Skip to main content
SpringerLink
Log in

Blockchain Startups and Prospectus Regulation

  • Article
  • Published:
European Business Organization Law Review Aims and scope Submit manuscript

Abstract

Initial coin offerings are a new way for blockchain startups to finance project development by issuing coins or tokens in exchange for fiat money or Bitcoin or other cryptocurrencies. In this article, we start from the current distinction between different types of tokens and argue that it can create confusion and should be at least partially abandoned. We believe that the conceptual difference between a currency token and a tradable utility token is just the dimension of the crypto environment in which the token is spent. More specifically, ‘utility tokens’ combine the customer payment mechanism with the utility component and, when tradable on a secondary market, the investment one. We argue that they blur the traditional distinctions between currencies, financial assets and consumption goods. Moreover, we stress the increasing importance of online crypto exchanges. Recently some exchanges have also taken up the role of trusted intermediaries and staked their reputation on token offerings, which are termed initial exchange offerings and have gained in popularity. We therefore argue that the crypto market increasingly looks like a segment of the capital market and behaves as such. Given that tokens have a clear investment component, we show that they are tradable securities under the Prospectus Regulation. We compare the European securities regulation with its US counterpart and focus on prospectus exemptions, highlighting the great differences between Europe and the US which make Europe less amicable to blockchain startups.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Regulation (EU) 2017/1129 of 14 June 2017, on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market [2017] OJ L168/12.

  2. For a more detailed analysis see for instance, Wright and De Filippi (2015).

  3. Viriyasitavat and Hoonsopon (2019).

  4. In the words of Vitalik Buterin (2014): ‘The purpose of a consensus algorithm, in general, is to allow for the secure updating of a state according to some specific state transition rules, where the right to perform the state transitions is distributed among some economic set’.

  5. Nakamoto (2008).

  6. Cong and He (2019).

  7. Nabilou and Prüm (2019).

  8. Truby (2018).

  9. Among those platforms are Cardano, EOS, Algorand.

  10. Abadi and Brunnermeier (2018).

  11. Probably the most famous hard fork is the one concerning Ethereum Network which occurred on July 2016. Following the hard fork there are two different versions of the Ethereum blockchain: Ethereum and Ethereum Classic.

  12. This was considered a rather theoretical situation because of the huge costs involved in taking control of the majority of computers. However, at least one study has mentioned the possibility of hiring computer power to take control of a blockchain: Bonneau (2016); see also Bonneau (2018). Small blockchains have been subject to 51 percent attacks: see Casey (2019).

  13. The Economist (2015).

  14. Blockchain mechanisms for generating and maintaining decentralized consensus are investigated by Cong and He (2019).

  15. Shin (2017).

  16. Boreiko and Sahdev (2018), p 8.

  17. Ethereum’s campaign raised $18 million worth of Bitcoin.

  18. Werbach and Cornell (2017); Cong and He (2019); Sklaroff (2017).

  19. We will return to the terminology further on.

  20. Data from http://www.icodata.io.

  21. On white papers see Zhang et al. (2019); Cohney et al. (2019); Zetzsche et al. (2019a); Florysiak and Schandlbauer (2018). For policy considerations concerning the regulation of ICO disclosure see Brummer et al. (2019).

  22. See later on the distinction between cryptocurrencies, coins, and tokens.

  23. A large amount of literature investigates the determinants of ICO success: cf. Adhami et al. (2018); Amsden and Schweizer (2018).

  24. With regard to blockchain projects, see OECD (2019).

  25. Katz and Shapiro (1985).

  26. Swiss Financial Markets Supervisory Authority (FINMA) (2018).

  27. Rohr and Wright (2019), pp 470 et seq.

  28. Last accessed on 1 September 2019.

  29. Sockin and Xiong (2018) analyze the problems of coins that facilitate transactions of certain goods or services, and are at the same time used to compensate miners on the platform.

