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ICO GUIDELINES

A GUIDE TO DIGITAL TOKEN OFFERINGS


1          PURPOSE


1.1      On 1 August 2017, the Monetary Authority of Singapore (“MAS”) clarified that if a digital token constitutes a product regulated under the securities laws administered by MAS, the offer or issue of digital tokens must comply with the applicable securities laws.


1.2      This paper provides general guidance on the application of the securities laws administered by MAS in relation to offers or issues of digital tokens in Singapore.


1.3      For purposes of this guide, the securities laws refer to the Securities and Futures
Act (Cap. 289) (“SFA”) and the Financial Advisers Act (Cap. 110) (“FAA”).


1.4      The contents of this guide are not exhaustive, have no legal effect and do not modify or supersede any applicable laws, regulations or requirements.


2    APPLICATION OF SECURITIES LAWS ON OFFERS OR ISSUES OF DIGITAL TOKENS IN SINGAPORE


2.1      Offers or issues of digital tokens may be regulated by MAS if the digital tokens are capital markets products 1 under the SFA. Capital markets products include any securities, futures contracts and contracts or arrangements for purposes of leveraged foreign exchange trading.


Digital tokens which constitute capital markets products


2.2    MAS will examine the structure and characteristics of, including the rights attached to, a digital token in determining if the digital token is a type of capital
markets products under the SFA.

2.3    For instance, a digital token may constitute –
2.3.1  a  share 2 ,  where  it  confers  or  represents  ownership  interest  in  a corporation3, represents liability of the token holder in the corporation4, and represents mutual covenants with other token holders in the corporation inter se5;
2.3.2  a debenture, where it constitutes or evidences the indebtedness6 of the issuer of the digital token in respect of any money that is or may be lent to the issuer by a token holder; or
2.3.3  a unit7 in a collective investment scheme8 (“CIS”), where it represents a right or interest in a CIS, or an option to acquire a right or interest in a CIS.


Please note that the characteristics of a share or a debenture described in paragraph
2.3.1 or 2.3.2 respectively are not exhaustive.


Offerors of digital tokens which constitute securities or units in a CIS


2.4    Offers of digital tokens which constitute securities or units in a CIS are subject to the same regulatory regime under Part XIII of the SFA, as offers of securities9 or units
in a CIS10 respectively made through traditional means.

2.5      A person may only make an offer of digital tokens which constitute securities or units in a CIS (“Offer”), if the Offer complies with the requirements under Part XIII of the  SFA 11 .  This  includes  the  requirements  that  the  Offer  must  be  made  in  or accompanied by a prospectus that is prepared in accordance with the SFA and is registered with MAS (“Prospectus Requirements”).


2.6      An  Offer  may  nevertheless be  exempt  from  the  Prospectus Requirements where, amongst others –


2.6.1  the Offer is a small offer12 of securities of an entity, or units in a CIS, that does not exceed S$5 million (or its equivalent in a foreign currency) within any 12-month period, subject to certain conditions;
2.6.2  the Offer is a private placement offer13 made to no more than 50 persons
within any 12-month period, subject to certain conditions;
2.6.3  the Offer is made to institutional investors14 only; or
2.6.4  the Offer is made to accredited investors15, subject to certain conditions.

The exemptions for a small offer, a private placement offer and an offer made to accredited investors, are respectively subject to certain conditions which includes advertising restrictions16.


2.7      In addition, where an offer is made in relation to units in a CIS, the CIS is subject to authorisation or recognition requirements17. An authorised CIS or a recognised CIS under  the SFA  must  comply with  investment restrictions 18  and business conduct requirements 19  .  Please  refer  to  the  Securities  and  Futures  (Offers  of Investments)(Collective Investment Schemes) Regulations 2005 (“SF(OI)(CIS)R”), the Code on Collective Investment Schemes (“Code on CIS”) and the Practitioner’s Guide to the CIS Regime under the SFA, for details.


