10 things to look for in initial coin offerings
While the Australian Securities and Investments Commission (ASIC) has recently stopped a number of retail initial coin offerings and token generation events (ICOs), The Fold Legal has found that tokens don’t always fit neatly into financial product categories.
ASIC recently stopped a number of ICOs and took action in respect of a completed ICO and even issued a stop order on a PDS for a crypto fund.
The Fold Legal said that ASIC’s two key concerns - misleading and deceptive information in the materials used to market the ICOs and breaches of the financial services laws - have repercussions for anyone thinking about working with crypto assets in Australia.
It said if a crypto asset is a “financial product” under the Corporations Act, a raft of regulatory requirements will apply to not only the ICO, but also to anyone broking the token or listing it on an exchange.
“So, unless you understand and can comply with these requirements, take care to ensure that the crypto assets you deal in are not financial products,” the law firm said.
However, The Fold Legal said this isn’t always black and white and that legal analysis is often required. Many tokens are hybrids and exemptions are available in some cases, the law firm said.
The law firm therefore provided a quick list of things to look out for. It said if one or more of these features are present, it said the token is likely to be a financial product:
- Token issuers can buy back the coin
- Token holders have rights to profits of the enterprise
- Tokens are backed by an asset or commodity
- Tokens can be converted into another asset
- Investors have a right to receive profit now or at a later date
- Investors have the right to buy or sell the coin in the future
- A ‘smart’ or self-executing contract is embedded in the design of the token
- Tokens can be converted into shares or equity
- Tokens holders are lending money and can expect a repayment of the money
- Investors are pooling resources to invest in the token
The Fold Legal said that businesses that don’t identify whether the tokens in which they deal are financial products and prepare to comply with the relevant requirements early on, may:
- Find that timelines for any ICO will change significantly;
- Have issues finding exchanges and markets who can support secondary sales of the token; and
- Face penalties or the risk that the offering will be shut down by ASIC – which could adversely impact your ability to raise funds and damage your reputation.
“So, it’s wise to get advice at the outset. It’s also a good idea to speak to ASIC directly, even if the tokens in which you deal aren’t financial products as ASIC is now responsible for all ICOs and businesses dealing in crypto assets,” the law firm said.
Recommended for you
The Reserve Bank of Australia (RBA) has lowered rates to a level not seen since mid-2023.
Financial Services Minister Stephen Jones has shared further details on the second tranche of the Delivering Better Financial Outcomes reforms including modernising best interests duty and reforming Statements of Advice.
The Federal Court has found a company director guilty of operating unregistered managed investment schemes and carrying on a financial services business without holding an AFSL.
The Governance Institute has said ASIC’s governance arrangements are no longer “fit for purpose” in a time when financial markets are quickly innovating and cyber crime becomes a threat.
