New startups seeking venture capital are increasingly looking to fintech options to build their business and raise the required funds. Blockchain technology has provided an alternative to achieve this – in the form of Initial Coin Offerings (ICOs).
ICOs are new forms of funding, which are used to raise funds online from various investors. Investors use cryptocurrency (e.g. Bitcoin) to purchase coins online for a set period of time. ICOs are global offerings and one of the risks is that they can be created and accepted anonymously.
In Australia, the regulation of ICOs depends on the circumstances of each ICO – for example, the structuring and operation and any rights which attach to the coin offered through the ICO.
There are a range of scenarios where an ICO may fall within the AFSL regime, including the following:
- Managed Investment Scheme: where the value of the coin acquired is affected by the pooling of funds from contributors or the use of funds under the scheme, the ICO is likely to be a MIS.
- Offer of shares: depending on the rights attached to the coins, the ICO may fall within the definition of a share where an ICO is created in order to fund a company.
- Derivative: where an ICO produces a coin that is priced on factors such as a financial product, or the movement of an underlying market or asset price which results in payment being required as part of the rights or obligations which attach to the coin, the coin may fall within the definition of a derivative.
- Trading of coins on a financial market: any platform that enables the trading of the ICO may involve the operation of a financial market where the ICO (or underlying coin) is found to be a financial product.
- Non-cash payment facility: an ICO may involve a NCP facility if it includes an arrangement that allows payments to be made by a number of payees in this form, or payments to be started in this form and converted to fiat currency to enable the completion of payment.
Startups utilising ICOs should consider the structure of the ICO in order to determine whether an AFSL is required or whether other aspects of the Corporations Act apply to your business. Sophie Grace can assist in determining whether the AFSL regime applies to the ICO and can assist in relation to any further compliance or disclosure obligations.
The relationship of ICOs to crowd-sourced funding (CSF) is something ASIC has been clear on in their guidance. Under the new laws, CSF will be a financial service and there are specific rules which apply to CSF, including the requirement for providers of this service to have an AFSL. ASIC advises, that care should be taken to ensure the public is not misled about the application of CSF laws to an ICO. Please refer to our previous blog article for further information on Crowd-Sourced Funding AFS Licenses.
ICOs also fall within the scope of the general consumer laws, including the prohibition against misleading and deceptive conduct. Startups looking to utilise ICOs as a method for raising funds should ensure any promotional material does not mislead or deceive potential investors. This includes information about the benefits of ICOs, any potential returns and the protection afforded by the regulation (if any) of the ICO under the AFSL regime.
Please contact Sophie Grace directly for further information on ASIC’s guidance for ICOs.