The European Securities and Markets Authority (“ESMA”) has issued two warning statements on initial coin offerings (“ICOs”), one on the risks of ICOs for investors and one on the rules applicable to firms involved in ICOs. ESMA is concerned about the rapid growth in ICOs globally and that both investors and firms may be unaware of all the potential high risks involved.

In summary, ESMA warns firms involved in ICOs that tokens or coins may be financial instruments (depending how they are structured), meaning that their activities may constitute regulated activities. Investors are warned of the highly speculative nature of ICOs and the potential to lose all capital investment.

An ICO is a way of raising money from the public, issuing so-called coins or tokens also called an initial token offering or token sale. In an ICO, a business or individual issues virtual coins or tokens and puts them for sale in exchange for fiat currencies, such as the Euro, or more often virtual currencies, e.g. Bitcoin or Ether.

The features and purpose of the coins or tokens vary depending on the ICO. Holders of the tokens and coins may have additional rights such as rights to access or purchase a service or product that the issuer develops using the proceeds of the ICO. Others provide voting rights or a share in future returns from the project. Some have no tangible value. Some coins or tokens are traded and/or may be exchanged for traditional or virtual currencies at specialised coin exchanges after issuance.


ESMA is concerned that investors may be unaware of the high risks involved in investing in ICOs and identifies the following key risks for investors:

Risks Summary
Unregulated space, vulnerability to fraud and money laundering Depending on how the ICO is structured, it may fall outside the scope of EU laws and regulations and not offer any of the protection that comes with regulated investments.
High risk of losing all invested capital The vast majority of ICOs are launched by start-up businesses that have an inherent high risk of failure, and many coins or tokens have no intrinsic value other than the possibility of using it to access a platform or service.
Lack of exit options and extreme price volatility Not all coins and tokens are traded on virtual currency exchanges and when they are, like virtual currencies, their price can be volatile. Exchange of coins or tokens back into traditional currency may not be available or investors may not be able to redeem their coins or tokens for prolonged periods.
Inadequate information The information available in so-called white papers may be unreliable as it is unregulated, unaudited and can be misleading as to the actual balance of risks verse profit.
Flaws in the technology The distributed ledger or blockchain technology that underpins the coins or tokens is still largely untested and there may be flaws in the code or programs.


ESMA is concerned that firms involved in ICOs may conduct their activities without complying with relevant EU legislation. Firms should pay careful attention to the way the ICO is structured. Where ICOs qualify as a financial instrument under MiFID it is likely that the firms may be involved in regulated activities such as placing, dealing in or advising on financial instruments or managing or marketing collective investment schemes. Alternatively, firms may even be involved in offering transferable securities to the public. If the coins and tokens do fall within the definition they will be within the scope of EU regulation in the same way as traditional financial instruments.

ESMA has provided a non-exhaustive, high level summary of the key EU legislations that are likely to apply to coins and tokens that qualify as financial instruments (ESMA stresses that firms should give careful consideration to the requirements of these rules and take into account any further legislation that might apply, such as national rules):

  • The Prospective Directive. Depending on how the ICO is structured the coins or tokens could, potentially, fall within the definition of a transferable security and therefore require publication of a prospectus which will be subject to approval by a competent authority.
  • The Markets in Financial Instruments Directive (MiFID). If an ICO coin or token qualifies as a financial instrument the process by which a coin or token is created, distributed or traded is likely to involve several MiFID activities/services such as placing, dealing in or advising on financial instruments. The organisational requirements, the conduct of business rules and the transparency requirements laid down in MiFID would then apply, depending on the services provided.
  • The Alternative Investment Fund Managers Directive (AIFMD). Depending on how it is structured, an ICO scheme could qualify as an AIF, to the extent that it is used to raise capital from several investors, with a view to investing it in accordance with a defined investment policy. Firms involved in ICOs may therefore need to comply with AIFMD rules
  • The Anti-Money Laundering Directive. The Directive requires firms to carry out due diligence on customers and to have in place appropriate record keeping and other internal procedures. Firms have an obligation to report any suspicious activity and to co-operate with any investigations by relevant public authorities.


Investors and firms should consider their regulatory options carefully and ensure they comply with all relevant regulation.

To view ESMA’s warning statement for firms please click here and to view ESMA’s warning statement for investors please click here.

For more information, and any guidance or advice on ICOs, Cleveland & Co, your External in-house counsel, are here to help.