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Initial Coin Offerings – An insight into the regulatory environment


Initial Coin Offerings (ICOs) are an innovative way for companies – usually start-ups – to raise money from the public. In an ICO, a business or individual issues coins or tokens which are sold in exchange for either traditional currencies such as the euro, or virtual currencies such as Bitcoin or Ether. Usually, an ICO starts with a white paper, essentially a simplified prospectus. This document describes the project’s business operations and the structure and features of the tokens and provides information on the status of the enterprise and the key team members involved.

What is the legal nature of the tokens?

There is no recognised general classification of ICOs, or of the tokens that result from them, in the Netherlands or internationally. However, a token can be categorised into one of three general categories, based on its underlying economic function. A token may act as a means of payment (payment token), confer digital access rights to an application or service (utility token), or function as an investment (security token).

One important trend in the current market is that parties issuing an ICO are registering a legal entity – instead of using a decentralised autonomous organisation – in anticipation of a more regulated and less anonymous ICO field that handles crowd sales as legitimately as possible. The firms involved in ICOs should comply with four EU Directives: the Prospectus Directive 2003/71/EC (the Prospectus Directive), the Markets in Financial Instruments Directive 2014/65/EU (MiFID II), the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD) and the Fourth Anti-Money Laundering Directive 2015/849/EU (4AMLD). Any failure to comply with the applicable rules will constitute a breach.

Securities law regulation of ICOs

A token can take various forms and can provide for voting rights or an entitlement to returns. The current trend seems to be moving towards the offering of security tokens (STOs). STOs can be structured so that they satisfy the provisions of the Prospectus Directive, providing investors with proper information disclosure, and ensuring legal compliance and even economic rights for the issuing company.

The definition of securities in the Dutch Financial Supervision Act (Wet op het financieel toezicht, "FSA") is in part derived from the Prospectus Directive. Transferable securities under the Prospectus Directive refers to MiFID II, which defines transferable securities as classes of securities that are negotiable on the capital market, with the exception of instruments of payment. Examples include:

  • shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares
  • bonds or other forms of securitised debt, including depositary receipts in respect of such securities
  • any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.

In essence, transferable securities under the Prospectus Directive are negotiable on capital markets.

Do tokens qualify as securities?

A token must be negotiable to qualify as a security under the Prospectus Directive and the FSA. Although not traded on regulated markets like Euronext, most tokens will be traded on an exchange or platform and therefore are negotiable. Standardisation is therefore relevant – most tokens will be standardised, especially tokens of the same financing round. But if a specific token is designed in a way that the code does not allow for transfer, it could be argued that these tokens lack transferability and therefore do not qualify as securities.

Another important consideration is whether the holders of a token participate in the company's capital and receive a payment for their investment. This payment must correspond to the return achieved from the invested capital. In this respect, any controlling rights are not decisive. From the guidance currently available, a token will probably qualify as a security under the FSA if it is negotiable, provides for participation in the issuer's capital and carries an entitlement to a payment, which depends on the return achieved from the invested capital. In the context of ICOs, the qualification of the company's capital will not always be straightforward. It could be argued that a token is not a security under the FSA if it does not provide for an entitlement to a payment that depends on the return achieved from the invested capital, or a return resulting from an increase of an index or a rise in the token's value, or a distribution of profits or reserves.

If a token that qualifies as a security under the Prospectus Directive and the FSA is offered to the public in the European Economic Area, the issuer must publish an approved prospectus unless an exemption applies.

Read our full guide Initial Coin Offerings in the Netherlands for a comprehensive view of the ICO regulatory framework.


Portrait of Clair Wermers
Clair Wermers
Portrait of Karsten Bruinsma
Karsten Bruinsma