ASIC has released guidance on initial coin offerings (ICOs) and the potential impact legislation will have on issuers.
Just because issuers are offering coins rather than shares or units does not mean that they will avoid the obligations of fundraisers under the Corporations Act 2001 (Cth) (Act). To determine whether any of Australia’s current laws apply, offers must be examined case by case to determine whether they fall into any of the established categories of investment. ASIC’s primary concern with any offering is protecting investors and consumers and minimising risks associated with investment. Because of this, ASIC’s main focus is on the features, rights and obligations attached to ICO coins.
ASIC will draw analogies between the nature of ICOs and established investment frameworks to determine whether an ICO falls into a certain category and triggers certain sections of the Act. ASIC has outlined that there are instances where an ICO could be a managed investment scheme, an offer of shares or an offer of derivatives based on the circumstances, rights and obligations attached to the transactions.
In a way, ASIC does not see ICOs as a new type of investment, but rather a new tool for facilitating investment transactions. Although it is accepted that distributed ledger technologies such as blockchain have been effective forms of carrying out transactions, it does little to reduce the risks associated with investing.
ICOs and Share offerings
A bundle of rights may be attached to the issue of a coin under an ICO. If the rights seem to be similar to those attached to shares, such as voting rights and limited liability, then it is likely that the coins will fall within the definition of a share. If ASIC considers the coin to be a share, then the offer will be treated as an Initial Public Offering and ASIC will require the issuer to prepare a prospectus.
ICOs and managed investment schemes
An ICO may be considered a managed investment scheme and therefore the relevant disclosure and regulation obligations will apply. A managed investment scheme is defined in the Act as an arrangement where people contribute assets to obtain an interest in the scheme, where the assets are pooled together to produce financial benefits and the contributors do not have day-to-day control over the operation of the scheme. If the value of a coin is affected by the pooling of funds from contributors or use of those funds under the arrangement, the ICO may be deemed to be a managed investment scheme and the issuer will have to comply with managed investment scheme obligations.
ICO’s and derivatives
It may be that the value of a coin from an ICO is based on factors such as a financial product or underlying market or asset price moving in a certain direction before a certain time. If the coin is similar to a derivative (such as an option or future contract), the coin will be deemed to be a derivative and the issuer will have to comply accordingly.
Other factors to consider
In the event that an ICO or underlying coin is deemed to be a financial product, ASIC has confirmed that a ‘coin market operator’ will be required to hold an Australian Market Licence.
ASIC cautioned that ICOs are not necessarily covered by crowd-sourced funding legislation. Crowd-sourced funding laws introduced on 29 September 2017 restrict the amount and frequency that investors can invest and fundraisers can raise over a period of time. ICOs are not under such restrictions and it would fall to an issuer of an ICO to demonstrate that the crowd-sourced funding restrictions apply to the offer for it to have the benefit of the crowd-sourced funding laws.
For more information
ASIC is keen to ensure that innovation is fostered appropriately with consumers and investors are adequately protected. ASIC has said that it is willing to engage with consumers and investors through the ASIC Innovation Hub.