Capital Markets | ESMA and CSSF alert investors to risks of ICOs

On 13 November 2017, the European Securities and Markets Authority (ESMA) released a statement highlighting the risks of so-called Initial Coin Offerings (ICOs). To inform investors and other market participants of ESMA’s statement, the CSSF published a press release 17/38 on 16 November 2017.

An ICO is an innovative way of raising money from the public. In an ICO, a business issues virtual “coins” or “tokens”. Investors can then buy these coins or tokens with fiat currencies (e.g. the Euro) or, more generally, with virtual currencies (e.g. Bitcoin).

The features and purpose of the coins or tokens vary across ICOs. Some coins or tokens provide future access to a service or product that the issuer develops using the proceeds of the ICO. Others provide voting rights or a share in the future revenues of the issuing venture. Some have no tangible value.

ICOs are highly speculative investments and are often structured in such a way that they fall outside the scope of EU law. Therefore, the protection offered to investors by EU law does not apply.

In its statement, ESMA warns investors of the following risks associated with ICOs:

– High risk of losing all of the invested capital;

– Lack of exit options and extreme price volatility;

– ICOs are typically unregulated and are vulnerable to fraud or illicit activities

– Inadequate information made available to investors;

– Flaws in the technology.