Name
Global FinTech Guide
Country _ Name
Australia
SectionTitle
ICO / token sale
Body
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.

Introduction

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
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

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