Intermediaries20 who facilitate offers or issues of digital tokens

2.8      MAS has observed that one or more of the following types of intermediaries typically facilitate offers or issues of digital tokens:


2.8.1   a person who operates a platform on which one or more offerors of digital tokens may make primary offers or issues of digital tokens (“primary platform”);
2.8.2   a person who provides financial advice in respect of any digital tokens;
2.8.3   a person who operates a platform at which digital tokens are traded
(“trading platform”).


2.9      A person who operates a primary platform in Singapore in relation to digital tokens which constitute any type of capital markets products, may be carrying on business in one or more regulated activities under the SFA. Where the person is carrying on business in any regulated activity, or holds himself out as carrying on such business, he must hold a capital markets services licence for that regulated activity
under the SFA, unless otherwise exempted.


2.7      In addition, where an offer is made in relation to units in a CIS, the CIS is subject to authorisation or recognition requirements17. An authorised CIS or a recognised CIS under  the SFA  must  comply with  investment restrictions 18  and business conduct requirements 19  .  Please  refer  to  the  Securities  and  Futures  (Offers  of Investments)(Collective Investment Schemes) Regulations 2005 (“SF(OI)(CIS)R”), the Code on Collective Investment Schemes (“Code on CIS”) and the Practitioner’s Guide to the CIS Regime under the SFA, for details.


Intermediaries20 who facilitate offers or issues of digital tokens

2.8      MAS has observed that one or more of the following types of intermediaries typically facilitate offers or issues of digital tokens:


2.8.1   a person who operates a platform on which one or more offerors of digital tokens may make primary offers or issues of digital tokens (“primary platform”);
2.8.2   a person who provides financial advice in respect of any digital tokens;
2.8.3   a person who operates a platform at which digital tokens are traded
(“trading platform”).


2.9      A person who operates a primary platform in Singapore in relation to digital tokens which constitute any type of capital markets products, may be carrying on business in one or more regulated activities under the SFA. Where the person is carrying on business in any regulated activity, or holds himself out as carrying on such business, he must hold a capital markets services licence for that regulated activity
under the SFA, unless otherwise exempted.


3         Money laundering and financing of terrorism concerns


3.1     MAS emphasises that the relevant MAS Notices on Prevention of Money Laundering and Countering the Financing of Terrorism may apply (“AML/CFT Requirements”).


3.2      Digital tokens that perform functions which may not be within MAS’ regulatory purview may nonetheless be subject to other legislation for combating money laundering and terrorism financing.   MAS would like to highlight in particular   the following:


3.2.1 Obligations to report suspicious transactions with the Suspicious Transaction Reporting Office, Commercial Affairs Department of the Singapore Police Force pursuant to section 39 of the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap.
65A);
3.2.2   Prohibitions from dealing with or providing financial services to designated individuals and entities pursuant to the Terrorism (Suppression of Financing) Act (Cap. 325) and various regulations giving effect to United Nations Security Council Resolutions.


3.3     MAS also intends to establish a new payments services framework (“New Payments Framework”) that will include rules to address money laundering and terrorism financing risks relating to the dealing or exchange of virtual currencies for fiat or other virtual currencies. Such intermediaries will be required to put in place policies, procedures and controls to address such risks. These will include requirements to conduct customer due diligence, monitor transactions, perform screening, report suspicious transactions and keep adequate records.


4    ILLUSTRATIONS OF APPLICATION OF SECURITIES LAWS TO OFFERS OR ISSUES OF DIGITAL TOKENS


4.1      The case studies below illustrate how the securities laws administered by MAS may apply. MAS emphasises that these case studies are for the purpose of illustration only. They are not indicative or conclusive of how the securities laws will apply to a particular case involving an offer or issue of digital tokens. The illustrations in the case studies are also not exhaustive.


4.2      If you wish to offer digital tokens in Singapore or operate a platform involving digital tokens in Singapore, you are encouraged to seek professional advice from qualified legal practitioners to ensure that your proposed activities are in compliance with all applicable laws, rules and regulations in Singapore.

