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Cleary Gottlieb on France’s New Framework for Approving ICOs

On April 11, 2019, the French parliament adopted a law (the “Loi Pacte”or “Law”)[1] that establishes a new regulatory framework for initial coin offerings (“ICOs”) of blockchain based tokens by entities established or registered in France.  At the heart of the Law’s ICO provisions is an innovative framework that will allow issuers to request an optional visa from the French Financial Markets Authority (the “AMF”) prior to undertaking an ICO.  ICOs of tokens that are not financial instruments will still be permitted without a visa, but the expectation is that issuers obtaining the visa for an offering of such tokens will have a distinct advantage relative to offers that lack such approval.  ICO issuers that do not obtain a visa also will be subject to restrictions on certain kinds of advertising and sales methods.  By “white-listing” issuers serious enough to seek and obtain an AMF visa, France hopes to give investors a new tool for screening out potentially fraudulent offers and help ICO issuers establish the investor confidence necessary to secure funding.  Many of the details of the new framework will be specified in implementing regulations to be adopted by the AMF, which are expected to be issued shortly after the Law is officially promulgated.  The AMF published an overview of its planned regulations on April 15, 2019, providing further clarity on how the regime will work in practice.[2]

While the Law provides a framework for ICOs, it will not be available for all kinds of tokens.  If a token qualifies as a “financial instrument,” it will continue to be governed by existing EU regulations applicable to financial instruments and will not be eligible for the new framework.  Accordingly, ensuring that the token’s terms fall outside the definition of “financial instrument” will be a critical first step for any issuer considering an offering under the new framework.

The new framework is part of a broader French government effort to establish France’s reputation as a leading “blockchain-friendly” jurisdiction and to make France a hub for blockchain innovation.  By adopting laws tailored to the needs of companies promoting blockchain technology and investing in the sector, France hopes to establish an attractive ecosystem that allows companies focused on blockchain technology to achieve their full potential.[3]

New Framework for Token Offerings

Eligible offerings

The new framework for token offerings generally will apply to any issuer that makes a “public offering” of tokens[4] and requests a visa from the AMF.  There are three important exceptions.  First, the Law provides that the new framework will not apply to offers of tokens already covered by specified provisions of the French Monetary and Financial Code[5] including Book II of the Code, which covers “financial instruments.”  As a result, tokens that qualify as financial instruments will not be eligible for the new regime and will continue to be governed by applicable EU regulations including the EU Prospectus Regulation.[6]  Second, the framework will not apply to offers of tokens to a limited number of persons acting for their own account.  The draft regulations published by the AMF set the threshold for such offers at 150 persons or less.  Finally, the framework will only apply to issuers that are established or registered in France.

Requesting a visa will be optional

Requesting a visa from the AMF will be optional.  In choosing to make the visa optional, the Law’s proponents argued that a law prohibiting ICOs without a visa would simply discourage issuers from offering their tokens in France, and would prove difficult to enforce in practice.  By offering issuers the marketing benefits of having an information document approved by a regulator, together with a tailored regime designed from the ground up with distributed ledger technology and tokenized offerings in mind, France hopes to attract token issuers to the French market on a voluntary basis, and to play a central role in establishing market practices for reputable “white-listed” offerings.  While obtaining a visa will be optional, the Law provides that ICO issuers that do not obtain a visa will be prohibited from engaging in solicitation (démarchage) activities in connection with the ICO.[7]

AMF review process

Under the AMF’s draft regulations, the AMF will have 20 calendar days from receipt of a complete file to review the request and decide whether to grant a visa.  The visa will be valid for the duration of the offering, not to exceed six months, and will cover only the specific offering for which the visa is granted.  Before granting its visa, the AMF will examine the information document and planned marketing materials for the offering, together with related supporting documentation.

At the option of the issuer, the issuer may include the source code for the issuance as an exhibit to the information document, which may at the option of the issuer be accompanied by an audit of the source code by an independent third party.

All information documents must include a required disclaimer concerning the AMF’s visa, its meaning and the limited nature of the AMF’s review, as well as a required general disclaimer related to the risks inherent to an investment in an ICO.

Material changes arising after the delivery of a visa

The AMF’s draft regulations provide that in the event a material change arises after delivery of the visa but before the close of the offering, the issuer must file a supplement to its information document and request an AMF visa for the amended information document.

Results of the offering

Within two days after completion of the offering, the issuer will be required to publish a press release setting forth the results of the offer.  Draft regulations under preparation by the AMF will set forth the required content of the press release.

Availability of the information document

The information document approved by the AMF must be made available to the public by the issuer and will be posted on the AMF website.  The AMF will maintain on its website a “white list” of offers that have been approved by the AMF and the validity dates for the related visas.

Measures to safeguard funds raised in the offering

Prior to granting a visa, the Law requires the AMF to verify that the offering includes a mechanism for safeguarding and tracing funds raised in the offering.  The draft regulations proposed by the AMF further clarify that this obligation will apply only during the offering period – the issuer will not be required to put in place a mechanism for escrowing funds after the offering is complete.  Given the rapidly evolving nature of technology, the AMF’s draft regulations do not mandate a specific form of escrow arrangement, but instead set forth general principles that must be met by the mechanism.  These include requirements that the mechanism ensure that funds raised are held in a secure manner during the period of the offering, including during any conversion of cryptocurrencies into euros, foreign currencies or other cryptocurrencies.  They also require that the funds raised be initially retained in a dedicated bank account or cryptocurrency address established for purposes of the offering, that any party receiving the funds raised in the offering be readily identifiable and that an arrangement be put in place that ensures that the funds are not released until the minimum amount and other conditions to release of funds set forth in the information document are met.  The mechanism must also permit the refund of amounts raised in the event the conditions to the offer are not met.

