Initial Coin Offerings (ICOs) or Token Generating Events (TGEs) are perceived as an unregulated means of raising
funds by issuing virtual coins or tokens (hereinafter: Tokens) intended to become a new cryptocurrency. Many
start-ups consider ICOs or TGEs as an alternative to the expensive traditional capital-raising processes.
Tokens issued in an ICO/TGE, however, are still subject to legal scrutiny and ICOs/TGEs have come into
the focus of the regulators in the USA (SEC) and Singapore (MAS) regarding their compliance with existing
capital markets regulations.
Tokens are created and disseminated using distributed ledger or blockchain technology. The start-ups
create a so called whitepaper which explains the project to be funded by the ICO/TGE in detail. Token
purchasers fund the development of a digital platform, software or other projects. The Tokens may
be used to access the platform, use the software or otherwise participate in the project or give a right
to participate in a share of the returns provided by the project. Once issued, the Tokens may be traded
on a secondary market, virtual currency exchanges or other platforms.
• The obvious purpose of most ICOs/TGEs is to raise money from the public. Under Swiss law the Tokens
qualify as securities or financial instruments if they fit into one of the categories outlined in
Art. 3 of the draft Federal Law for Financial Services: equity securities (equity or a derivative on
equity, ownership and voting rights), loans, units in collective investment undertakings, structured
products, derivatives, deposits of which the reimbursement value is depending on certain
variable financial criteria, bonds and securities.
• A qualification as a financial instrument/security is always likely if the investor simply purchases
a Token and then passively waits and observes what happens on the secondary market. In this
case, the ICO/TGE is subject to banking law, securities law or collective investment scheme law
and its strict regulative schemes.
• For newly issued Tokens which neither qualify as a security nor as a financial instrument, Swiss
law currently knows no specific regulation.
Criteria to Assess the Token Design
The Tokens must be analyzed on a case by case basis.
The assessment is based on the description of the Token in the whitepaper. The following criteria
might serve as examples:
A Token with one or more of the following rights will in all likelihood not meet the definition of security/
1. Rights to program, develop or create features for the distributed ledger;
2. Rights to access the system;
3. Rights to contribute labour or effort to the system;
4. Rights to use the services of a system and its outputs at no charge;
5. Rights to sell the products of the system; and
6. Meaningful voting rights, free information and possibility of exchanging opinions among Token holders.
A Token with one or more of the following rights will in all likelihood qualify as a security/financial
1. An investment of money in a start-up
a. with a reasonable expectation of profits, such profits consisting of dividends, periodic payments
or the increased value of the investment; or
b. if the profits are to be derived from the entrepreneurial or managerial efforts of others (i.e. of the
c. the voting rights of the Token holders do not provide a meaningful control over the start-up.
2. Share of profits and/or losses, or assets and/or liabilities;
3. Status as equity holder, creditor or lender;
4. Claim in bankruptcy as equity interest holder or creditor;
5. Holder of a repayment obligation from the issuer of the Token; and
6. Management or board of the issuer have the effective control over the project.
If there are any doubts regarding any of the criteria above, we strongly recommend contacting the Swiss
regulator Financial Market Supervisory Authority (FINMA).
The Swiss Regulator’s Approach
For the time being FINMA’s approach is as follows:
- Bitcoin (BTC) and Ether (ETH) are considered as means of payment and can be traded on respectively
transferred to a wallet, provided the rules for the prevention of money laundering (AML Rules) are respected;
- FINMA assesses new financing tools such as ICO/TGE in accordance with the existing legal basis for
financial markets, because in Switzerland no specific rules for ICOs/TGEs or similar business models exist;
- Regarding the applicability of the financial markets law (in particular Banking Act, Anti-Money Laundering
Act and Ordinances, Securities Trader and Stock Exchange Act, Collective Investments Scheme
Act) one question among many is decisive: Do the Tokens offered qualify as financial instruments /
securities? If yes, the relevant laws for banks, securities, collective investment schemes etc. apply.
Based on this background, FINMA invites the parties interested in launching an ICO/TGE to submit detailed
information on the planned Token offering for an assessment of the need for authorization.
Depending on the level of intensity and details of the information provided, FINMA will charge fees for
FINMA does not assess questions of civil law (prospectus) or tax law in the context of ICOs/TGEs.
AML, Secondary Market, Custody
The AML Rules for the prevention of money laundering apply. The “know your
customer” (KYC) process is cumbersome because it mostly relies on a face-to-face contact between the parties.
In the virtual world, this is considered an obstacle. Several jurisdictions have implemented KYC procedures
which avoid the need for a face-to-face contact (e.g. video identification). The KYC procedures of
one country, however, might not be accepted in other countries.
Custody, distribution as well as secondary market trading of the Tokens are relevant and need to be
in line with applicable local laws. Again, compliance with the laws of one country does not automatically
mean that the Tokens can be distributed in other countries without the approval by local
regulators. Finally, the type of investor who is allowed to purchase Tokens must be defined (consumers,
qualified investors, etc.) for each jurisdiction.
Corporate Form of the Issuing Entity
Based on previous examples, most developers aim
for a foundation such as Ethereum Foundation.
The advantage of a foundation in an early phase (complete independence of any ownership since
there are no shareholders), contrasts with the disadvantages in the long term such as governmental
supervision, “locked box” (no chance to ever get the funds out again other than for promotion of the
foundation’s purpose), rigid structure or no tax benefit per se (only in case of a charitable foundation,
a status seldom granted). In addition, although there is no formal ownership, whoever controls the board
of the foundation controls the foundation itself.
There is no transparency regarding the founders in public registers.
The suitable corporate form needs to be evaluated in each case. A limited liability company, for example,
would provide full transparency on the ownership due to the required registration of the shareholders
in the public commercial register.
Irrespective of the corporate form chosen, a re-characterisation by the courts cannot be excluded if the
activities of the start-up correspond to the activities regulated by financial markets laws.
ICO/TGE is a new form of contributing to or investing in start-ups. Due to the diversity of Tokens,
general qualifications cannot be made and each Token has to be assessed on an individual basis. If
it mainly serves the purpose of financing the startup, the existing laws and regulations for financial