Case study 1


Company A plans to set up a platform to enable sharing and rental of computing power amongst the users of the platform. Company A intends to offer digital tokens (“Token A”) in Singapore to raise funds to develop the platform. Token A will give token holders access rights to use Company A’s platform. The token can be used to pay for renting computing power provided by other platform users. Token A will not have any other rights or functions attached to it. Company A intends to offer Token A to any person globally, including in Singapore.


Application of securities laws administered by MAS in respect of an offer of Token A


•    A holder of Token A will only have rights to access and use Company A’s platform, and the right to use Token A to pay for rental of computing power provided by other users. Token A will not provide its holder any other rights or functions attached to it. Hence, Token A will not constitute securities under the SFA.
•    Company A’s offer of Token A will not be subject to any requirement under the SFA
or the FAA.

Case study 2


Company B is in the business of developing properties and operating commercial buildings. It plans to raise funds to develop a shopping mall by offering digital tokens (“Token B”) to any person globally, including in Singapore. Token B will be structured to represent a share in Company B, and will be a digital representation of a token holder’s ownership in Company B. Company B also intends to provide financial advice in relation to its offer of Token B.


Application of securities laws administered by MAS in respect of an offer of Token B


•    Token B will be a share and constitute securities under the SFA.
•    The offer of Token B will need to comply with Prospectus Requirements, unless the offer is otherwise exempted under the SFA.
•    Company B will likely require a capital markets services licence for carrying on business in the regulated activity of dealing in securities under the SFA, unless otherwise exempted.
•    To provide financial advice in relation to its offer of Token B, Company B will need to be a licensed financial adviser, unless otherwise exempted29.

 

Case study 3


Company C intends to offer digital tokens (“Token C”) to any person globally, including in Singapore. Company C will pool funds raised from the offer and use the funds to invest in a portfolio of shares in FinTech start-up companies (“Portfolio”). Company C will also manage the Portfolio. Holders of Token C will not have any powers relating to the day-to-day operations of Company C or the management of the Portfolio. Profits arising from the Portfolio will be pooled and distributed as payments to the token holders. The purpose of this arrangement is to enable token holders to receive profits arising from the Portfolio.

 

Application of securities laws administered by MAS in respect of an offer of Token C


•    The arrangement established by Company C in relation to Token C will be a CIS
(“Arrangement”).
•    On this basis, the Arrangement will have to be authorised under section 286 of the SFA, or recognised under section 287 of the SFA depending on whether the arrangement is constituted in Singapore or outside Singapore. The Arrangement will also be subject to the applicable requirements under Division 2 of Part XIII of the SFA, the SF(OI)(CIS)R and the Code on CIS.
•    On this basis, Token C will be a unit in a CIS, and constitute securities under the SFA.
•    On this basis, Company C will need to comply with Prospectus Requirements in respect of the offer of Token C, unless otherwise exempted under the SFA.
•    Company C will likely require a capital markets services licence for carrying on business in the regulated activity of fund management under the SFA, unless otherwise exempted.
•    As no financial advisory service will be provided by Company C in respect of Token
C, the FAA will not apply in relation to the offer of Token C.

 

Case Study 4


Company D is a Singapore-incorporated company with operations in Singapore. It intends to offer digital tokens (“Token D”) to members of the public, but the offering will not be accessible by persons in Singapore. Company D will pool the funds raised from the offer and use the funds to invest in a portfolio of shares in FinTech start-up companies. Company D will manage the portfolio of shares. Holders of Token D will not have any powers relating to the day-to-day operations of Company D or the management of the portfolio of shares. Profits arising from the portfolio of shares will also be pooled and distributed as payments to holders of Token D. The purpose of this arrangement is to enable token holders to receive profits arising from the portfolio of shares.


