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ICO / token sale
Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms.  While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.


Attitude of the country towards ICOs/token sales

The Australian blockchain industry is driving ahead with development and innovation despite regulatory headwind and uncertainty. However, reports in Australia have indicated that only 44% of Australian blockchain start-ups have survived 120 days or more after funding via an ICO. Despite crypto having been around for over a decade, in one sense or another, the market is still highly volatile as new technologies emerge and fight for market attention and adoption. Accordingly, the success of ICOs and TGEs are certainly not impervious to market sentiment. Investors, innovators, and businesses must weigh up the current state of the global crypto market (and perhaps also other traditional financial product markets) in deciding whether to pursue an ICO at one point in time or another.

Legal affairs

Presence of any explicit regulation on ICOs and the issuance of token/coins

As an ICO involves an offer of ‘financial products’ to the market (and therefore to retail clients), a product disclosure statement or a prospectus and a financial services guide that complies with the CA and other Australian regulatory instruments is usually required. Additionally, if an entity carries on a financial services business in Australia, and/or facilitates payments using crypto assets, it is also required to hold an AFSL (unless exempt). 

Even in the event that an ICO is not regulated under the CA, it may still be captured by other laws such as the Australian Consumer Law set out at Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL). The ACL prohibits conduct that crosses the threshold of being ‘misleading’ or ‘deceptive’ in various types of communications. As such, ICO or TGE materials published by businesses must comply with Australian laws. 

Further, the Australian Competition and Consumer Commission (ACCC) has delegated powers to ASIC to act against business communications that contain misleading or deceptive statements relating to ICOs. The delegation from the ACCC enables ASIC to pursue against misleading or deceptive conduct in marketing or selling of ICOs, even if the ICO does not involve a financial product under the CA. ASIC Commissioner, John Price, said, ‘If you are acting with someone else’s money, or selling something to someone, you have obligations. Regardless of the structure of the ICO, there is one law that will always apply: you cannot make misleading or deceptive statements about the product. This is going to be a key focus for us as this sector develops. 

AML/CTF reporting requirements will also apply regardless of if a crypto asset constitutes a financial product or not.

Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins

As noted above, AFSLs, CA disclosure requirements, ACL misleading
and deceptive conduct considerations and AML/CTF laws are among the most important considerations for businesses considering an ICO or TGE. 

ASIC’s information/regulatory guidance sheet 225 (INFO225) provides guidance to market participants considering an ICO in navigating their CA and ASIC Act responsibilities. Entities considering an ICO should be prepared to justify a conclusion that their crypto asset (and means of offering that crypto asset to the public – i.e. via an ICO) does not involve a regulated financial product. Further, entities are expected to know who their investors are in order to justify a conclusion that they are exempt from certain CA requirements pertaining to ‘wholesale’ or ‘sophisticated’ investors (which do not apply where retail investors are involved). 

For crypto assets and ICOs that are not financial products, the same prohibitions against misleading or deceptive conduct under the ACL apply. As noted by ASIC, conduct that may be misleading or deceptive to consumers can include:

  • stating or conveying the impression that the crypto-assets (such as coins or tokens) or ICO offered are not a financial product if that is not the case;
  • stating or conveying the impression that a crypto-asset trading platform does not quote or trade financial products if that is not the case;
  • using social media to generate the appearance of a greater level of public interest in a crypto-asset or ICO;
  • undertaking or arranging for a group to engage in trading strategies to generate the appearance of a greater level of buying and selling activity for an ICO or crypto asset;
  • failing to disclose adequate information about the ICO or crypto-asset, or
  • suggesting that the ICO or crypto-asset is a regulated product, or the regulator has approved the ICO or crypto-asset if that is not the case.

Obligations and requirements to issue token/coins

An entity will be required to hold an AFSL in any the following circumstances: 

  • if the entity is issuing crypto assets that fall within the definition of a financial product;
  • if the entity is giving advice, dealing, providing insurance, or providing other intermediary services for crypto assets that are financial products;
  • if the entity is operating a market for crypto assets that are financial products;
  • if the entity is operating a clearing and settlement facility in respect of financial products (depending on how the financial products are cleared and/or settled); or
  • if the entity’s payment services involve a ‘non-cash payment facility’ (see INFO225).

Further, if the entity is a wallet provider or custody service provider holding crypto assets that fall within the definition of a financial product, it will need to ensure it holds the appropriate custodial and depository authorisations. 

Outside of professional services fees which may need to be incurred in preparing and submitting applications for AFSLs, the online application by a company ranges from $3,721 through to $7,537 (for wholesale clients and high complexity products, which may include crypto assets). Licensees have other ongoing costs depending on the type of licence held and/or services provided. These additional costs may include levies, compliance, and audit costs.

Classification of token/coins in the jurisdiction

Coins or tokens may constitute interests in managed investment schemes (a form of collective investment vehicle), derivatives, securities, or some other form of generally defined financial product, depending on the individualistic characteristics that pertain to that coin or token.

