The Australian Securities and Investments Commission (ASIC) has updated its INFO225 Initial coin offerings and cryptocurrency information sheet to further clarify its position on the treatment of initial coin offerings (ICOs). ASIC issued the first information sheet in September 2017 to provide guidance on the potential application of the Corporations Act 2001 (Cth) (Corporations Act) to businesses seeking to hold an ICO (as discussed in our previous insight). ASIC Commissioner, John Price, recently indicated that the information sheet would be updated in coming weeks.
Broadly, this update has expanded the scope to further clarify the corporate and consumer law consequences that might arise in an ICO context, including the prohibition on misleading and deceptive conduct. Notably, on 19 April 2018, ASIC received delegated powers from the Australian Competition and Consumer Commission (ACCC) to enable ASIC to take action against misleading or deceptive conduct in marketing or issuing in ICOs (regardless of whether it involves a financial product). ASIC has stated that it will use this power to issue further inquiries into ICO issuers and their advisers to identify potentially unlicensed and misleading conduct.
Legal status of ICOs and crypto-assets
Misleading or deceptive conduct
Misleading or deceptive conduct is prohibited under the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth). This prohibition applies to conduct in general trade or commerce, as well as in connection with financial products and providing financial services.
As has been the longstanding position, ICOs and crypto-assets that constitute financial products will attract the application of the Corporations Act. The Corporations Act provides for its own prohibitions against misleading and deceptive conduct. However, even if the ICO and crypto-asset do not constitute a financial product, the prohibition will continue to apply by virtue of the ACL. The question is not whether the conduct actually misleads or deceives purchasers, but whether the conduct is capable of misleading or deceiving purchasers.
ASIC has indicated that misleading or deceptive conduct to consumers can include:
- using social media to create the appearance of greater levels of public interest in an ICO;
- creating the appearance of greater levels of buying and selling activity for an ICO or a crypto-asset by engaging in (or arranging for others to engage in) certain trading strategies;
- failing to disclose appropriate information about the ICO; or
- suggesting that the ICO is a regulated product or endorsed by a regulator when it is not.
ICO issuers should ensure that promotional materials and communications do not mislead or deceive potential customers and do not contain false information. It is important to note that these laws may apply even if the ICO or crypto-asset issuer is located overseas.
Corporations Act application
ASIC has also stated in more emphatic terms that the Corporations Act will apply to ICOs and tokens that constitute financial products, irrespective of how they are described. The mere fact that an issued token may be described as a utility token or a digital currency does not mean it is not a financial product. All of the rights and features associated with the token will be heavily scrutinised by ASIC in making this determination.
Financial products and financial markets
Based on the updated guidance, it appears that ASIC’s position on the characterisation of ICOs as financial products has remained unchanged since the previous information sheet. Additionally, businesses are reminded that where they operate a platform that enables financial product token holders to buy or sell these tokens, this may involve the operation of a financial market and will trigger the requirement to hold an Australian market licence or be exempt from the requirement to hold one. Please read our previous insight for more information on these matters.
Financial products referencing crypto-assets
It may be the case that entities will propose to issue financial products that are linked to or reference crypto-assets. Where a financial product does reference a crypto-asset, it will fall within the scope of the standard regulatory regime under the Corporations Act that applies to that kind of product.
ASIC has reminded businesses to carefully consider the characteristics of the new product. Where there is a proposed new financial product that invests in, or gives consumers exposure to, crypto-assets, this may require a new licence or licence variation to provide the financial services involving the proposed product.
ASIC has also provided some clarity for businesses seeking a new licence or a licence variation to offer these types of products, including:
- where ASIC receives a licence application or variation application in relation to a crypto-asset related financial product, they will assess the application in accordance with the usually applicable policy based on their risk-targeted framework;
- ASIC considers that applications regarding crypto-asset related financial products are likely to be novel applications. If so, assessment of the application will likely take more time; and
- ASIC will work with businesses to identify issues in an application, indicating that additional guidance will be issued to an industry where necessary.
Where a financial product is intended to be an exchange-listed product, ASIC has also reminded licensed market operators in Australia that they are expected to ensure the suitability of issuers and products that they are permitted to list and trade on their markets.
ASIC’s guidance represents a continued effort by the regulator to proactively engage in this space and provide greater regulatory certainty for ICOs.