Application of securities laws administered by MAS in respect of an offer of Token D


•    As the offer of Token D will only be made to persons based overseas (i.e. Token D will not be offered to any person in Singapore), Part XIII of the SFA will not apply to the offer.
•    Company D may nevertheless be carrying on the business of fund management in Singapore if it operates the management of portfolio of shares in Singapore. If so, Company D will require a capital markets services licence for carrying on business in fund management, unless otherwise exempted.
•    As no financial advisory service will be provided by Company D in respect of Token
D, the FAA will not apply in relation to the offer of Token D.

 

Case study 5
Company E plans to set up a platform that helps start-ups raise funds from investors through digital token offerings (“Offerings”). To facilitate the Offerings, Company E will set up one entity (“Entity”) which will be used as a vehicle to make investments into a start-up, for every start-up that will make Offerings. Investors who wish to invest into a start-up will provide a loan to the respective Entity (“Loan”). In return, the Entity will issue to the investors, digital tokens that are unique to the start-up (“Token E”). Token E will be offered to any person globally, including in Singapore. Token E will represent the rights of an investor as a creditor of the Loan provided to the Entity. Company E’s platform will also operate as a market to facilitate trading of Token E among investors using Company E’s platform. In addition, Company E intends to provide financial advice to investors on the Offerings.


Application of securities laws administered by MAS in relation to an offer of Token E


•    Token E will be a debenture, and constitute securities under the SFA.
•    An Entity will need to comply with Prospectus Requirements in respect of an
Offering, unless otherwise exempted under the SFA.
•    Company E, in facilitating the purchase or sale of Token E on its platform, may require a capital markets services licence for dealing in securities under the SFA, unless otherwise exempted.
•    Depending on the business activities that an Entity undertakes on Company E’s platform, the Entity may require a capital markets services licence for dealing in securities under the SFA, unless otherwise exempted.
•    To provide financial advice to investors in relation to an offer of Token E by an
Entity, Company E must be a licensed financial adviser unless otherwise exempted.
 

•    Company E is likely be operating a securities market in relation to the trading of Token E. On this basis, Company E will have to be approved by MAS as an approved exchange or recognised by MAS as a recognised market operator under the SFA, unless otherwise exempted.

 

Case Study 6
Company F is planning to set up a virtual currency exchange platform that allows users to exchange virtual currencies (such as Bitcoin) that do not constitute securities, to fiat currencies. In its initial years of operation, the platform will be configured such that trading of digital tokens constituting securities will not be allowed. This restriction may be lifted after a few years.


Application  of  securities  laws  administered  by  MAS  in  respect  of  Company  F ’s virtual  
currency exchange


•    On the basis that Company F’s virtual currency exchange will not allow trading of
any products regulated under the SFA, the SFA will not apply.
•    Company F should re-assess its position should it intend to trade in any digital tokens that constitute securities under the SFA. For instance, upon lifting the abovementioned restriction, Company F will likely be operating a securities market in relation to the trading of digital tokens that constitute securities. On this basis, Company F will need to be approved by MAS as an approved exchange or recognised by MAS as a recognised market operator under the SFA, unless otherwise exempted.


Application of New Payments Framework to Company F ’s  virtual currency exchange 


Please note that while the activity of exchanging virtual currencies to fiat currencies is presently not regulated by MAS, MAS intends to regulate such activity under the New Payments Framework.


5          APPLICATION OF SANDBOX CRITERIA ON DIGITAL TOKENS


5.1      Any firm that is looking to apply technology in an innovative way to provide new financial services that are or are likely to be regulated by MAS can apply for the regulatory sandbox. MAS expects that interested firms would have done their due diligence, such as testing the proposed financial service in a laboratory environment and knowing the legal and regulatory requirements for deploying the proposed financial service, prior to submitting an application.


5.2      If an application is approved, MAS will provide the appropriate regulatory support by relaxing specific legal and regulatory requirements prescribed by MAS, which the applicant would otherwise be subject to, for the duration of the sandbox. Please refer to the evaluation criteria outlined in the “FinTech Regulatory Sandbox Guidelines”.