Summary of the Italian CONSOB document "Initial offers and crypto-activity exchanges"
On March 19th 2019, the Italian National Commission for Companies and the Stock Exchange (CONSOB) published a document entitled "Initial offers and exchanges of crypto-activities" which opens the debate at national level on the subject of initial coin offering (ICO) and Exchange ("crypto-activities") in which Italian savers can invest.
Below is a summary of this document, with some terms that we have highlighted. Here is the link to the CONSOB original document in italian language.
1) Description of the phenomenon
The ICOs are initially described by CONSOB through comparison with the IPOs:
|Intended for an audience of investors with a potentially indeterminate number.||Use of blockchain technology.|
|Promotion/advertising activities of the operation.||Payment of tokens generally with virtual currencies.|
|Advertising and promotion through the world wide web, to give rise both to forms of promotion and collection on a cross-border basis, without any territorial constraint as regards either the figure of the issuer or that of the promoter.|
|Publication of a so-called white-paper instead of a prospectus, in which the main characteristics of the operation and of the object of the offer are reported.|
Types of tokens:
- Investment-token or Security-like-token, financial instruments or financial products.
- Hybrid-token, have a variable mix of characteristics, can present an appreciable content of financial type besides being placed to retail investors with public offers.
ICOs are increasingly targeted at the retail public, but not always the tokens issued are similar to financial instruments or products and therefore subject to the relevant rules of investor protection.
Financial investments included in the category of financial products are investment proposals involving the simultaneous presence of:
- Use of capital;
- Financial promise/expectation of return;
- Taking a risk directly related to the use of capital.
Further elements of evaluation are:
- prevalence of the financial connotation over that of using and disposing of the asset acquired through the operation;
- The expected increase in the value of the capital employed (and the risk associated with it) is an intrinsic element of the operation itself, other than the mere appreciation of the asset over time, thus accessing the very cause of the underlying contract.
ICOs, according to the characteristics of the tokens offered, can determine in the purchasers' expectations of economic returns/returns represented, broadly speaking, by income generated in two different ways.
- i) directly, i.e. yields linked to the trend of revenues, volumes of goods and services sold or profits of the entrepreneurial initiative;
- (ii) indirectly, i.e. related to the potential appreciation of the value of tokens traded on dedicated exchanges.
The distinctive features of these activities are as follows:
- Use of innovative technologies, such as blockchain, in order to incorporate into the tokens the rights of those who have invested with the aim of financing the underlying business project.
- Destination for the subsequent negotiation of the tokens (crypto-assets), the transferability of which is, moreover, closely connected with the technology used, or rather with its ability to record and maintain the evidence of ownership of the rights associated with the crypto-assets in circulation.
CONSOB values the codification of a new ad hoc category following what is dictated by the Italian national legislator in the so-called Simplification Decree. This opens to a new ad hoc discipline of the "crypto-activities", in substance this could involve that:
- If the promoters of the ICO use dedicated platforms supervised by CONSOB and meeting certain requirements, they may avoid being subject to the regulation of financial products, in terms of prospectus and distance offers;
- investments other than financial instruments and investment products are exempt from the rules on financial products established by the TUF.
- If, on the other hand, the token is clearly and undoubtedly attributable to all financial instruments or investment products, it is subject to current European regulations.
The new framework would have as its object the protection of potential buyers in relation to:
- characteristics of issuing entities;
- provision of appropriate information on projects.
- The "platform for crypto-activity offers" is defined as an online platform whose exclusive purpose is the promotion and implementation of newly issued token offers.
In order to do this, the best-positioned operators appear to be the portal operators in accordance with the CONSOB regulation on Crowdfunding.
It could be expected that this activity could also be carried out by different parties while respecting the subjective requirements similar to those of the aforementioned operators of crowdfunding portals.
Crowdfunding portal operators should notify CONSOB and may be required to keep the crowdfunding platform separate from the token platform.
Different parties should be required to implement an information, procedural, organisational and control system, structured and appropriate to the underlying risks, with a view to protecting investors.