  30. See http://www.coinmarketcap.com.

  31. Schwartz et al. (2014).

  32. Tether is currently subject to legal proceedings: an investigation by the New York Attorney General (‘Attorney General James Announces Court Order Against “Crypto” Currency Company Under Investigation For Fraud’, 25 April 2019, at https://ag.ny.gov) and a class action (The Block, ‘Class action lawsuit against Bitfinex and Tether filed by lawyers who successfully sued Craig Wright’, 7 October 2019, at https://theblockcrypto.com (last accessed 22 October 2019).

  33. Pistor (2019); Zetzsche et al. (2019b).

  34. Typical examples are cryptocurrencies backed by gold (such as Zengold), silver (Silvercoin), precious or industrial metals (Zrcoin, Sandcoin) or even electricity (GigaWatt).

  35. See infra n. 76.

  36. Hacker and Thomale (2018).

  37. Gans and Halaburda (2015).

  38. Gans and Halaburda (2015).

  39. Another use of retained tokens might be a signal of the project’s quality and the founders’ firm beliefs in future tokens’ appreciation, Boreiko and Sahdev (2018).

  40. OECD (2019).

  41. Howell et al. (2018), p 7.

  42. Boreiko and Vidusso (2019).

  43. Bakos and Halaburda (2019).

  44. Bakos and Halaburda (2019).

  45. Catalini and Gans (2018).

  46. Momtaz et al. (2019), p 4.

  47. Momtaz (2019). With regard to the reason why investors participate in risky and opaque ICOs, Fisch (2018) provides the only survey study so far on the characteristics of the investors in the ICOs and their motivation for funding blockchain startups.

  48. Fisch (2018).

  49. Agrawal et al. (2014).

  50. Boreiko and Vidusso (2019).

  51. Boreiko and Vidusso (2019).

  52. Benedetti (2019).

  53. Lielacher (2018).

  54. Lyandres et al. (2018) show that ICOs demonstrate very similar empirical regularities in comparison to initial public offerings (IPOs) and argue that token offerings tend to behave like equity ones.

  55. World Bank Group data, https://data.worldbank.org/indicator/CM.MKT.TRNR?view=chart (last accessed on 14 September 2019).

  56. Marketcoincap.com data (last accessed on 14 September 2019).

  57. See also Fahlenbrach and Frattaroli (2019), observing from their data that the median participant contributes small amounts and many investors sell their tokens before the underlying product is developed.

  58. ‘Hackers Have Stolen $400 Million From ICOs’, Lucinda Shen, http://fortune.com/2018/01/22/ico-2018-coin-bitcoin-hack/ (last accessed on 10 February 2019).

  59. ‘SEC Stops Fraudulent ICO That Falsely Claimed SEC Approval’, SEC Press release from 11 October 1918.

  60. Chance and Edleson (2019).

  61. ‘Five Major Cryptocurrency Exchange Collapses’, Kaia, https://www.coinstaker.com/five-major-cryptocurrency-exchange-collapses/ (accessed on 10 February 2019).

  62. On the issue cf. Maas (2019); Annunziata (2019); Hacker and Thomale (2018); Ferrarini and Giudici (2020).

  63. Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) [2014] OJ L173/349.

  64. The same provision specifies that Member States shall notify the Commission and the European Securities and Markets Authority (ESMA) whether and how they decide to apply the exemption pursuant to the first subparagraph, including the monetary amount below which the exemption for offers in that Member State applies. They shall also notify the Commission and ESMA of any subsequent changes to that monetary amount. ESMA has published information about the legislation adopted in this regard by the Member States: ‘National thresholds below which the obligation to publish a prospectus does not apply’, 8 February 2019, ESMA 31-62-1193, downloadable at https://www.esma.europa.eu/sites/default/files/library/esma31-62-1193_prospectus_thresholds.pdf.

