Thursday, 03 March 2022

Regulating advertising of Cryptoassets presented as a means of investment

VolverAfter the initial innovation in recent years, cryptoassets and the services linked to them have a greater presence in the Spanish economy, and, especially, in the financial system. This is a challenge for Spain regarding legal protection for investors and, especially, for small non-professional investors, because currently there is no complete and unified regulation meeting the protection needs of those investors with regard to the risks involved in cryptoassets marketing, where the exponential increase in the value of these cryptoassets has multiplied their investment attractiveness. This fact is exploited by the players involved in this new industry in order to further increase the demand of these cryptoassets, through advertising campaigns.

This advertising, especially in cases where it is massively made, seeks to steer the impact to individual non-professional investors, who so far may have seen an incentive in investing in those assets without sufficient information on their nature and the risks arising from them.

Subsequently, the Spanish Securities & Exchange Commission (CNMV, in Spanish) and the Bank of Spain released a joint statement on 9 February 2021, completing a previous one of 2018, addressing the potential risks arising from investing in this kind of assets. The releases above were especially focused on the associated risks of such cryptoassets due to their volatility and the potential lack of liquidity of such investments.

In that connection, the Royal Decree-Law 5/2021, of 12 March, on extraordinary measures to support healthy business in response to the COVID-19 pandemics, introduced a new article 240 bis in the Securities Market Act (LMV, in Spanish) to reinforce the legal framework for the protection of citizens and investors regarding the advertisement of new instruments and financial assets in the digital field. In the aforementioned act, the CNMV was granted competences in order to have under administrative control the advertisement of cryptoassets and other assets and instruments that are not ruled in the LMV, which may be offered as an investment proposal for the general public.

Thus, exercising the competences granted in the aforementioned royal decree, the CNMV has released the Circular letter 1/2022, of 10 January, on the advertising of cryptoassets presented as a means of investment (the "Circular").

The Circular establishes among its purposes: to determine the objective and subjective scope of application for which the rules on cryptoassets advertisement are applicable; to establish the requirements that the marketing communications linked to cryptoassets as a means of investment must follow; to spell out the advertising activity that must be subjected to a regime of prior notice and set the tools and procedures that will be used to make effective the supervision of the advertising activity of cryptoassets as a means of investment.

Thus, the Circular does not include any rules on the cryptoassets, or the services linked to them, or their features or the requirements that the providers must meet, but exclusively the eligible requirements in the advertising activity which has the aim to offer cryptoassets as a means of investment.

In this regard, it should be noted that the definition of the Circular for those services is:

Cryptoassets services: all professional or business activities related to cryptoassets, among others: -Trading cryptoassets on platforms. -Purchase, sale, or swap of cryptoassets. -Advice on investment in cryptoassets. – Management of cryptoasset portfolios. -Any kind of returns of cryptoassets. -Any other services or activities for the distribution of cryptoassets.

In connection with the services above, along with the specific requirements established in the Circular, it is noted that such cryptoassets advertising is naturally subject to the general regulations applicable to advertising and, especially, to the General Advertising Act 34/1988, of 11 November, and the Unfair Competition Act 3/1991, of 10 January, as well as the rules applicable to media where the advertising material is broadcasted, for example, but not limited to: Act 34/2002, of 11 July, on Services of Information Society and Electronic Commerce (LSSI, in Spanish), regarding the advertising communications via the Internet, or Act 7/2010, of 31 March, on audiovisual communication services, regarding advertising on television. Moreover, the provisions of the Act for the Protection of Consumers and Users will be also applied to the extent that illicit advertising will infringe such a regulation and, where appropriate, legal proceedings may be taken against the illicit advertising.

The Circular excludes from the definition of advertising some activities such as: advertising of cryptoassets that are deemed as financial instruments included in the Securities Market Act; the information on new cryptoassets issuance (“White Papers”); those cryptoassets that due to their features are not a means of investment; the advertising on cryptoassets with no other use than digital access to a product or services; the advertising on cryptoassets that are unique and non-fungible, when they are collectible assets or works with intellectual property rights; the advertising of technical workshops, courses and symposia on cryptoassets, etc.

