Why ASIC is putting a stop to ICOs
The corporate regulator has recently stopped several retail initial coin offerings (ICOs), has taken action with regard to a completed ICO and has even issued a stop order on a PDS for a crypto fund.
ASIC’s two key concerns – misleading and deceptive information in the materials used to market the ICOs and breaches of the financial services laws – have repercussions for anyone thinking about working with crypto assets in Australia.
If a crypto asset is a “financial product” under the Corporations Act, a raft of regulatory requirements will apply to not only the ICO, but also to anyone broking the token or listing it on an exchange. So unless you understand and can comply with these requirements, take care to ensure that the crypto assets you deal in are not financial products.
This isn’t always black and white; legal analysis is often required. Our September 2017 blog, 'Global Regulation of ICOs', explored typical crypto financial products. Since then, we’ve analysed some interesting crypto assets and services, including:
- Value of the token tied to the price of gold or an interest rate – likely to be a derivative;
- Token attached to a loan – likely to be a debenture;
- Token backed by an asset like gold – likely to be a debenture;
- Token issued as a reward for repaying a loan or making a loan to someone else – likely to be debentures; and
- Crypto purchasing service – if it only deals in crypto assets that are not financial products, no financial service is provided.
Tokens don’t always fit neatly into the financial product categories; many are hybrids and exemptions are available in some cases.
Here’s a quick list of things to look out for – if one or more of these features are present, the token is likely to be a financial product:
- Token issuers can buy back the coin;
- Token holders have rights to profits of the enterprise;
- Tokens are backed by an asset or commodity;
- Tokens can be converted into another asset;
- Investors have a right to receive profit now or at a later date;
- Investors have the right to buy or sell the coin in the future;
- A ‘smart’ or self-executing contract is embedded in the design of the token;
- Tokens can be converted into shares or equity;
- Tokens holders are lending money and can expect a repayment of the money; and
- Investors are pooling resources to invest in the token.
Businesses that don’t identify whether the tokens in which they deal are financial products and prepare to comply with the relevant requirements early on, may:
- Find that timelines for any ICO will change significantly;
- Have issues finding exchanges and markets who can support secondary sales of the token; and
- Face penalties or the risk that the offering will be shut down by ASIC – which could adversely impact your ability to raise funds and damage your reputation.
So, it’s wise to get advice at the outset. It’s also a good idea to speak to ASIC directly, even if the tokens in which you deal aren’t financial products as ASIC is now responsible for all ICOs and businesses dealing in crypto assets.
By engaging with ASIC’s Innovation Hub, you can benefit from their insights and show them that you’re a responsible operator.
Your meeting with ASIC will go better if you demonstrate that you know what regulatory obligations apply to your token and/or service. For example, for tokens that are financial products:
- The token will need a disclosure document such as a product disclosure statement or registered prospectus or offer document;
- Token issuers and/or businesses that arrange for the issue will need an AFS licence;
- Broking services that deal in the token will need an AFS licence; and
- Exchanges that list the token will need a financial markets licence.
Now that the hype cycle has almost reached full circle, we’re seeing a trend away from “unregulated” tokens and ICOs. Reputable token issuers recognise the advantages of operating in a regulated market, for promoting investor confidence. And it’s usually cheaper to comply from the outset than to deal with regulatory intervention at a later date.
Charmian Holmes, solicitor director, The Fold Legal