Initial coin offers (ICOs) and token events are a form of fundraising where you receive tokens that carry certain rights, such as providing access to a new product or service, or an interest in an underlying asset or project.
The extent to which an ICO is regulated depends whether a ‘financial product’ is being offered to retail investors in New Zealand (ie a ‘regulated offer’ is being made). Whether a token offered via an ICO is a financial product, and if so, what type of product, depends on the token’s specific characteristics and economic substance.The Financial Markets Conduct Act 2013 (FMC Act) sets out four types of financial product:
A token is a debt security if investors have a right to be repaid money or paid interest on money lent to, deposited with, or owed by a person, company, or unincorporated entity making a token offer. For example, a token linked to the value of a dollar or commodity could be a debt security if:
A pegged cryptocurrency is a token linked to the value of a dollar or commodity like gold. These operate in a similar way to a negotiable bearer instrument (such as a cheque) issued by a bank. Both give the investor holding the token or instrument the right to redeem that token or instrument for money.
To make a regulated offer of debt securities, you must:
A token is an equity security if investors buy, or have the option to buy, a share in a company. A token that provides an option to buy a share is an offer of both the token and the equity share.
If you make a regulated offer of equity securities, you must register a PDS. Investor interests and rights will be set out in the company’s constitution. This means a trust deed is not required. Financial reporting and fair dealing obligations apply.
A token is a managed investment product (an interest in a ‘managed investment scheme’) if:
The manager of a managed investment scheme must be licensed by us in order to make offers to retail investors in New Zealand. The manager is the person, company, or unincorporated entity issuing the tokens. When you make a regulated offer of managed investment products, you must also:
A token may be a derivative if, under the terms of the token, the issuer or holder may be required to pay an amount or provide something else in the future, and the amount to be paid or the value of the token is derived from the value or amount of something else, such as a commodity or asset.
The issuer (person, company, or unincorporated entity) of the tokens must also be licensed by us in order to make offers to retail investors in New Zealand. If you make a regulated offer of derivatives, you must register a PDS and meet financial reporting and fair dealing obligations.
A token that is issued as part of an ICO is not regulated by the FMA unless it meets the criteria of a financial product (ie it is a debt security, equity security, managed investment product or derivative) and is offered to retail investors in New Zealand.
However, we can designate tokens issued as part of an ICO to be a particular financial product if, based on their economic substance, this is necessary to promote fair and efficient financial markets in New Zealand or any of the other purposes of the FMC Act. For example, a project token giving investors voting rights and a share in the company and its profits could be designated an equity security. A designation could be accompanied by an exemption to modify FMC Act disclosure and governance requirements.
Designations are only made after consultation with industry and do not apply retrospectively. This means that only ICOs that happen after a relevant designation is in place are regulated by the FMA.
ICOs and tokens that are not financial products will still be subject to general consumer protection laws in New Zealand, for example prohibitions against misleading and deceptive conduct and fraud or other criminal conduct.
If you are New Zealand-based and provide financial services you must:
If your token or cryptocurrency is not a financial product or financial service, you will need to comply with the Fair Trading Act 1986 to the extent you are in ‘trade’. The Fair Trading Act also applies to overseas-based tokens and cryptocurrencies offered in New Zealand.
Crowdfunding in the form of an ICO is not the same as crowdfunding covered by the FMC Act. We license crowdfunding platforms to provide an intermediary service via a facility, such as a website, where companies make offers to retail investors. Crowdfunding under the FMC Act enables companies to raise up to $2 million in any 12-month period, without registering a PDS.
We can grant exemptions to promote the FMC Act’s objectives. One objective is to promote innovation and flexibility in our financial markets. We can also, if appropriate, grant exemptions to ensure FMC Act requirements are fit for purpose for ICOs. This may include modifying PDS or governance requirements.
As this sector develops, we will continue to monitor and consider what additional regulatory support and requirements may be appropriate for the offer of these products and services. Other ideas mentioned to us regarding the possible regulation of ICOs and token offers include creating a new category of prescribed intermediary service similar to the equity crowdfunding model. This would require law reform and that can take a long time. Instead of proposing alternatives at this early stage we’d rather hear from you about any ideas on how token offers could be regulated effectively.
We want to play our part in making markets work, and greater regulatory scrutiny of token offers may be necessary to ensure this innovation can become a sustainable method of fundraising. Our focus is to enhance New Zealand’s reputation by promoting fair, efficient and transparent financial markets.
Given the bespoke nature of ICOs we encourage you to approach us early in the development phase if you’re considering making an offer. With reasonable timeframes, we can help you and your legal advisers determine if tokens are ‘financial products’, and, if so, whether any exemptions are appropriate. Get in touch at: firstname.lastname@example.org
We’ll keep this information up-to-date, based on general developments in the ICO space, our regular engagement with other regulators and those developing token offers.