Examining France’s Progressive Legislation on ICOs

France’s parliament recently passed a legislative framework for Initial Coin Offerings (ICOs), and it looks quite progressive on the face of it… it looks very reasonable and makes room for innovation.

The French equivalent of SEC, Autorite des marches financiers (AMF) has been tasked with analysing Whitepapers of ICO projects emanating from within the jurisdiction to ensure that they are credible. Projects that scale through the AMF scrutiny are given a licence and a go-ahead to commence their process for crowdsale.

In a deviation from the existing British derived law which looks pretty rigid and encompassing, the French law is more about communicating and making the intended rules easily understood by industry players.

A not-so-professional translation of the French legislative framework reads thus;

“Article 26 relates to the creation of a French system of offers for 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 reign 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 licence 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 labelled 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.”

The AMF says that most ICO tokens they have observed do not possess the basic elements of financial securities – this is a contrast from the US SEC that seems to have a view that a good number of ICO tokens can be classified as securities.

As seen from the translated text above, the specific requirements by the new French law for the classification of ICO tokens have still not be made succinct, it is however clear that the authorities aim to ensure that the law does not stifle innovation. The law basically aims to prevent abuses by unscrupulous persons who might want to defraud in the pretense of conducting an ICO.

It is necessary to note however that the application for licence from the AMF is optional. This means that projects that pass the scrutiny do not necessarily have to apply for a licence to ICO – this is quite a deviation from what regulators with existing legislation are known to do. Would this have an effect on market play? Would this cause the market to put a premium on AMF licencing? Can it be that investors would value this licence more and begin to question French ICOs as to why they have not applied to get the licence if they claim to have been passed by the AMF? Let’s see how it plays out.

The AMF licence comes with an attractive peck of a guaranteed bank account and banking services. With some discrimination against cryptocurrency and Blockchain based projects in certain jurisdiction where banks go as far as denying them services, the AMF licence would ensure that projects get an all-clear as their business model has been ascertained and approved by the regulators. This is stated in the AMF’s ICO law as an amendment translated here;

“Credit institutions shall put in place objective, non-discriminatory and proportionate rules to govern the access of token issuers who have obtained the licence 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.”

This amendment also paves way for institutional investors to be able to invest up to 20% of their existing portfolio into tokens that have acquired the AMF licence, but this must be done on the back their own risk analysis and risk studies of these projects. Existing laws prevent institutional investors from investing more than 10% of their total portfolio in crypto projects, but the AMF licence is the magic that doubles this allowance to 20%.