The Monetary Authority of Singapore, the Central Bank and financial regulator of the sovereign city/island state, has followed up on its previous announcements and published an ICO guide. Its Guide to Digital Token Offerings aims to address the applicability of financial regulation in relation to Initial Coin Offerings. While most of it is old news and confirms the status quo, it also contains some interesting aspects worth looking at and we also explain what the guidance means for ICOs in Singapore in practice.
The Smart Nation
The power of technology and innovation sits at the centre of Singapore’s Smart Nation Agenda and its central bank, the Monetary Authority of Singapore (MAS), has embraced financial technology and digitalisation. The mission of MAS is to promote sustained non-inflationary economic growth, and a sound and progressive financial centre and it looked like Singapore would become the dominating hub for cryptocurrencies and ICOs. Like other regulators, the financial watchdog saw a need to warn consumers about the dark side of ICOs and the potential risks involved when investing in token offerings. On 1 August, MAS had already clarified in a statement that the offer or issue of digital tokens in Singapore will be regulated by MAS if the digital tokens constitute products regulated under the Securities and Futures Act.
MAS has now published more guidance in respect for parties offering digital tokens in Singapore and the respective regulatory consequences. While the “Guide to Digital Token Offerings” is not a conclusive document and is not legally binding, it touches on the central questions on how securities laws affect an ICO and the people behind it.
The two main securities laws that the guide refers to are the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA). The basic requirement for the application of these acts is obviously the categorization of tokens as a financial instrument or as it MAS puts a “capital markets products“, which is a broad term that includes any kind of securities, futures contracts, contracts or arrangements for the purposes of foreign exchange trading, contracts or arrangements for the purposes of leveraged foreign exchange trading, and such other products as MAS may prescribe as capital markets products. As in other jurisdictions, whether a specific token falls within this definition needs to be determined on a case-by-case analysis, but there seems to be a strong likelihood that most ICOs would do so. MAS gives a number of examples of the nature of a token, i.e. a token may constitute an equity share, a debt instrument or even a unit in a managed fund (“collective investment scheme”).
If and when a token offering falls within any of those definitions, it will have to comply with the respective requirements, in particular the need to accompanied the token offering by a prospectus that is prepared in accordance with the SFA and is registered with MAS. The regulator had already issued a helpful document on the subject of on good drafting practices for prospectuses that highlights three principles:
1) Use plain English: Using plain English means presenting information in a clear, concise and effective manner so that the reader can understand the information at first reading.
2) Present information in a clear, concise and logical manner: Clear, concise and logical presentation enhances the effectiveness of plain English, allowing investors to navigate and grasp information disclosed in the prospectus more quickly and easily.
3) Keep the Prospectus as short as possible: Shorter prospectuses are generally easier to read. You should always prepare prospectuses that are as short as possible without compromising accuracy or completeness of the information required to be included.
Exemptions from the prospectus requirements
While these guidelines certainly help, the reality are often lengthy documents that require significant legal input and ramp up costs quickly. A solution to avoid this would be to get an exemption from the prospectus requirements if the offer (a) does not exceed S$5 million (“Small Offer”), (b) is made to no more than 50 persons, (c) is made to institutional investors only, or (d) is made to accredited investors. How practical these exemptions are is a different question though: In the current climate, most ICOs exceed the limits of a Small Offer, which is the equivalent of approximately US$3.7 million. The limitation to 50 people is even more so against the nature of a decentralised crowd fundraising. And the reduction to institutional investors and/or accredited investor does not only diminish the pool of parties permitted to invest in an ICO and as such increasing the difficulties to reach the target; it also increases the compliance obligations for a token offering.
Naturally, this is in the interest of investor protection and since ICOs are high risk investments as well as prone to being used by fraudsters in some cases, the regulator’s intentions are understandable. However, it sounds a little bit less like a financial centre that is embracing innovation at all costs, but that doesn’t need to be a bad thing in the end.
Middle-men and extra-territoriality
The guide also addresses two other aspects that need to be discussed in these circumstances: First, that of the intermediary, either in the form of an ICO platform, a cryptocurrency advisor or an exchange. Secondly, the question of applicability of the MAS rules for activities happening in another jurisdiction that have a connection to Singapore though. With regard the intermediary all cases are, unsurprisingly, the same: if it is a regulated activity, it needs to be authorised. More interesting is that in that way Singapore has quietly shuffled cryptocurrency exchanges into its existing legal framework through the back door rather than establishing specific rules as Japan has. In the end, a question of regulatory approach that may be more interesting for scholars than people practically involved, but nonetheless noteworthy.
On the subject of extra-territoriality, MAS makes it clear that if there is a connect with the Singaporean jurisdiction, its financial rules will apply, too. Again, pretty much what applies everywhere else and in practical terms, it may be less of an issue as Singapore has been more important as an outbound platform for ICOs than as an investor pool. It means though that ICOs need to consider the financial regulations of Singapore as well if there is a chance that investors have their origins there.
It is also an indication of what other regulators are likely to confirm expressly if they haven’t done so already like ESMA did earlier this week.
MAS concludes the first part of its guide by highlighting the need to comply with regulations in respect of Money Laundering and Countering the Financing of Terrorism. This stresses the importance for token offerings not to take their obligations in that field lightly as the consequences may be severe from hefty fines to prison time. The financial watchdog somewhat sneakily confirms in the last paragraph of this section that it will introduce new regulations called the New Payments Framework that will also address AML/CFT rules regarding the dealing or exchange of virtual currencies for fiat or other virtual currencies.
ICO case studies
Furthermore, the guide also contains a number of case studies explaining whether a token should be considered a capital markets product according to the MAS. Again, they are based on assumptions that have already been discussed in the industry at length, but it is nonetheless helpful as it may be easier to understand for someone with little or no legal background. The 5 cases studies examine situations where the token grants access rights (= no security & no application of Singapore regulation), an offering is a fundraising for investments (= security & Singapore regulations applicable), an offering is based somewhere else and markets to Singapore as well (= Singapore regulations applicable), where the Singaporean token offering for investments is closed to persons in Singapore (= Singapore regulations in part applicable), a loan token platform (= security & Singapore regulations applicable), and a virtual currency exchange for cryptocurrencies that are not securities (= Singapore regulations not applicable, but review & monitoring of situation required).
Do the case studies substitute a comprehensive analysis of a token offering by an expert? No, certainly not, but it gives some indication as to what people are to expect and highlights that in most cases financial regulations will be applicable at least to some extent.
What does it mean for ICOs in Singapore?
So, what does this guidance mean for ICOs in Singapore then? First of all, it gives some regulatory certainty and should help to provide for a higher quality of token offerings. It also means that the process of launching an ICO in Singapore becomes more burdensome, but in a way even ICOs in the past should have considered these aspects. MAS rounds its guidance off with a reference to its Sandbox scheme that is also open to token offerings and gives the opportunity to test the waters. It also shows that the regulator is willing to show some flexibility as long as the will to comply is shown. After all, Singapore will still be keen to be considered a forward thinking jurisdiction when it comes to financial innovation.