On the 28th September, the Australian Securities & Investments Commission (ASIC) published a document providing regulatory guidance for businesses that may be engaging in operations pertaining to initial coin offerings (ICOs). The release seeks to clarify the circumstances under which different types ICO may be subject to the Corporations Act, and identify the legal requirements of different types of ICOs.
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ASIC Hopes “To Assist Businesses to Understand Their Potential Obligations Under the Corporations Act”
This week, the Australian Securities & Investments Commission published a media release seeking to clarify the regulatory requirements of ICOs operating in Australia. ASIC has avoided adopting a one size fits all regulatory approach to ICOs, stating “whether the Corporations Act applies to an ICO will depend on the type of ICO offering and what rights attach to the coins from the ICO itself, underlying coins or tokens used in the ICO… In Australia, the legal status of an ICO is dependent of the circumstances of the ICO, such as how the ICO is structured and operated, and the rights attached to the coin (or token) offered through the ICO.”
ASIC concludes “that ICOs have the potential to make an important contribution to the options available to businesses to raise funds and to investment options available to investors”, however, specifies that “an ICO must be conducted in a manner that promotes investor trust and confidence, and complies with the relevant laws.” The regulator also states that “crowdfunding using an ICO is not the same as the ‘crowd-sourced funding’ (CSF) that will be regulated by the Corporations Act from 29 September 2017,” emphasizing the need to “ensure the public is not misled about the application of… CSF laws to an ICO.”
Under the Corporations Act ICOs May Be Seen to Comprise Either an Offer of Shares, a Managed Investment Scheme (MIS), or an Offer of a Derivative
A share is defined as “a collection of rights relating to a company.” The release states “most shares issued by public companies are ‘ordinary shares’, and carry rights regarding the ownership of the company, voting rights in the decisions of the body, some entitlement to share in future profits through dividends, and a claim on the residual assets of the company if it is wound up.”
ASIC states that “when an ICO is created in order to fund a company… if there appears to be ownership of the body, voting rights in decisions of the body or some right to participate in profits of the body shown in the white paper – then it is likely that the coins could fall within the definition of a share.” ASIC concludes that where it appears that an issuer of an ICO is actually making an offer of a share, the issuer will need to prepare a prospectus.”
The statement appears to imply that companies failing to provide sufficient information through a prospectus will be subject to scrutiny under the same rules governing Initial Public Offerings, however, ASIC specifies that “no such protection exists for ICOs made without a prospectus.”
Managed investments schemes are defined as when “people contribute assets… to obtain an interest in [a] scheme[,]… the assets are pooled together with one or more other contributors… [, and] the contributors do not have day-to-day control over the operation of the scheme.” ASIC states that if “the value of the digital coins acquired is affected by the pooling of funds from contributors or use of those funds under the arrangement, then the ICO is likely to fall within the requirements relating to MISs.”
ASIC’s Guidelines Have Been Welcomed by Several Representatives of the Australian Blockchain and Fintech Industries
For a detailed definition of a derivative, ASIC refers to section 761D of the Corporations Act, however, cites “options and futures” as “examples of derivatives.” ASIC suggests that smart contracts may be subject to derivatives licensing laws.
Danielle Szetho, CEO of Australia’s fintech industry association FinTech Australia, stated that “the guidance ASIC has released is a positive step to ensure a viable future for ICOs in Australia, and sits alongside other positive initiatives such as removing double taxation on digital currencies and driving international blockchain standards.” CEO of blockchain consultancy firm ICOPromo, Sergei Sergienko, echoed Ms. Szetho’s position, describing ASIC’s handling of ICO regulations as comprising “a calm and measured approach to help provide guidance to interested parties in Australia.”
What do you think of the Australian Securities & Investment Commission’s regulatory guidelines for ICOs? Share your thoughts in the comments section below!
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Australian Securities & Investments Commission Issues Guidance for Initial Coin Offerings