Blockchain Startups and Prospectus Regulation

Abstract

ICOs 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 also took up the role of a trusted intermediaries and staked their reputation on token offerings, which are termed initial exchange offerings (IEOs) and have gained in popularity. We argue therefore 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 (PR). 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.

Keywords: Cryprocurrencies, tokens, coins, Initial coin offerings, Initial exchange offerings, startups, prospectus, financial, capital markets regulation, exemptions, qualified investors, accredited investors

JEL Classification: G23, G32, M13, K22