Do we need an ICO law?

Currently, the impression is emerging that in the start-up scene the procurement of venture capital via Initial Coin Offerings (ICO) with relatively little effort displaces the traditional initial public offering (IPO).

The main reason for this is probably the high legal requirements that are placed on a traditional IPO. The IPO is clearly regulated by law. In this respect, the company needs legal, economic and internal market maturity. In addition, pursuant to Section 3 of the German Securities Prospectus Act, a prospectus must be prepared which provides information on risk factors, business activities, issuers, bodies, finances and the business outlook. Prior to publication, this prospectus is subject to approval by the BaFin and will be checked for consistency. In the course of this, the creators must guarantee the accuracy of their statements and the civil liability rules apply.

With regard to ICOs, the impression arises that start-ups increasingly act according to the principle: there is no law, and therefore no regulations. Depending on their design, the ICOs could be subsumed under the provisions of the Investment Act (VermAnlG), the Securities Trading Act (WpHG) or the Payment Services Supervision Act (ZAG). If, for example, subscription rights for further tokens are associated with the token to be paid out, these tokens can be classified as investments within the meaning of section 1 (2) no. 1 VermAnlG.

As with the traditional IPO, the consequences would be a conditional approval by the BaFin and a prospectus obligation vis-à-vis investors, which could lead to possible liability for damages, fines and prohibitions. According to the current legal situation, the design of the ICO is therefore of fundamental importance for its legal classification.

So it is not surprising that on 15.11.17 BaFin warned against the considerable (financial) risks of ICOs. In doing so, she also made it clear that she reserves the right to decide on a case-by-case basis under which law the respective ICO is to be subsumed and which requirements result in the consequence.

Nevertheless, BaFin's reports show that there is still considerable legal uncertainty - especially from an investor perspective - so that legislative action or at least a clear legal classification seems desirable. For example, in Russia, ICOs are treated like IPOs.

An ICO law is not absolutely necessary for this, as the existing laws allow for handling, provided that a clear classification is made. However, a reformulation for ICOs, which can not be subsumed under existing law due to their design, is recommended. Thus, for each ICO, regardless of the design, a sales prospectus should be published, which fundamentally clarifies risks and also opens up a possible liability of the founders to the investors in case of false information.

In addition, regulation based on an IPO would also counteract possible prohibition requirements that could result in significant criminal offenses or losses for investors.

Thus, one could from a state perspective, a flight abroad by ICOs, often to Singapore or in Switzerland ("Kryptovalley train"), prevent. In principle, the applicability of German regulations does not depend on the location of the company, but on a sufficient domestic relationship. This may already arise from the fact that the ICO is addressed to German investors, z. B. with a German-language Internet presence.