Initial Coin Offerings (ICOs): legal issues according to Italian law

1. Definition.

Initial Coin Offering (ICO) refers to the initial offerings of cryptographic tokens that can be traced back to a blockchain and are made by the issuer itself. When coin offerings are launched via an exchange platform, they are generally referred to as Initial Exchange Offerings (IEO).

From an empirical point of view, initial token offerings have emerged in practice by means of a basically recurring scheme, which consists of the following phases:

1. preliminary disclosure of the project through specialized internet channels (such as new technology forums), followed by the so-called executive summary, aimed at disclosing the project to potential interested parties in order to receive their feedback;

2. publication of the so-called white paper containing detailed information on the project;

3. publication of the so-called yellow paper, containing all the technical specifics of the project;

4. launch of the offer, sometimes preceded by the so-called pre-ICO reserved for selected investors;

5. subscription of the tokens by private investors through the issuer's electronic structure or through an exchange platform;

6. as a general rule, tokens are then listed on exchange portals.

The initial offer of crypto-assets traces back to the public offer of financial products, but the discipline to which the offer is subject depends, in the Italian context, on the type of token considered and is affected by recent regulatory interventions adopted in the European context. In fact, in the absence of an organic regulation of crypto-activities, the classification of tokens constitutes the discriminating element in identifying the discipline applicable to ICOs.

2. Offerings of “security tokens”.

Security tokens are to all intents and purposes considered as financial instruments. From this qualification derives the application of the relevant discipline regardless of whether the financial instrument consists of a crypto-asset. Therefore, initial offers of security tokens, insofar as they qualify as financial instruments, are subject to the rules that apply to offers of financial products to the public, as set forth in Articles 94 et seq. TUF and the so-called Prospectus Regulation (EU Reg. 2017/1129).

The further trading of security tokens (the issuance of which is, as mentioned, governed by the general rules for financial instruments) has been considered in two recent regulatory interventions.

At the European level, EU Regulation 2022/858 "on a pilot scheme for market infrastructures based on distributed ledger technology and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU" (so-called Pilot Regulation) was adopted on May 30, 2022. It entered into force the following June 22, 2022 and receives application from March 23, 2023. This regulation is intended to set up an initial regulatory framework for market infrastructures using DLT technology. It only concerns tokens that qualify as financial instruments under MIFID (so-called security tokens) and are defined as 'DLT financial instruments' (instruments that, as will be seen, are exempt from the application of the MiCAR Regulation).

At the domestic level, the provisions of the above-mentioned Regulation were implemented by Decree-Law No. 25/2023, converted into Law No. 52/2023, setting forth "Urgent provisions concerning the issuance and circulation of certain financial instruments in digital form and the simplification of FinTech experimentation" (so-called Fintech Decree).

3. Offerings of “utility tokens” and “monetary tokens”.

While the regulation of offers of security tokens has found complete regulation through the assimilation of this type of crypto-asset to financial instruments, the reconstruction of the regime applicable to issues of other types of tokens, which do not qualify as financial instruments, has been more uncertain.

The first hint of domestic regulation came from Consob consultation document dedicated to 'Initial offers and exchanges of crypto-assets' of March 19, 2019, which was followed, as a result of the consultation, by the final report published on January 2, 2020. In that document, Consob postulated an opt-in regime for those wishing to initiate crypto-asset offerings in Italy, outlining an optional framework that the issuer could elect to access or not.

A roughly uniform framework for crypto-assets has been provided for by the EU digital finance regulatory package and, in particular, the recently adopted MiCAR (EU) Regulation 2023/1114. This regulation, which regulates both the issuance and the trading phase of crypto-assets, applies, however, only to crypto-assets other than those listed in Article 2(4) MiCAR (EU Reg. 2023/1114), among which are, in particular, also those falling under the definition of financial instruments. The Regulation applies, therefore, only to "utility tokens" and "monetary tokens". The latter include those tokens which under the Regulation itself are defined as "asset-referenced tokens" and "e-money tokens". The MiCAR Regulation, adopted on May 31, 2023, will apply in its entirety as of December 30, 2024 (see Art. 149).

Pursuant to Article 3(1)((12)), an offer to the public is defined as “a communication to persons in any form, and by any means, presenting sufficient information on the terms of the offer and the crypto-assets to be offered so as to enable prospective holders to decide whether to purchase those crypto-assets”.

