New lease of life for ICOs
Jamari Mohtar 

A new lease of life is in the offing for the Initial Coin Offering (ICO) market when it got a wake-up call from Singapore’s financial regulator on Nov 15 in the form of a detailed guideline on digital token offerings. This followed from the Monetary Authority of Singapore’s (MAS) announcement in August that it would consider some digital tokens as capital market-like securities.

The city-state is not the first country to make this announcement. In July, the US Securities and Exchange Commission (SEC) had ruled that some of the digital coins for sale in ICOs are actually securities and thus, subject to the agency’s regulations.

The SEC had even charged in September two companies running ICOs with defrauding investors and selling unregistered securities. The owner of the two firms, claiming his tokens were backed by real estate and diamonds, had raised US$300,000 from investors by just putting a white paper on a website.

This case has opened a can of worms because many, especially those in the cryptocurrency and block-chain technology movements, are waiting for clearer guidance from the SEC on what makes a digital token a securities token.

Then there is also a court precedent to be reckoned with, known as the Howey test. In a 1946 US Supreme Court case SEC v. Howey, securities is defined as a scheme which “involves an investment of money in a common enterprise with profits to come solely from the efforts of others”.

This has galvanised the US legal fraternity, especially those associated with the crypto and blockchain technology movements, to come out with their own interpretations of what constitutes a token that is outside the purview of the securities laws. This, in turn, revolves around failing the Howey test for a token not to be considered as securities.

The simple agreement for future tokens (SAFT) framework engineered by a New York legal firm and firms with a vested interest to make ICOs compliant with US securities laws, for instance, argues that one way to fail the Howey test is tokens must be delivered to investors only after a functioning product or service is in place, that is, after having a utility value.

“The network and the token must be genuinely useful such that they are actually used on a functional network,” says SAFT.

Others feel this is not good enough since the tokens were issued before they have a utility or functional value.

What motivated SAFT to come out with this framework is the unlocking of a major source of liquidity (US investors) to flow into these ICOs in view of the fact several major ICOs had excluded US individuals then for fear of breaching the securities laws.

While the US was “mired” in a court precedent to come out with a detailed guideline on whether an ICO is just like an IPO (Initial Public Offering), MAS has its work cut out in being the first to announce a set of neater, clearer and seamless guidelines on ICO, thanks to the city-state’s comprehensive securities laws.

All MAS has to do is to use the existing securities laws governing its capital markets and then see whether the structure and characteristics of a token, including the rights attached to it, have some commonalities to securities under the republic’s Securities and Futures Act (SFA) and the Financial Advisers Act (FAA).

For the uninitiated, an ICO works the same way as an IPO in that it’s a way for a company to raise money from the public. In a typical ICO, which can last anywhere from a few hours to a few weeks, the company invites people to buy digital tokens to fund a project.

These projects involve blockchain software such as Ethereum, which runs across multiple computers in order to create a tamper-proof digital ledger. The software can also be programmed to do things like create smart contracts or make investments.

The issuance of MAS’ guidelines does not mean that it will regulate all ICOs. The guideline may affect only the offering of digital token that can be construed as a product of the capital markets.

What constitutes a securities token?

MAS has provided three criteria in which digital tokens can be construed as capital market-like products based on their structure and characteristics. These are:

• A share where it confers or represents ownership interest, liability of the token holder, and mutual covenants with other token holders in the corporation;

• Debenture, where it constitutes or evidences the indebtedness of the issuer of the digital token in respect of any money that is, or may be, lent to the issuer by a token holder; or

• A unit in a collective investment scheme (CIS), where it represents a right or interest in a CIS, or an option to acquire a right or interest in a CIS.

All requirements of an IPO under the SFA, including exemptions, may be applicable to such tokens in an ICO. This includes the issuance of a prospectus.

If you’re wondering why I use the words “may be applicable” instead of “will be applicable” or “is now applicable” since the SFA is an existing legislation, that’s because the MAS’ statement in the form of a paper entitled “A Guide to Digital Token Offerings” uploaded on its website has the following disclaimer:

“The contents of this guide are not exhaustive, have no legal effect and do not modify or supersede any applicable laws, regulations or requirements.”


Hint of transition period

This actually means ICO and cryptocurrencies, like bitcoins, remain unregulated items in the republic for now. But the guide seems to be hinting at a transition period before these could be regulated.

This cautious approach is understandable and admirable. Understandable because cryptos and ICOs are new “animals”; admirable since the underlying technology behind their creation and issuance is the distributed blockchain ledger technology (DLT). This is a disruptive innovation that has the potential for varied-use cases that could reform our financial markets, supply chains, consumer and business-to-business services, and publicly-held register.

But as with all things, innovation has its downside too as it can lead those with a nefarious bent of mind to “improve” further on the innovation to take advantage of the loopholes and lacunae, if any, in order to scam the investing public.

In my next column, I will touch on the fate of a trading platform like Luno – the only Malaysia-based crypto exchange in the world that deals directly with the ringgit in your bank account – under the MAS guidelines.

Jamari Mohtar is a veteran journalist who used to work in Singapore. Comments:

This article first appeared in Focus Malaysia Issue 261.