The French parliament has passed on Wednesday what looks like the most progressive and the most innovative legislative framework on Initial Coin Offerings (ICOs).
That makes them the world’s first national legislative body to pass a law on ICOs and on the surface it looks like a very reasonable regulatory framework.
The French equivalent of SEC or FCA, the Autorité des marchés financiers (AMF) (English: “Financial Markets Regulator”), is tasked with analyzing whitepapers and basically with ensuring that it is not an initial scam/fraud offer. If they are happy, then they provide a license or visa and publish a whitelist.
Unlike British derived law, which tends to be precise and all encompassing, French law is more focused on the principles or on communicating the “spirit” of the intended rules. With that in mind, a rough translation of the law in question reads as follows:
“Article 26 relates to the creation of a French system of offers of tokens. The ‘Initial Coin Offering’ (‘Initial Token Offering’), ie the fundraising via a shared recording device (in particular by means of the so-called technology ‘blockchain’ or ‘chain of blocks’) via the issuance of digital ‘tokens’, have developed dramatically during the year 2017.
This dynamic growth, reinforced in the first months of 2018, reflects the attraction of this new mode of financing and investment, especially within the blockchain ecosystem but, more broadly, for innovative companies wishing to attract new categories of investors or customers, in new ways.
These operations, however, for the moment, escape a clear legal framework, insofar as, under French law and European law, the ‘tokens’ thus issued can be legally qualified in different ways according to their specific characteristics. In particular, most of these tokens do not meet the definition elements of financial securities.
This situation has the advantage of giving free rein to innovation. However, it has the disadvantage of putting on the same level any type of issuer and project, without providing the subscribers of tokens sufficient means to distinguish serious offers from abusive ones, and the actors who implement procedures in terms of information, identification and knowledge of the customer, of those who do not respect any rule.
In anticipation of European and international rules, necessary on these transnational issues by nature, it seems desirable, in order to better protect the buyers of tokens and the carriers of ‘legitimate’ projects, to allow the AMF to issue a visa to stakeholders who wish to issue tokens intended in particular for the French market for the financing of a project or an activity, provided that they respect certain rules of a nature to avoid obvious abuses and to inform and protect the investor.
The AMF would be given the task of examining the documents prepared by token issuers upstream of their offer (‘white paper’). It may also require issuers to acquire the status of a legal person established or registered in France, set up a mechanism for sequestrating the funds raised, or any tool having equivalent effect, and a device for identifying and customer knowledge.
The actors thus labeled would appear on a ‘white list’, on which the AMF would communicate to the general public, which would identify the actors who respect these rules and provide them with an important pledge of respectability with subscribers. Tokens with the characteristics of a financial security would nevertheless remain subject to the regime of the offer to the public of financial securities.”
What exactly would make a token have the characteristics of a financial security under French law is unclear, but they say most of these tokens do not meet the definition elements of financial securities. That’s in stark contrast to the US Securities and Exchanges Commission (SEC) which has effectively stated almost all tokens are securities.
As can be seen above, the exact requirements by this new law are not fully clear, but the aim seems to be permissive as they say the focus is on establishing “certain rules of a nature to avoid obvious abuses and to inform and protect the investor.”
Moreover, the license or visa is optional. Projects don’t have to apply for it while still being able to ICO, something which is very much a first for regulators and may well test whether this would lead to better rules by AMF, to more responsiveness to the market by the regulator, and whether the market would in fact put a premium on the AMF license.
Because the idea here is that investors would value the license, assuming the rules are reasonable, and would shun or at least raise questions if an ICO hasn’t applied for the license. At the very least, journalists would do so.
In addition to market forces, there’s a huge carrot to get the license as it effectively guarantees a bank account. An amendment to the above was added which according to a rough translation says:
“Credit institutions shall put in place objective, non-discriminatory and proportionate rules to govern the access of token issuers who have obtained the visa referred to in Article L. 552-4 of this Code to deposit and deposit account services [for] payment they hold. This access is large enough to allow these people to use these services effectively and without hindrance.”
If that’s not enough, a second amendment would probably seal the deal for any proper project that wants to ICO.
The amendment says institutional investors, like asset managers and so on, are unable to invest in ICOs according to current rules governing such professional entities. In line with likewise rules everywhere else, institutional investors have to place some 90% of the funds in stocks, and only 10% can go into other assets such as gold, oil, other commodities or cryptos.
The amendment removes that restriction, allowing institutional investors to have 10%-20% or more of their portfolio just in tokens that have acquired the AMF license, in line of course with their own analysis of risk and so on.
That in effect makes this framework pretty much an embrace of ICOs with the general idea describable as a voluntary contractual arrangement between entrepreneurs and investors but with some oversight by the AMF if the entrepreneurs want to comply with their requirements and receive the added benefits of a bank account and far greater access to the number of investors.