The AMF’s rules will cover three specific examples the AMF considers acceptable: (i) an escrow arrangement with a bank or other professional; (ii) a blockchain based multisignature arrangement for safeguarding and releasing the funds, where the release of funds depends on the agreement of independent third parties ; and (iii) an automatic ‘smart contract’ mechanism releasing the funds.  These three mechanisms are intended as non-exclusive examples — issuers remain free to propose other mechanisms, so long as they meet the general principles set forth the AMF’s general regulation.

“Know your customer” and anti-money laundering requirements

The Law will subject any issuer that requests a visa for an ICO to France’s rules against money laundering and terrorism financing, including the related “know your customer” requirements.[8]  To enable the AMF to evaluate the issuer’s ability to respect these rules, the draft regulations require an issuer to submit documents demonstrating the implementation of appropriate procedures and restrictions.   In practice, an issuer will have the option of engaging third-party services for this purpose or putting in place its own procedures, which must include at minimum carrying out a risk assessment, implementing “know your customer” procedures and account freezing capacities that comply with the applicable rules, and designating a person responsible for reporting suspected violations to the authorities.[9]

Enforcement powers of the AMF

The Law provides the AMF with a range of enforcement powers in respect of ICOs:

The Path Ahead

The Law and the AMF’s proposed regulations represent a significant step forward toward legitimizing offers of tokens that fall outside the scope of existing EU securities regulation.  Via the new framework, France offers issuers considering an offer of utility tokens an attractive and straightforward path to obtaining regulatory approval of their offerings.  While the level of disclosure required in the information document will be greater than that typically seen in most white papers today, the requirements are not particularly burdensome, are built from the ground up with distributed ledger technology and token offerings in mind and are far less extensive than the requirements that apply to offerings of transferable securities under the EU Prospectus Regulation.

A key defining characteristic of the new regime promises to be its limitation to tokens that do not qualify as financial instruments:

ENDNOTES

[1] The text of the Projet de Loi relative à la croissance et la transformation des entreprises, as adopted by the French Parliament, is available at http://www.assemblee-nationale.fr/15/ta/tap0258.pdf. The Law has been adopted by Parliament, but will not become effective until it has been signed by the French President, following the review by the Conseil Constitutionnel, which is expected to occur in the coming weeks.

[2] See Offres au Public de Jetons – Présentation des Projets de Textes d’Application de la Loi Pacte, available at https://www.amf-france.org/technique/multimedia?docId=668317ee-c806-4951-ac82-99f38af29698.  The draft regulations remain subject to change until they are adopted in final form.

[3]  Other French initiatives in the blockchain space include a new tax and accounting framework adapted to the specificities of crypto-assets, provisions allowing blockchain technology to be used to register and transfer unlisted securities, and the Law’s provisions establishing a new regulatory framework for digital asset service providers. France has also announced plans to invest €4.5 billion over the next five years to promote technologies including blockchain technology.

[4] “Tokens” are defined in draft article L. 552-2 of the French Monetary and Financial Code (the “Code”) as “an intangible asset representing, in digital form, one or more rights that may be issued, recorded, held or transferred using a distributed ledger system that allows the direct or indirect identification of the owner of such asset.”

[5] The Law provides that it does not apply to an offer of tokens that is governed by Books I to IV, or Chapter VII of Title IV or Chapter I of Book V of the French Monetary and Financial Code.

[6] For example, “security token” offerings, if and to the extent they involve offers of tokens that qualify as financial instruments, will not be eligible for the new regime.

[7] Article L. 341-1 of the French Monetary and Financial Code. The Law also amends Article L. 226-16-1 of the French Consumer Code to prohibit ICO issuers without an AMF visa from using advertisements that directly or indirectly invite a user to fill out a contact form to obtain further information about the ICO.  Similarly, Article L. 226-16-2 of the French Consumer Code has been amended to prohibit ICO issuers that have not obtained a visa from engaging in patronage (mécenat) or sponsoring (parrainage) activities.

[8] L. 561-2 of the French Monetary and Financial Code.

[9] Many ICO issuers have had difficulty opening or maintaining bank accounts due to the difficulties faced by banks in obtaining sufficient information about the subscribers in the ICO and therefore the source of funds to enable the bank to meet its KYC obligations under the anti-money laundering and anti-terrorist financing rules.  To facilitate the opening of bank accounts, the Law requires financial institutions to adopt non-discriminatory and proportionate rules to govern access to bank accounts by issuers that have obtained an AMF visa.   See the Law’s amended version of L. 312-23 of the French Monetary and Financial Code.

[10] Because obtaining a visa is optional, the withdrawal of the visa will not require the issuer to terminate the offering.  The offering can continue but the issuer must note that the visa has been revoked.

[11]  See the SEC’s “Framework for “Investment Contract” Analysis of Digital Assets” https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.

[12]  See AMF Public Consultation on Initial Coin Offerings, available at https://www.amf-france.org/en_US/Publications/Consultations-publiques/Archives?docId=workspace%3A%2F%2FSpacesStore%2Fa2b267b3-2d94-4c24-acad-7fe3351dfc8a.

[13] ESMA survey on legal qualification of crypto-assets (January 2019), available at: https://www.esma.europa.eu/sites/default/files/library/esma50-157-1384_annex.pdf.

This post comes to us from Cleary, Gottlieb, Steen & Hamilton LLP. It is based on the firm’s memorandum, “France’s Parliament Adopts an Innovative New Framework for Approving Initial Coin Offerings,” dated April 25, 2019, and available here.

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