The Monetary Authority of Singapore today (August 1) issued guidelines tightening regulation of how technology companies raise money by issuing digital tokens.
The MAS will require companies to submit a prospectus if their token sale, also known as an initial coin offering (ICO), constitutes a security, as regulated by the Securities and Futures Act.
ICOs enable crowdfunding by startups, which can raise large amounts of money in minutes in the form of donations into a bespoke token, akin to a private currency. Some can also be structured as debentures.
It’s the token, rather than the business, that is being sold – but some tokens promise investors rights that could include ownership or a claim on future revenues, akin to owning stock.
The MAS is now saying that in such cases, it would consider these securities – and therefore require issuers to submit a prospectus, rather than just a white paper outlining how proceeds could be used.
White paper v. paperwork
Marcus Chow, Singapore-based partner at Bird & Bird, a law firm, says defining what a prospectus should mean for an ICO has yet to be determined.
“The big question is what goes in a prospectus for an ICO,” he told DigFin.
A prospectus for a traditional equity or bond issue is a legal document full of detailed information about a company, its principals, its balance sheet, corporate structure, track record, and so on. “But a white paper for a company in a token sale often describes nothing but a business concept.”
It may take a number of test cases before any consensus emerges on what this entails. “It’s still a new concept, and no one understands the law around ICOs,” said Jonathan Lee, co-founder of 300cubits, a Hong Kong startup now planning its own token sale.
The first ICO was issued by blockchain developer Ripple in 2013, but it has been the advent of Ethereum, a blockchain technology with wide application and smart contracts, that has fuelled this financing method: most ICOs now only accept Ether crypto-currency to exchange for tokens.
ICOs have become as big as mainstream initial public offerings: in July, a Singapore-based startup, Tezos, raised $232 million. So far this year, ICOs have raised more than $1 billion, setting them in competition with traditional capital-markets underwriting.
However, given the new and unregulated nature of this business, ICOs have attracted scammers and get-rich-quick schemers, as well as legitimate entrepreneurs. Regulators such as MAS are particularly unsettled by the prospect of ICOs being used to launder money and finance terrorism.
MAS was an early mover in terms of seeking to regulate intermediaries involved in digital currencies. It issued guidelines in 2014 to that effect, while acknowledging it wasn’t going to regulate virtual currencies per se.
That was when Bitcoin was the prevalent alt-coin. Bitcoin is likened to gold because it doesn’t ‘do’ anything: the digital currency and its blockchain infrastructure exists for its own sake. But Ethereum and other innovations have greatly expanded the use of these technologies, and tokens today function as more than virtual currencies.
The diversity of ICOs
Each token is unique, however, as it is meant to serve the ecosystem created by a technology, as outlined in white papers. Lee at 300cubits says some ICOs raise money in ways that are not like securities. For example, 300cubits plans to sell tokens to enable prospective customers to book container ships using its token instead of U.S. dollars.
The company has been careful to avoid having its tokens be perceived as securities. “In our case, token-holders can secure ship bookings,” like a coupon.
The MAS guidelines are likely to separate ICOs, presumably with high-quality issuers willing to go through the hassle of hiring lawyers and filing a prospectus in order to be seen as legitimate, according to several people following these events.
This could have an impact on competing jurisdictions.
“This will impact the Hong Kong Exchange’s plans for a new board,” says a consultant, noting that ICOs challenge HKEx’s desire to launch a ‘fourth’ board and a private, blockchain-enabled market to attract startup listings.
In Hong Kong, the regulators officially consider Bitcoin a commodity, rather than a currency; so does the U.S. Fintech professionals speculate that these views may change, because they are based on the brief era when the main digital currency was (the gold-like) Bitcoin, and before tokens began to be issued with functions akin to stocks or bonds.
This would not be a stretch for Hong Kong, where regulators have already decided equity crowdfunding falls under the Securities and Futures Ordinance, and therefore requires a license or be restricted to professional (rich) investors.