Managed investment schemes: At a high level, a managed investment scheme i
s defined under the CA as having three core elements:

  • people contribute money or assets (such as crypto currency or other crypto assets) to obtain an interest in the scheme (subject to limited exceptions);
  • any of the contributions are pooled or used in a common enterprise to produce financial benefits or interests in property (e.g., utilising funds raised from contributors to develop the underlying platform), for purposes that include producing a financial benefit for contributors (e.g. from an increase in the value of their tokens); and
  • the contributors do not have day-to-day control over the operation of the scheme but, at times, may have voting rights or similar rights.

Securities: Where an ICO is created to fund a company (or to fund some other entity that operates like a company), the rights associated with the particular issued crypto asset may fall within the definition of a security. If the rights associated with the crypto asset (which are usually set out in the ICO’s ‘white paper’) are similar to rights commonly attached to a share, such as if there appears to be ownership of the body, voting rights in decisions of the body or some right to participate in profits of the body, then it is likely the ICO’s crypto asset classifies as a security.

Derivatives: The CA provides a comprehensive definition of a derivative. Derivatives generally derive their value from another underlying product, asset or thing which has some value proposition – such as a share, currency, commodity, or crypto asset. If, for instance, an ICO’s value is priced on factors such as the price movements of another financial product, the ICO may involve derivative products. 

Non-cash payment facilities: A non-cash payment (NCP) facility is an arrangement through which an entity makes payments, or causes payments to be made, other than by the physical delivery of currency. Just because a crypto asset is the asset used to complete a transaction, this does not necessarily mean that the crypto asset is an NCP facility. The rights and obligations associated with the crypto asset require consideration in order to ascertain whether the asset is an NCP facility.

Presence of a duty to publish a prospectus bevor offering token/coins to investors

Managed investment schemes: If an issuer of a crypto asset is operating a managed investment scheme offered to retail investors it will need to:

  • register the scheme with ASIC;
  • establish a constitution and compliance plan;
  • obtain an AFSL to act as a responsible entity; and
  • prepare and issue a compliant PDS and comply with other disclosure obligations.

Securities: If an ICO issuer is actually offering a security, a prospectus which contains all material information that consumers will require to make an informed investment decision, is required. Such offers of securities that are shares are often described as initial public offerings (IPOs). 

Derivatives: Issuers of derivative products must prepare a PDS, and providers will generally require an AFSL. The ASIC Derivative Transaction Rules (Reporting) 2013 (Cth) will also apply to AFSL holders and other ‘reporting entities’. 

Non-cash payment facilities: Where an ICO involves an NCP facility, an AFSL and PDS may be required. Other regulatory requirements may be applicable regardless of whether the issuer is required to hold an AFSL.

Presence of AML/KYC requirements that are needed to be fulfilled regarding (i) the initial issuance of token/coins and (ii) any following transfer of token/coins to third parties

AML/KYC compliance should be
carefully considered for ICO issuers. Many decentralized services are designed to allow customers to remain anonymous and keep their personal information private from any central authority. This means many crypto firms are not able to identify who their customers are, which is something Australian regulators do not find particularly palatable. 

Generally, KYC information needs to be collected from a customer prior to providing a service to that customer. This typically involves collecting the customer’s personal details and verifying those details against identification documents or online identification verification services.

The types of information that must be collected and verified will depend on the type of customer the service or offering is being provided to. AUSTRAC provides some helpful standard guidelines for information relating to individuals, domestic companies, and trustees of trusts.

Additional comments regarding (i) the legal situation for ICOs/token/coins and (ii) any following transfer of token/coins to third parties

As ICOs and TGEs involve considerable legal complexity and are subject to a broad cross-section of potentially applicable laws, considerable due diligence should be conducted prior to engaging in such activity.

Economic conditions

Market size for ICOs/token sales and existence of any previous regulated ICO/token sales in the jurisdiction

Australia is not new to the ICO landscape. In 2017, Perth based company Power Ledger raised $34 million backed by roughly 15,000 supporters. Since then, a number of other Australian entities have utilised ICOs to raise capital. Some reports note that ICO investors in Australia have contributed an output volume that is 1.42x higher than the Australian population.

Additional comments regarding the economic situation for ICOs/token sales or what companies must be aware of in this business area

Whilst ICOs can be a powerful capital raising tool used by issuers, regulators are on watch due to the number of reported scams in the space, as well as the impact that these scams have on market participants (especially retail investors). For instance, the infamous Bitconnect scam saw founders and developers raise and take approximately $14.5 million USD on the back of unsubstantiated representations promoting “guaranteed risk-free returns of anywhere between 91% up to 571% per annum”. Once it became clear that the founders and developers were offloading their coins whilst at the same time enticing investors with fraudulent claims as the value rose, the value of Bitconnect’s coin dropped from $432 to $25.91 USD in just 11 days, impacting an estimated one and a half million investors. 

Accordingly, ICO investors must be particularly careful in participating in ICOs. Similarly, ICO issuers must ensure compliance with Australian laws to avoid being penalised by regulators for breaches of Australian law.



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