In general terms, the regulation makes the publication of the white paper mandatory and introduces powers of control and approval in the hands of the supervisory authorities of the member states. Specific disciplines are introduced for public offerings of:

a) utility tokens: art. 4 ss.

The offering is reserved for legal persons who have prepared and notified the competent authority of the white paper, the content of which is specifically regulated in Article 6 below. The crypto-asset white paper shall contain all of the following information:

(a) information about the offeror or the person seeking admission to trading;

(b) information about the issuer, fi different from the offeror or person seeking admission to trading;

(c) information about the operator of the trading platform in cases where ti draws up the crypto-asset white paper; (d) information about the crypto-asset project;

(e) information about the offer to the public of the crypto-asset or its admission to trading; (f) information about the crypto-asset;

(g) information on the rights and obligations attached to the crypto-asset;

(h) information on the underlying technology;

(i) information on the risks;

(i) information on the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the crypto-asset.

In cases where the crypto-asset white paper is not drawn up by the persons referred to in the first subparagraph, points (a), (b) and (c), the crypto-asset white paper shall also include the identity of the person that drew up the crypto-asset white paper and the reason why that particular person drew ti up.

Consumers who have purchased such tokens are granted a right of withdrawal that can be exercised freely and without cost within 14 days (Art. 13).

b) asset-referenced tokens: art. 16 ss.

The offer of such tokens may only be made by entities authorized by the competent supervisory authorities of the Member States. Authorization may only be granted to entities established in the Union and on the basis of a specific application accompanied by the white paper. Additional requirements are foreseen for the issuance of significant tokens.

c) e-money tokens: art. 48 ss.

With respect to these, the offer may only be made by an authorized issuer such as a credit institution or e-money institution, which has notified a White Paper on crypto-assets to the competent authority and has also published it. Even then, additional obligations are introduced for significant tokens.

4. The U.S. context (referral).

On the test applied by the Security and Exchange Commission (SEC) in order to establish whether or not a certain activity is referable to the offering of financial products (i.e. investment contracts) in the U.S. and is therefore subject to U.S. Securities Law see: Howey test.

References.

S. Schlegelmilch, E. Newman and C. Wolfe, SEC’s Inaction Against Most Initial Coin Offerings Sends More Mixed Messages on Crypto Enforcement, January 6, 2023, available at: https://wp.nyu.edu/compliance_enforcement/2023/01/06/secs-inaction-against-most-initial-coin-offerings-sends-more-mixed-messages-on-crypto-enforcement/;

P. Carrière, Decreto Fintech e MICAR: il quadro normativo sulle cripto-attività, in Dirittobancario.it, May 30, 2023;

P. Carrière, N. de Luca, M. de Mari, G. Gasparri and T.N. Poli, Tokenizzazione di azioni e azioni tokens, Quaderni giuridici Consob, January 25, 2023, available at: https://www.consob.it/documents/1912911/1916538/qg25.pdf/0cc70f0f-49ac-7ee4-f8cc-c07f7affbf35;

G. Farina, L’emissione di token digitali nell’assetto normativo attuale, in A. Blandini, Diritto dell’innovazione, Wolters Kluwer, Milano, 2022, p. 471 ss.;

P. Carrière, Initial Coin Offerings (ICOs): Italia-Francia, due approcci regolatori a confronto, in Dirittobancario.it, January 15, 2020;

M. Nicotra, Il regime giuridico delle ICOs. Analisi comparata e prospettive regolatorie italiane, in Dirittobancario.it, April 18, 2019;

M. Nicotra, ICO, Initial Coin Offering: una ricostruzione giuridica del fenomeno, 2017, available at: https://www.blockchain4innovation.it/esperti/ico-initial-coin-offering-ricostruzione-giuridica-del-fenomeno/.

Websites.

Consob consultation document on “Le offerte iniziali e gli scambi di cripto-attività” of May 19, 2019 is available at: https://www.consob.it/documents/1912911/1972122/doc_disc_20190319.pdf/2044537e-487c-5093-112e-3eacc69b12d4;

Consob Final Report on “Le offerte iniziali e gli scambi di cripto-attività” of January 2, 2020 is available at: https://www.consob.it/documents/1912911/1938506/ICOs_rapp_fin_20200102.pdf/e83b06b8-6e7a-2dd7-9fe5-f742e9f2621e.