The subjects that issue tokens may be companies, individuals or networks of product developers. The characteristics and minimum requirements an ICO needs to fulfil to be selected for the promotion of the relative offers on the aforesaid platforms are still an open debate. So far these two requirements emerged:
- Adequate safeguards for the selection of business projects deserving of access to the platform;
- Rules of conduct that entities operating crypto-activity platforms would be required to respect in their relationship with investors.
Standardisation of transaction information would also be required.
CONSOB provides for an opt-in mechanism that allows the initiative promoter (issuer/bidder/proponent) to choose the use of a dedicated platform (meeting the requirements) in order to address investors in a regulated environment.
As a result, offers made outside regulated platforms would still remain legitimate (unless there are aspects that can be assessed as abusive under the TUF where the token incorporates the notion of financial product). These offers, however, would be clearly recognizable by the general public as not assisted by the same protections provided by the regime applicable to those who, by the will of the issuer / provider / proponent, instead of access the regulated circuit.
One form of incentive could be the provision of token offers which are suitable for supplementing the domestic concept of a financial product, a derogation from the application of the rules on public offer and distance offer of financial products.
4. Token Exchanges.
The regulatory proposals under consideration by CONSOB cover tokens which, in the initial placement phase, are transferred directly from the issuing vehicles to the subscribers through the use of blockchain technology and which can subsequently be demobilised through dedicated exchange systems.
At present, the management and operation of token exchanges that cannot be classified as financial instruments are not subject to any reserve of assets within the meaning of MiFIDII, nor to the related regulations.
A "crypto-activity exchange system" is defined as a set of rules and automated structures, which allows to collect and disseminate token trading proposals and to execute such proposals, also through technologies based on distributed registers.
Exchanges in which tokens are traded that do not qualify as financial instruments but have the required distinctive characteristics also require adequate forms of control and regulation.
According to CONSOB, it would be desirable to introduce a discipline that provides for minimum parameters of governance and operation for the platforms in question (i.e. where tokens that do not qualify as financial instruments are traded).
A system that does not create a real reserve of activities for the management of such exchange systems is conceivable (leaving, therefore, to the relative organizer the choice of whether or not to submit to the discipline provided for in the matter), but that at the same time creates an incentive to opt in that could be constituted by the existence of a close link with the offers (in the primary phase) that have been conducted through dedicated and regulated platforms.
Also from the point of view of the incentive for the operators of exchange circuits to access a regulated system, it can be considered that the attribution of a special "label" (consisting in the registration of the exchange system with Consob, with the purpose of negotiating tokens), should constitute an element of attraction with respect to the volumes of business / interest in the further spread of the so-called ICOs. Last but not least, the acquisition of the aforementioned "label" could also be of interest to incumbent operators.
Rules for the offer
Only tokens which have been offered to the public through one or more token offer platforms may be admitted to trade.
Rules for exchanges - CONSOB register
Entry of the token exchange system, upon request of the organiser, in a special Consob register, on condition that the system is present:
(a) transparent and non-discriminatory rules and procedures concerning the conduct of exchanges, as well as the initial selection of tokens, access to the system and identification of participants in the system itself;
(b) effective procedures to ensure that when a token is started to be traded on the system, up-to-date information on the token, which is necessary for potential buyers/dealers, has been published;
(c) procedures to identify and manage the risks to which the system is exposed;
(d) measures necessary to facilitate the efficient settlement of trading operations conducted in the system (taking into account that such settlement as well as the allocation of ownership of tokens would take place through blockchain technology);
(e) appropriate organisational and operational safeguards (e.g. on business continuity and IT security);
(f) adequate procedures for managing conflicts of interest;
(g) appropriate rules and procedures regarding the investment of financial resources and the holding of crypto-currencies and tokens by the system operator.
According to CONSOB, it would be appropriate to provide that the exchange systems are equipped with rules and procedures for access and identification of participants in such a way as to render unusable - by the relevant organizers who are responsible for the admission processes - technologies based on registers distributed in the form of so-called permissionless (ie with free access even anonymous) for aspects relating to the management of the exchange processes and transfer of cryptoactivities on the register itself.