IVFAO within a European context | New in 2019

One of the major aspects regulated under Malta’s Virtual Finical Assets (VFA) Framework is the Initial Virtual Financial Asset Offering (IVFAO) or Initial Coin Offering (ICO), the latter being the more famous acronym internationally.

What is a IVFAO or ICO?

IVFAOs or ICOs can be described as an innovative process through which a fintech company or start-up can raise funds by means of an issuance of a Blockchain or DLT token generation event, whereby the investor is rewarded with the newly created token and the company may use the acquired capital to fund its intended project as highlighted in the proposal whitepaper.

Is a whitepaper required in order to carry out an IVFAO or ICO in Malta?

Under the Maltese VFA Act, “no issuer shall offer a virtual financial asset to the public in or from within Malta… unless such issuer draws up a whitepaper which complies with the requirements” as listed under the First Schedule of the VFA Act. In order to successfully carry out an IVFAO or ICO in or from within Malta, one would require, amongst other things, the appointment of a local VFA Agent to assist and advise the issuer in question.

How is an IPO different from IVFAO or ICO?

Unlike traditional Initial Public Offering (IPO), most IVFAO or ICO tokens do not amount to acquiring a share of the ownership of the issuing company or start-up. One needs to analyse what this token represents as well as its future potential usage and the value it will represent once the intended project is accomplished. Therefore, the value of the newly created tokens can be considered as speculative at best. This highlights the fact that prior to investing in an ICO or IVFAO, one must conduct adequate and serious research both on the ICO project and its whitepaper as well as the team and individuals involved in that same project.

How do other European jurisdictions deal with ICOs and IVFAOs?

While Malta lies at the forefront of DLT regulation including IVFAO, different European jurisdictions have differed from one another in their interpretation and approach towards this novel fin-tech industry which has taken the world by storm. As of yet there are no European regulations or directives dealing directly with ICOs and IVFAOs however the European Securities and Market Authority (ESMA) has raised its concerns with respect to the potential risks which may be involved within the mentioned token generation events.  ESMA has also made reference to the regulated industries under the European framework and noted that should the tokens in question classify as financial instruments as found under MiFID II, the applicable EU legislation must be adhered to and complied with by the token-issuing firm.

ICO or IVFAO regulation in Germany

In Germany the financial regulator decides on a case-by-case basis as to what are the applicable legislations and regulations for each particular token. Similar to what was expressed by ESMA above, while tokens which feature characteristics common to financial instruments must comply to such relevant German and European legislation, if the token is a pure utility token, deriving its usage primarily solely within the issuer’s software or ecosystem, no such legal requirements are imposed.  This approach is also shared by the UK financial regulators along with most EU member states.

ICO or IVFAO regulation in France

France has been more proactive in its approach as it has passed a legislative framework focusing specifically on IVFAO and ICOs. The PACTE (Plan d’Action pour la Croissance et la Transformation des Entreprises) intends to ‘facilitate access to diversified funding’ such as ICOs/IVFAOs whereby the French regulator (AMF) will be certificating ICOs with the hopes to incentivize more companies to make use of ICOs as a means to raise capital. Similarly to the Maltese framework, the French legislative proposal has laid down a number of standard criteria which need to be incorporated and form part of the ICO’s whitepaper in order to be certified by the AMF. This regulation will not apply to tokens which are considered as financial instruments but focuses solely on tokens which as of yet remain unregulated both at a local as well as European level.

ICO or IVFAO regulation in Switzerland

Switzerland has for long been referred to one of the top crypto-friendly jurisdiction and despite of the fact that it ranks as the fourth most ICOs launched, it is considered as the market leader with the highest amount of capital being raised as a jurisdiction when compared with other countries such as the US, the UK and Singapore. According to the Swiss Financial Market Supervisory Authority (FINMA), the current ICOs being conducted within Switzerland must adhere to the financial legislation in place, especially with respect to its anti-money laundering and securities (if applicable) regulations.

ICO or IVFAO regulation in Malta – Conclusion

From the comparative analysis made above, it is evident that the vast majority of countries recognise that ICOs and IVFAOs can alleviate and assist companies with their capital requirements yet at the same time the potential risks involved such as investor protection and fraud cannot be side-lined. Malta remains the only jurisdiction to have taken an active role and legislated comprehensively on the issue with the hopes of injecting further legal certainty and investor protection within the Blockchain and DLT industry without over-regulating and stifling innovation within this ever-changing industry. This remains the prime reason why Malta is often referred to as the ‘Blockchain Island’ and why major industry players such as Binance and OKEx have decided to regulate themselves in accordance with the avant-garde Maltese DLT VFA framework.

Nathaniel Falzon

Nathaniel Falzon

An ambitious and determined law graduate who is always keen on enhancing his skills and knowledge through new opportunities and experiences. Skilled in a number of foreign languages and recently graduated in a Bachelor’s Degree in Law (LL.B. (Hons.)). Currently reading a Masters of Advocacy (M.Adv. (Melit.)) from L-Università ta' Malta. A keen interest in Finance especially Competition law, Blockchain and the FinTech industry, Intellectual Property Law as well as International Law and Politics.