ASIC unveils new ICO guidelines


James Riley
Editorial Director

The corporate regulator has released its first set of guidelines for ICOs – or Initial Coin Offerings – detailing how the ‘Wild West’ of startup capital raising is to be governed in Australia.

ASIC unveiled guidelines late last week that demonstrate how ICOs fall into a range of existing regulations, and warning investors of a range of risks associated with blockchain-based fund raising methods.

The regulator has adopted a light-handed approach to ICOs in line with the US and Singapore, and in stark contrast to China, which recently issued a blanket ban on ICOs.

Danielle Szetho: The guidelines provide clarity and direction for startups and investors

An ICO is a form of capital raising where a blockchain-based platform or project issues a number of ‘tokens’ which can be bought in exchange for digital currencies, including bitcoin.

These tokens are unique to the issuing company, and often grant the buyer a stake in the company or the ability to participate in the platform in the future.

Similar to crowdfunding, ICOs are aimed at supporters and early adopters who are hoping the project will take off in future and the tokens will increase in value.

ICOs are currently largely unregulated. While an estimated $US1.6 billion has been raised globally through the method in the last 12 months, several projects have turned out to be scams, and investors are offered no recourse to recover their money.

ICOs are notoriously difficult for regulators to control, and often fall between the cracks of existing acts and legislation.

ASIC has now released its guidelines and a new information sheet explaining how the Corporations Act 2001 applies to businesses raising funding through an ICO.

As reported by InnovationAus.com early last month, the regulator will not intrduce any new policies or rules, instead clarifying how it will approach the funding method and how existing laws will be applied to it.

“We want to ensure innovative firms understand the regulatory framework they may be operating under and ensure they meet any obligations they may have when raising funds in Australia,” ASIC commissioner John Price said.

“ICOs are highly speculative investments, are mostly unregulated and the chance of losing your investment is high,” he said.

“Consumers should understand the risks involved, including the potential for these products to be scams, before investing,” he said.

ASIC is aiming to clamp down on scam ICOs and gain a greater control over the method while not stymying its growth potential.

“ASIC recognises that ICOs have the potential to make an important contribution to the options available to businesses to raise funds and to investment options available to investors. An ICO must be conducted in a manner that promotes investor trust and confidence, and complies with the relevant laws,” the information sheet said.

How the existing regulations apply to ICOs depends largely on the ‘tokens’ that are put on offer and the rights that are attached to them.

Depending on this, an ICO may constitute a managed investment scheme, an offer of shares, an offer of derivative or a non-cash payment facility, according to ASIC, and different elements of the Corporations Act will then apply.

Fintech Australia worked with ASIC to develop the guidelines, and its CEO Danielle Szetho said it is a “considered and balanced” approach to regulating ICOs.

“[The guidelines] bring much-needed clarity and direction for companies seeking to understand when their ICO tokens might come under different parts of Australian regulatory framework,” Ms Szetho told InnovationAus.com.

“In Australia we know there’s some innovative, legitimate blockchain companies launching ICOs, so this guidance hopefully makes it clear that it’s possible to do an ICO from Australia whilst also making it clear that any fraudulent activity will be picked up and treated as such,” she said.

“Long-term that’s necessary to build consumer and investor confidence in the sector, which is why our members support it.”

The guidance is a positive step forward for the local sector in Australia, Stone & Chalk Melbourne general manager and Fintech Victoria founder Alan Tsen said.

“One of the big challenges in the space is actually getting regulators to say something, so the fact they’ve come out and written what I think is a pretty thorough piece of thought leadership around it is really good for the industry,” Mr Tsen said.

The information sheet issued by ASIC provides a checklist of sorts for companies looking to undertake an ICO, outlining the different forms it can take and the legal requirements for each.

The type of “token” issued as part of the ICO is crucial for this, as is the accompanying white paper which is meant to outline the intentions behind the raise, Mr Tsen said.

“It turns on what you’re saying in your white paper. Some people put them together and think it’ll be fine, but a lot of the indicative factors as to what an ICO is going to look like comes from the white paper,” he said.

“Founders need to be cognisant of the fact the white paper shows intent for what they’re trying to achieve with the ICO.”

As clarified in the guidelines, if an ICO has the attributes of an investment, with the token representing an interest in the scheme, granting voting rights or similar rights, it may constitute a managed investment scheme under Australian law.

If this is the case, the issuing company under law has to comply with a range of disclosure, registration and licensing obligations under the Corporations Act.

An ICO will constitute an offer of shares if its purpose is to fund a company, and the tokens come with a number of rights, including ownership of the comping, voting rights and entitlement to a share in future profits.

These rights will be found in the company’s white paper, which it issues before undertaking an ICO. A company undertaking an ICO in this form will have to prepare a prospectus similar to a company going through an IPO.

An ICO is an offer of a derivative if the token’s price is based on factors like financial product or underlying market or asset price moving up or down before a time or event.

Under the ASIC guidelines, if an ICO token is found to be a financial product, then the platform that enables investors to buy or sell the product – the platform facilitating the ICO – will have to hold an Australian market licence.

ASIC has also tried to differentiate ICOs from equity crowdfunding, with the legislation allowing unlisted public companies to undertake an equity crowdfunding round coming into effect at the end of last week.

Sergei Sergienko, CEO of blockchain consultancy and marketing firm ICOPromo, said the guidelines are a positive step forward.

“It’s very commendable that ASIC is looking intently at ICOs and is taking a calm and measured approach to help provide guidance to interested parties in Australia,” Mr Sergienko said.

“This is certainly a welcomed announcement as it shows the regulator is listening and is being proactive in taking a collaborative approach to working with the blockchain startup community in Australia.”

To accompany its information sheet, ASIC also updated its MoneySmart site with warnings and precautions for investors looking to be involved with an ICO.

“ICOs are highly speculative investments that are mostly unregulated, and some have turned out to be nothing more than scams,” the site reads.

“Token values can fluctuate drastically and it’s possible for a computer hacker to steal them. Before you decide to invest in an ICO you’ll need to do a lot of research to ensure they are not a scam.”

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