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 FMA is open to consultation with providers in relation to ICOs and token sales in New Zealand. The legislative regime under which the FMA is constituted operates under the express purpose of promoting innovation and flexibility within New Zealand’s financial markets.
Presence of any explicit regulation on ICOs and the issuance of token/coins
There are no specific regulations relating to these. As with other FinTechs, regulation is provided for under broader legislative regimes such as under the FMCA.
Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins
Not per se and certainly nothing as specifically relating to these – the level of regulatory compliance (if any) is dependent upon what products are being provided and to who.
Obligations and requirements to issue token/coins
It is highly likely that these activities will be captured under the FMCA and FSPA as either “Financial Services” and/or “Financial Products”.
Providers of financial services must register as Financial Service Providers in accordance with the FSPA with the associated costs as outlined at 1.a. ii. above.
Whether a licence is required will depend upon the types of services/products being provided. If the provider is offering equity securities, debt securities, managed investment products or derivatives to retail investors then they will need to consider whether they are required to get a licence.
Classification of token/coins in the jurisdiction
There is no specific classification relating to these. All three (3) could fall within the definitions of “Financial Products” and “Financial Services” under the FMCA and FSPA.
Presence of a duty to publish a prospectus bevor offering token/coins to investors
Subject to the size of the offering, if the offering is to retail investors and relates to equity securities, debt securities, managed investment products or derivatives then it is likely that a PDS will be required. If a statutory exemption applies, then this must be stated on the documentation relating to the offer.
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
In most instances, managing client funds will require compliance with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT) and its associated regulations.
The AML/CFT provides for different levels of identity verification (referred to as customer due diligence (CDD) depending upon the perceived AML risk and the entity or trust from which the funds are flowing. CDD will, at minimum, require a full set of personal details from the client and obtaining photo ID and proof address verification. In some cases, enhanced CDD will be required (for instance, if the client is a trust) and further information will be required such as the trust deed or source of wealth evidence, sufficient to identify the beneficial owners.
Additional comments regarding (i) the legal situation for ICOs/token/coins and (ii) any following transfer of token/coins to third parties
Providing financial products and/or service to retail investors will also require compliance with the Privacy Act and New Zealand’s consumer protection legislation.
Market size for ICOs/token sales and existence of any previous regulated ICO/token sales in the jurisdiction
There is insufficient publicly available data relating to revenues, transactions, and customers. We are not aware of any ICO occurring within the New Zealand jurisdiction. Token sales certainly occur in New Zealand but by a large share the issuers are not New Zealand based. We expect this space will grow in the near future.
Additional comments regarding the economic situation for ICOs/token sales or what companies must be aware of in this business area