidity or the possibility of trading them on specific markets.

The CNMV warned that, as of that date, no “cryptocurrency” issuance nor any ICO had been registered, authorized, or verified by any supervisory body in Spain.

On September 20, 2018, it issued a new statement, in which it initially warns that “those cases in which it is not reasonably possible to establish a
correlation between the expectations of appreciation or return on the instrument and the evolution of the underlying business or project” will not qualify as negotiable securities; but, in addition to the above, it analyzes:

1. Necessity and Scope of Intervention by Authorized Entities to Provide Investment Services

2. The Token Representation System and the Consequences of Their Trading on Trading Platforms

3. Necessity of Information Prospectus

The CNMV criteria are as follows:

Necessity and scope of intervention by authorized entities to provide investment services.

“—Regarding the intervention of an authorized entity referred to in Article 35.3 of the Securities Market Law (LMV), the provisions published in the Fintech Q&As will apply regarding the minimum degree of intervention by the entity authorized to provide investment services for marketing purposes (which implies that said entity must perform general supervision of the process and validate the information to be delivered to investors, which must be clear, impartial, and not misleading and refer to the characteristics and risks of the securities issued, as well as the legal and economic-financial situation of the issuer in sufficient detail to allow the investor to make an informed investment decision).

Likewise, it is considered appropriate that the authorized entity not proceed to validate the information to be delivered to investors unless it includes prominent warnings about the novel nature of the registration technology and the fact that custody of the instruments is not performed by an entity authorized to provide investment services.

—In principle, the intervention of an authorized entity to carry out the placement of securities is not necessary, given that the transaction will normally be merely occasional for the issuer. The reserved activity provided for in Article 144.1 LMV (in relation to Article 140 e) and f)) requires that the activity be carried out “on a professional or habitual basis”).

—Nor does the intervention of an authorized entity to carry out custody of the securities have to be necessary, in principle, since the reserved activity provided for in Article 144.1 LMV (in relation to Article 141 a)) requires that the activity be carried out “on a professional or habitual basis”).”

Token Representation and Consequences of Their Trading on Trading Platforms

Article 6.1 LMV allows for the interpretation that it is possible for certain securities not to be represented by means of book entries or certificates (given that the term “may” is used). Therefore, the possibility of registering rights that may qualify as negotiable securities through DLT (blockchain) technology cannot be excluded. With this in mind:

a) If the tokens are to be traded on NON-Spanish markets:

*Article 6.2 LMV is only applicable to Spanish trading venues. Therefore, if the tokens are traded on a non-Spanish market, the CNMV is not competent to require that they be represented by book entries.

*It will be the law (and the competent authority) of the country in which the market where the tokens are to be traded is located that determines to what extent a specific form of representation of the securities is required for their trading on an organized market and, where applicable, the need for the registry to be maintained by a central securities depository.

b) Trading of tokens on Spanish regulated markets, MTFs, or OTFs does not appear possible since:

*Article 6.2 LMV would require that the tokens be represented by book entries.

*Article 8.3 LMV would require that the registry be maintained by a central securities depository.

c) Nor does it appear possible to generate an internal market on an unregulated platform or for the tokens to be traded on a platform (exchange) located in Spain since:

*In the case of tokens considered negotiable securities, these platforms would need to have the authorizations required to carry out their activity, including those necessary as a trading venue (as a regulated market, MTF, or OTF) or as an investment services firm (ESI) or credit institution operating as a systematic internalizer. Management of the trading venue should be carried out by an ESI or by a market governing body, and they would generally be subject to market regulations and the CNMV’s supervisory scope.

*The same provisions of letter b) above would also apply regarding the need for representation by book entries and participation of a central securities depository.

Necessity of Information Prospectus

“—Given that most of the transactions being considered may be covered by Article 35.2 LMV (relating to situations in which there is no obligation to publish a prospectus), issuers are advised to adhere to the criteria discussed above in relation to Article 35.3.

—It should be noted that the preparation of a prospectus for an ICO may encounter difficulties due to the absence of a harmonized model at the European level, which, in turn, may generate dysfunctions with other European authorities regarding the passport of the prospectus approved by the CNMV.

—However, when a prospectus is necessary due to the characteristics of the transaction, the CNMV will make the necessary adaptation effort and will take into account the principle of proportionality (especially when it is foreseeable that the transactions will not be large) in order to reduce the complexity and length of the document as much as possible.”

New CNMV criteria for ICO issuance: More info…

For more precise information on the CNMV’s ICO issuance, we provide the following documentation:

The IN DIEM Abogados practice area specializing in Cryptocurrencies and Bitcoin has extensive experience and a high degree of knowledge in New Technologies and Cryptocurrencies. We operate and advise not only in relation to the virtual currency Bitcoin but also with all existing cryptocurrencies including: Ethereum, Ripple, Litecoin, Dash… and investments in ICOs (Initial Coin Offerings), offering our clients the appropriate operational strategy and the necessary advice for their transactions and investments.