In the note, CVM clarified that virtual assets issued through ICOs, depending on the economic context of their issuance and the rights conferred on investors, may represent securities. In such cases, the corresponding transactions would therefore be subject to specific laws and regulations and the assets could not be offered through Brazilian virtual currency exchanges (since such exchanges are not authorized by CVM to provide securities trading environments). The same applies to companies, whether or not publicly traded, or other issuers that raise funds through an ICO in transactions whose economic substance is the issuance and trading of securities.
On this topic, a virtual asset may be considered a security, for example, when it is publicly offered and generates the right of participation, partnership, or remuneration to the investor whose income arises from the effort of the entrepreneur who issues the assets or from a third party (as per article 2, IX, of Law No. 6,835/76). That is, although an ICO does not deliver to its investor a direct equity stake in a company, it is still a security when the risks and returns related to the asset derive from the effort or performance of an entrepreneur or any third party that shares the risk of a certain activity and that can be determined.
It is also important to note that, in the same note, CVM states that there are certain ICO transactions that are outside of its jurisdiction because they do not constitute public offerings of securities (that is, when the virtual asset does not fit within the definitions of securities listed in article 2 of Law No. 6,385/76).
Also, according to CVM, offers of virtual assets that fall into the definition of a security and are not in compliance with the regulation will be considered irregular and, as such, will be subject to the sanctions and penalties applicable. In this regard, it is important to note that, after the issuance of Provisional Presidential Decree No. 784/17, a fine corresponding to the higher of the following amounts may be applied to the issuer (and third parties involved in the distribution, for example): up to R$ 500 thousand, or double the value of the issuance or transaction, or 20% of the value of the total revenue of the individual company or its economic group obtained in the previous year (among other penalties provided for in the legislation, such as disqualification from holding offices, suspension of authorizations, or a warning).
In addition, CVM warns of several risks related to ICOs (especially in cases of issuers and offers not registered with the agency), such as: (i) risk of fraud and pyramid schemes; (ii) lack of suitability claims; (iii) risk of money laundering and tax and foreign exchange evasion; (iv) cyber risks (including attacks on infrastructure and systems, as well as compromise of access credentials that hamper access to assets or partial or total loss of assets); (v) volatility; (vi) liquidity; and (vii) legal and operational challenges in cases of litigation with issuers inherent in the virtual and transnational nature of transactions with virtual assets.
As a way to avoid the risk of fraud, CVM recommends in the note that potential investors who come across ICO ads should verify on the issuer’s website whether the issuer is duly registered, or whether the offer has been registered (or exempted from registration).
Finally, CVM warns that, to date, no ICO offer has been registered or exempted from registration in Brazil. The agency also states that it will remain vigilant with respect to the evolution of ICOs in order that, in a timely manner, it may take appropriate measures within its jurisdiction in order to ensure the stability and development of the capital markets in Brazil.
