To begin with, it needs to be recalled that an ICO allows for public fund raising in digital form for entrepreneurial purposes based on the blockchain technology. In practice, the more general term "token generating event" ("TGE") is also used.
At an ICO, investors pay financial means to the organizer of an ICO. In exchange, they receive digital coins or tokens, which are blockchain-based and which are linked to a project of the organizer.
There are currently no specific regulations applying to ICOs in Switzerland and until recently the Swiss regulator has been reticent to communicate about the way it deals with enquiries regarding ICOs.
On 16 February 2018, however, FINMA published a practical guide on ICOs ("Practical Guide") in which it takes position by explaining how it deals with enquiries in this field and gives some details on the application of the Swiss financial market laws to ICOs.
Classification of the tokens to be issued
According to its Practical Guide, FINMA distinguishes three types of digital tokens which have different functions, knowing that mixed forms are also possible ("hybrid" tokens)
Payment tokens ("pure" cryptocurrencies)
Payment tokens which can be assimilated to pure cryptocurrencies include tokens which are accepted as a means of payment in particular for the acquisition of goods or services. These tokens are generally not linked to other functions or projects. "Cryptocurrencies give rise to no claims on their issuer". These tokens are therefore a digital means of payment or exchange.
Utility tokens
The second category of tokens, utility tokens, are tokens that give access to a digital application or service by means of a blockchain-based infrastructure. These tokens do not include any promise or profit expectations.
Asset tokens
The third and last category of tokens, security tokens, "represent assets such as participations in companies" and give a right to income, dividends or interest. These tokens therefore represent a claim against the issuer. "In terms of its economic function, the investment tokens are analogous to equities, bonds or derivatives".
In our practice, we have already noted that the delimitation set by FINMA between the different categories of tokens is not so obvious in reality. The tokens will often have the characteristics of several tokens (e.g. payment token and asset token or utility token and payment token).
Once the tokens are classified, the organizer of an ICO must determine which financial laws apply to his project and verify whether a license to issue and trade these tokens needs to be obtained.
Determination of applicable laws
On this subject, the Practical Guide gives some indications:
Payment tokens ("pure" cryptocurrencies)
FINMA considers that payment tokens do not represent securities, except in the case of a pre-sale of tokens, but that Swiss based issuing is subject to Swiss provisions on anti-money laundering.
Utility tokens
Utility tokens are neither treated as securities as long as they only confer an access right to a digital service and can already be used in this way at the time of issue.
Asset tokens
FINMA regards asset tokens as securities and indicates that the legal and regulatory consequences of this qualification must be considered. For example, if the token has the characteristics of a derivative, its sale may require a dealer's authorization. Furthermore, this approach also involves obligations under the Swiss Code of Obligations, for example the obligation to draw up a prospectus for the issuance of equities or bonds in the form of digital tokens.
Preparation of the necessary documentation for the implementation of the ICO
It is recommended to send an enquiry to FINMA about the applicability of financial market regulation to ICOs and the existence of licensing requirements (or its non-applicability) by preparing a file containing all the required information per the Practical Guide.
Upon receipt of FINMA's position on the enquiry, (i) the legal documentation necessary for the issuance of the tokens, i.e. a request for license to FINMA if one is required and/or a prospectus as well as (ii) the documents relating to the ICO itself, including the general conditions applicable to it, must be drafted.
In this context, it will also be necessary to assess which organizational structure (e.g. incorporation of a company, type of company, etc.) is most appropriate for the launch of the ICO. Further, tax implications should be considered when the structure is determined.
In this respect, practice shows that, given the generally relatively high amounts involved in ICOs, a project that is viable from a financial market laws point of view may not be profitable because of the taxation that would be applicable to it, which is why this point should always be analyzed at the preliminary stage already.
To sum up, to avoid regulatory pitfalls, ICO organizers are strongly recommended to carry out a legal assessment of the tokens to be issued, or even to submit an enquiry to FINMA about the applicability (or non-applicability) of financial market regulation to ICOs and the existence (or non-existence) of licensing requirements.
Originally published on May 25, 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
