Last week, the Australian Securities and Investments Commission (ASIC) released guidance to help issuers of Initial Coin Offerings (ICOs) consider their legal obligations when offering coins or tokens.
A business or individual can raise funding by creating and selling its own cryptocoins or tokens in exchange for cryptocurrencies of immediate, liquid value such as Bitcoin or Ethereum. Startups use this to avoid the rigorous and regulated pathways of going via banks or venture capital firms or doing a regular IPO (Initial Public Offering or the initial offer of shares of previously private company to the public). The ICOs are often global offerings which can be created anonymously and/or accepted anonymously.
Crowd funding using an ICO is not the same as the ‘crowd-sourced funding’ (CSF) that is regulated by the Corporations Act since 29 September 2017. ASIC recognises 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.
But it also says that an ICO must be conducted in a manner that promotes investor trust and confidence, and complies with the relevant laws. It notes that a number of international regulators have issued guidance on the application of their securities and financial services laws on ICOs. For instance, the Monetary Authority of Singapore (MAS) clarified in August that the offer or issue of digital tokens in Singapore will be regulated by MAS if the digital tokens constitute products regulated under the Securities and Futures Act
ASIC Commissioner John Price said, “We want to ensure innovative firms understand the regulatory framework they may be operating under and ensure they meet any obligations they may have when raising funds in Australia.”
ICOs vary in nature and may raise funds for a variety of projects, including the development of a new cryptocurrency or distributed ledger technology (for example, Blockchain) related services. Anyone with access to the internet can create or invest in an 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. An ICO could be considered to be an offer of services or products or it could be equivalent to a managed investment scheme, an offer of shares or even a derivative and it would be subject to regulations accordingly. Information sheet 225 provides guidance about the potential application of the Corporations Act 2001 to businesses that are considering raising funds through an initial coin offering.
ASIC and the Australian Competition and Consumer Commission (ACCC) also jointly warned people of the potential risks of investing in ICOs.
“ICOs are highly speculative investments, are mostly unregulated and the chance of losing your investment is high,” ASIC Commissioner John Price said, “Consumers should understand the risks involved, including the potential for these products to be scams, before investing.”
ASIC’s MoneySmart website has published guidance for investors on the risks of investing in initial coin offerings. Risks highlighted include the difficulties for regulators in ensuring that proper investor protections are in place because ICOs are sold internationally, online and usually paid for with virtual currencies, rapid fluctuation in the value of ICO tokens, their correlation to other tokens which restricts hedging risk through diversification and the possibility of digital wallet being stolen by a hacker, with little possibility of getting anything back.
Innovative businesses can contact the ASIC’s Innovation Hub for assistance in understanding the regulatory framework. The Innovation Hub provides the opportunity for entrepreneurs to understand how regulation might impact on them. It is also helping ASIC to monitor and understand fintech developments.
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