  65. Klöhn et al. (2018), p 29.

  66. Ibid., p 30.

  67. Ibid., p 32.

  68. ESMA (2019).

  69. ESMA (2019), Annex 1, Legal qualification of crypto assets—survey of NCAs.

  70. Radin (1930).

  71. [1923] AC 175.

  72. See Choudary and Anor v. R. [2016] EWCA Crim 61 (22 March 2016).

  73. One author focuses on crypto exchanges, but he does so to argue that utility tokens should be treated as derivatives: Annunziata (2019).

  74. Boreiko and Risteski (2019).

  75. During which some articles had already discussed whether cryptoassets can be considered as securities: Valkenburgh (2016).

  76. SEC, ‘Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO’ (25 July 2017). The report was issued with regard to an investigation concerning The DAO, which was a ‘decentralized autonomous organization’ that wanted to operate as a for-profit entity by funding blockchain projects and sharing the earnings with the holders of DAO Tokens, which would have been negotiable on crypto exchanges.

  77. SEC v. W.J. Howey Co., 328 US 293.

  78. Hinman (2018).

  79. With regard to cryptoassets a rather specific issue concerning the Howey test is the individuation of ‘the efforts of others’. At the start of the project there is a team of developers and they are ‘the others’ whose efforts investors rely on. But if the project becomes a platform and its fortune depends on a network of users, there is no longer any specific third party to make reference to. On this issue Henderson and Raskin (2019).

  80. Filecoin Token Sale Economics, p 4, at coinlist.co. See also Batiz-Benet et al. (2017).

  81. See https://coinlist.co/filecoin (accessed on 4 November 2019).

  82. Munchee, Inc., Securities Act Rel. No. 10445 (11 December 2017) (settled order).

  83. Memorandum and Order, 1:17-cr-00647-RJD-RER (E.D.N.Y.), ECF No. 37 (11 September 2018).

  84. Tokenlot LLC, Lenny Kugel, and Eli L. Lewitt, Rel. No. 33-10543 (11 September 2018) (settled order) (‘TokenLot Order’).

  85. CarrierEQ, Inc., Rel. No. 33-10575 (16 November 2018); Paragon Coin, Inc., Rel. No. 33-10574 (16 November 2018).

  86. Crypto Asset Management, LP and Timothy Enneking, Rel. No. 33-10544 (11 September 2018) (settled order).

  87. Zachary Coburn, Rel. No. 34-84553 (8 November 2018) (settled order) (‘Coburn Order’).

  88. On ICO regulation and the SEC see Trotz (2019), Hazen (2018).

  89. See https://www.sec.gov/finhub (last accessed on 7 October 2019).

  90. SEC, ‘Concept release on harmonization of securities offering’, 18 June 2019.

  91. ICOAlert, 6 August 2019, 10 Questions for Blockstack, available at https://blog.icoalert.com/blockstack (last accessed 6 October 2019).

  92. See https://www.reuters.com/article/us-crypto-currencies-younow/us-video-streaming-app-younow-files-cryptocurrency-offering-with-sec-idUSKCN1TK2LJ.

  93. See https://blockchainlawguide.com/securities/.

References

Download references

Author information

Authors and Affiliations

  1. School of Economics and Management, Free University of Bozen-Bolzano, Bolzano, Italy

    Dmitri Boreiko & Paolo Giudici

  2. Law Department, University of Genoa, Genoa, Italy

    Guido Ferrarini

  3. European Corporate Governance Institute (ECGI), Brussels, Belgium

    Guido Ferrarini & Paolo Giudici

Authors
  1. Dmitri Boreiko
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Guido Ferrarini
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Paolo Giudici
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Paolo Giudici.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Boreiko, D., Ferrarini, G. & Giudici, P. Blockchain Startups and Prospectus Regulation. Eur Bus Org Law Rev 20, 665–694 (2019). https://doi.org/10.1007/s40804-019-00168-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40804-019-00168-6

Keywords

Search

Navigation