Concerning the subjective implementation of the Circular, as usual in advertising-related regulations, both general and sector-specific, in addition to establishing their enforceability for the cryptoassets services providers who advertise, they are also applied to the advertising services providers involved in such an activity.

One of the main objectives of the Circular is establishing the content and format requirements that must be met by the advertising of this kind of cryptoassets, as well as the information on the risks involved in acquiring or trading them. Moreover, under general matters relevant to advertising, the Circular requires advertising to be clear, impartial, balanced and not misleading. All these requirements and matters are extensively developed on Annex I of the Circular, with all the mandatory general principles and criteria applicable to cryptoassets advertising. Thus, it is also established that in connection to all advertising that includes information on costs or potential returns of cryptoassets, the information must be clear, accurate, adequate, and updated regarding nature and complexity, the features of the used broadcast media and the target audience to which it is addressed.

In particular, we would like to note, to demonstrate the regulator’s concern due to the need of informing the potential investors about the risks, that the Circular requires every commercial communication on these cryptoassets to include information on the risks of the advertised products, in particular:

a) the following warning shall be included in the commercial communication, with format and position guaranteeing the relevance within the advertising material. It should not be included as secondary information or as a footer.

Investment in cryptoassets is unregulated, may not be suitable for retail investors and the entire amount invested may be lost

The Circular establishes supervisory powers for the CNMV related to “mass” advertising campaigns addressed to the general public and, therefore, not necessarily familiar to cryptoassets investment.

In that connection, in order to determine in advance what is deemed as “mass” advertising campaign and expressly including advertising in online media: digital media and browsers, social media and sponsored videos, to which advertising of this kind of cryptoassets is closely linked, the Circular includes a definition that establishes that such mass advertising campaigns must have the following features, by broadcast medium and metrics, based on the number of persons potentially impacted by the campaigns.

«Mass advertising campaign»: advertising campaigns that are aimed at more than 100,000 people, through any advertising media and based on the following metrics from the information offered by the sources used at large in advertising industry: -Television: audience of programs by number of viewers. -Radio: (…). -Printed media: (…). -Outside advertising: (…). -Digital media and browsers: audience and estimated visitors. - Social Media: the highest between the estimated user in advertising campaigns and number of followers in the used accounts. Sponsored videos: number of followers of the video broadcaster.

Among the requirements for these mass advertising campaigns, it is included the obligation to provide a 10 days’ notice for the mass advertising campaign, according to the form set by the CNMV, as well as the following information and documents: a) general details of the campaign: details of the cryptoassets object of the campaign or of the advertised services, description of target audience and connection between mass media and advertising supports used for the broadcast; b) Specific information of the advertising materials: copy of every material with a different message (including explanations or legal and risks warnings) or format (radio slot, TV spot, banner, signage, etc) that is intended to be broadcasted during the campaign, in the original or electronic format to be read or played.

Notwithstanding the aforementioned reporting procedure, the Circular states that the lack of response from the CNMV within ten (10) working days will not mean that the institution considers that the advertising subject to prior notice properly complies with the rules established in the Circular.

After analysing in a summarised form the rules on cryptoassets advertising established in the CNMV Circular, if your company conducts business related to cryptoassets advertising and requires specific advice, don’t hesitate to contact Belzuz Abogados in order to obtain the necessary legal advice.

Igor Orozco Román  Igor Orozco Román

Commercial and Corporate Law department | Madrid (Spain)

 

Belzuz Abogados SLP

This publication contains general information not constitute a professional opinion or legal advice. © Belzuz SLP, all rights are reserved. Exploitation, reproduction, distribution, public communication and transformation all or part of this work, without written permission is prohibited Belzuz, SLP.

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