On 1 August 2017, MAS issued a press release clarifying its approach to initial coin or token offerings (ICO) or token issuance or sales. This note provides some comments on MAS’ clarification. It is of significant interest because there have been several ICOs conducted in Singapore recently, and has thus attracted interest in prospective issuers looking to raise funds by way of ICO. This comes shortly after the US Securities and Exchange Commission (SEC) announced that certain ICOs would amount to “securities”.
In the 1 August 2017 MAS clarification (“MAS Clarification“), it stated, inter alia, as follows:-
4 … MAS has observed that the function of digital tokens has evolved beyond just being a virtual currency. For example, digital tokens may represent ownership or a security interest over an issuer’s assets or property. Such tokens may therefore be considered an offer of shares or units in a collective investment scheme under the SFA. Digital tokens may also represent a debt owed by an issuer and be considered a debenture under the SFA.
5 Where digital tokens fall within the definition of securities in the SFA, issuers of such tokens would be required to lodge and register a prospectus with MAS prior to the offer of such tokens, unless exempted. Issuers or intermediaries of such tokens would also be subject to licensing requirements under the SFA and Financial Advisers Act (Cap. 110), unless exempted, and the applicable requirements on anti-money laundering and countering the financing of terrorism. In addition, platforms facilitating secondary trading of such tokens would also have to be approved or recognised by MAS as an approved exchange or recognised market operator respectively under the SFA.
6 The types of digital tokens offered in Singapore and elsewhere vary widely. Some offers may be subject to the SFA while others may not be. All issuers of digital tokens, intermediaries facilitating or advising on an offer of digital tokens, and platforms facilitating trading in digital tokens should therefore seek independent legal advice to ensure they comply with all applicable laws, and consult MAS where appropriate.
What are securities?
The MAS Clarification says that “digital tokens may represent ownership or a security interest over an issuer’s assets or property. Such tokens may therefore be considered an offer of shares or units in a collective investment scheme under the SFA. Digital tokens may also represent a debt owed by an issuer and be considered a debenture under the SFA. … Where digital tokens fall within the definition of securities in the SFA, issuers of such tokens would be required to lodge and register a prospectus with MAS prior to the offer of such tokens, unless exempted”.
This sheds some light on MAS’ position on what types of ICOs or token sales amount to offer of securities. Where the terms and arrangement of the ICO or token sale are such that the digital tokens effectively provide some form of ownership or security interest, it could amount to an offer of securities or units in a collective investment scheme (“CIS“) under the Securities and Futures Act (“SFA“).
But how could digital tokens amount to “securities” within the meaning of the SFA? It’s important to understand certain clarifications which preceded this recent announcement by a few years.
MAS 2014 Consultation Paper
In July 2014, MAS issued a “Consultation Paper on Proposals to Enhance Regulatory Safeguards for Investors in the Capital Markets”. In that Consultation Paper, MAS expressed a view that certain recent arrangements which have been structured to circumvent the SFA and MAS regulations would in substance effectively amount to debentures or CIS. So MAS clarified that it would regulate such arrangements as debentures:
(i) Party A purchasing precious metals of gold, silver or platinum (“asset”) from Party B for an agreed sum of money or money‟s worth;
(ii) Party B being under an obligation to purchase the asset back from Party A at a future time; and
(iii) The purpose or effect of the arrangement is to enable Party A to receive a financial benefit from Party B.
This Consultation Paper eventually led to the Securities and Futures (Amendment) Act 2017 which was recently passed, but has not yet come into force.
Although the Consultation Paper referred to precious metals, the same reasoning could possibly apply to digital tokens and ICOs.
MAS also expressed in the Consultation Paper concerns about certain arrangements which circumvented CIS regulations by circumventing the definitional criterion that the property of scheme participants must be effectively “pooled” to generate profits which would otherwise not be
available to participants if property was managed on an individual basis. Thus, MAS proposed to make this criterion alternative to the criterion that the scheme property is managed as a whole by or on behalf of the scheme operator. This also found its way into the Securities and Futures (Amendment) Act 2017 which was recently passed. This also means that the definition of a CIS would now be much wider.
Suffice to say, the SFA and the overall financial regulatory environment is experiencing shifts which could affect various arrangements, including ICOs and token sales, and other creative arrangements which may be developed in the near future.
It is important to note then that the MAS Clarification does not definitively opine or conclude one way or another what would come under its regulatory regime. In other words, everything has to be examined on its facts. Intelligent structuring of the arrangement may take the fundraising effort outside of the current regulatory regime. Creative fundraising efforts can still be explored. Nevertheless, risks should still be made known to potential investors.
Where the arrangement does not cause the digital tokens to represent some form of ownership or security interest, and would not be deemed by MAS to amount to confer a “financial benefit” in the sense stated above for the purposes of regulating debentures, and would not constitute a CIS in that some property under the arrangement would be managed as a whole by or on behalf of the scheme operator, it may not attract the regulatory regime of the SFA. It is an interesting time for these developments and startups, funds, issuers and investors would do well to examine the legal issues carefully before diving in.