Following recent growth in initial coin offerings (ICOs), the Jersey Financial Services Commission (the Commission) has issued a guidance note setting out certain minimum standards and requirements in respect of ICOs. The guidance note is a measured and pragmatic clarification of the Commission's approach to, and expectations of, Jersey companies issuing tokens/coins (the Issuer) as well as the application process.
As is acknowledged in the guidance note, most ICOs will not be regulated by the Commission, though detailed legal analysis of the structure of the ICO (including as to whether the tokens have the features of securities as opposed to, for instance, utility or cryptocurrency tokens) will be required in order to consider the potential application of Jersey's regulatory laws, including the Collective Investment Funds (Jersey) Law 1988 and Alternative Investment Funds (Jersey) Regulations 2012, the Financial Services (Jersey) Law 1998, the Banking Business (Jersey) Law 1991 and the Proceeds of Crime (Jersey) Law 1999.
Headline ICO Issuer Requirements
The guidance note stipulates that the Issuer must:
- be a company incorporated in Jersey whose registered office is provided by a regulated trust and company services provider (TCSP);
- obtain consent pursuant to the Control of Borrowing (Jersey) Order 1958 (COBO) prior to undertaking any activity;
- comply with the Commission's Sound Business Practice Policy (which now refers to "involvement directly or indirectly in ICOs or crypto exchanges or providing other services relating to cryptocurrencies" as a sensitive activity);
- apply relevant AML/CFT requirements to persons purchasing tokens from the Issuer or selling tokens back to the Issuer;
- appoint and maintain a TCSP;
- appoint a Jersey resident director who is a natural person and also a principal person of its TCSP;
- be audited;
- implement procedures to mitigate and manage the risk of retail investors investing inappropriately in the ICO and ensure that any retail investors understand the risks involved in such an investment;
- ensure that any marketing material issued by the ICO is clear, fair and not misleading.
ICO Application Process and Ongoing Reporting Requirements
As mentioned above, the Issuer is required to obtain the Commission's prior consent under COBO (COBO Consent) prior to undertaking any activity. The application package will include an analysis by the Issuer's legal advisers addressing certain prescribed matters which are set out in the guidance note, including the use of the proceeds of the ICO, the features of the tokens, how underlying assets will be managed and a description of how assets will be distributed to token holders on the winding up of the Issuer. A key part of this submission will be a Jersey legal and regulatory analysis of the ICO.
The COBO Consent granted to the Issuer will contain a number of conditions which will reflect the ICO Issuer requirements set out above. In particular, certain changes to material aspects of the ICO will be subject to the prior approval of the Commission, such as changes in specified counterparties including, in particular, the TCSP.
The guidance note contains certain additional requirements for the board of directors of the Issuer. They must advise the Commission promptly if the Issuer defaults on any token issued. In addition, when submitting the Issuer's Annual Return, the directors must confirm that there have, to the best of their knowledge, been no breaches of the COBO Consent and its conditions save as previously disclosed to the Commission.
Appointment and obligations of the TCSP
The TCSP appointed by the Issuer must have the appropriate level of knowledge, skills and experience to provide services to the issuers of ICOs, including the appointment of a natural person, which is a principal person of the TCSP, to the board of directors of the Issuer. Importantly, the guidance note imposes a number of specific initial and ongoing obligations on TCSPs providing such services. The obligations include a requirement for the TCSP to satisfy itself as to the honesty and integrity of the Issuer and the persons associated with it, an assessment of the Issuer's financial and non-financial resources, the effectiveness of the Issuer's corporate governance arrangements and arrangements in place for the protection of client assets and money, the standard of the Issuer's security access protocols and the systems it has in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing.
Specific Disclosure and Marketing Requirements
Marketing materials relating to an ICO must not be published and coins or tokens must not be issued by an Issuer unless the Commission has first issued a confirmation of "no objection".
Any offer document or information memorandum (which may be in the form of a White Paper) circulated by the Issuer must, among other matters, contain the disclosure requirements set out in the Schedule to the Companies (General Provisions) (Jersey) Order 2002 and clear risk warnings regarding the speculative nature of investment in the ICO, the risk of loss of the entire investment and the fact that the ICO is not subject to existing capital markets regulations and protections.
Marketing materials must not imply that the Issuer or the tokens are regulated by the Commission or that the Commission has considered or provided any level of assurance relating to the conduct or the financial standing of the Issuer or the tokens issued by it. The guidance note provides standard wording to describe the Jersey regulatory treatment of the Issuers.
The Commission expects Issuers to take appropriate steps to mitigate and manage the risks of retail investors investing inappropriately in ICOs. Such steps could include minimum investment amounts or other considerations relating to the individual investor's circumstances. In the event that satisfactory processes to manage these risks are not agreed with the Commission, the guidance note introduces a "safe harbour" process which requires investors to receive a risk warning and actively confirm that they understand the risks involved and wish to proceed with purchasing the tokens or coins.
Jersey is a leading jurisdiction for ICO activity. The government and the Commission are committed to innovation and fintech generally. The guidance note is an important development and provides welcome clarifications which will assist in structuring future ICOs.