Initial Coin Offerings – not immune from regulation

Initial Coin Offerings – not immune from regulation

21 August 2017

Despite being a novel and still-developing form of capital raising, initial coin offerings (ICOs) raise significant questions as to how legal obligations may be enforced and applied, according to insights released today from leading law firm, Russell McVeagh.

As the world of crypto-finance continues to develop, the firm's 'Initial Coin Offerings' article considers whether New Zealand's Financial Markets Conduct Act 2013 (FMCA) could apply to the issue of digital tokens issued in an ICO.

Russell McVeagh Finance partner Deemple Budhia says that tokens issued in an ICO may be regulated by the FMCA if the offer is received by a person in New Zealand (for example if the ICO is published online without restricting access to New Zealanders).

"The wide territorial scope of the FMCA, which may subject a significant number of ICOs to New Zealand regulatory requirements, raises important questions about the how these legal obligations can or will be enforced, and particularly, in respect of ICOs based outside New Zealand," says Budhia.

Whether the FMCA will be engaged by any particular ICO must be determined by reference to the facts and circumstances of that ICO, she says.

"For each ICO, it is necessary to qualitatively evaluate the rights conferred by the tokens issued in the ICO and evaluate these against the definitions of each of the financial products regulated by the FMCA.

"It is entirely possible that a token issued in an ICO could be classified as any one of the financial products regulated by the FMCA, or alternatively fall outside the scope of the FMCA. Where a token falls outside scope, the FMA may nevertheless use its designation power to declare a product is a financial product if the circumstances warrant such a designation," she says.

The article examines the legal implications in the context of The DAO, an unincorporated virtual organisation, and certain other associated persons, and how they violated US federal securities laws by failing to produce and file with the United States' Securities and Exchange Commission a "registration statement" in respect of tokens issued by The DAO without qualifying for an exemption from those registration requirements.[1] The article concludes that DAO Tokens could be regulated under the FMCA as a managed investment scheme, and the tokens issued, regulated as managed investment products.

[1] Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (Securities and Exchange Commission, Release No. 81207, 25 July 2017) [SEC Report].

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