Initial coin offerings (ICOs) are not immune from the law despite being a novel and still-developing form of capital raising. They raise significant questions as to how legal obligations may be enforced and applied, according to insights released today from law firm Russell McVeagh. As the world of crypto-finance continues to develop, the firms debates whether New Zealand’s Financial Markets Conduct Act 2013 (FMCA) could apply to the issue of digital tokens issued in an ICO in a new article, Initial Coin Offerings.
Russell McVeagh Finance partner Deemple Budhia says 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 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.
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. “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,” she says. “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.” In an ICO, or token sale, organisations issue tokens on a digital ledger known as a blockchain. The tokens issued in an ICO can confer a variety of different rights on the purchaser, which may not include rights traditionally associated with shares (such as rights to participate in governance and to receive a share of the organisation’s residual profits.)
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