Digital Token Offerings (ICO)
Updated: Aug 13
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 and Futures Act (Cap. 289) (“SFA”) and the Financial Advisers Act (Cap. 110) (“FAA”).
Digital Token Offerings (ICO)
An Initial Coin Offering (ICO) is a fundraising method in which a new cryptocurrency project raises capital by selling tokens to early investors. The tokens are typically used to access the project's services or products, and they may also have the potential to appreciate in value over time.
The Monetary Authority of Singapore (MAS) regulates ICOs in Singapore. In its Guide to Digital Token Offerings, MAS states that an ICO may be considered a security under the Securities and Futures Act (SFA) if it involves the offer or issue of a digital token that represents:
Entitlement to profits or income from the issuer's assets or activities;
A right to participate in the management of the issuer; or
A right to acquire another type of asset.
If an ICO is considered a security, the issuer must comply with the SFA's requirements, such as registering a prospectus with MAS and obtaining a license to conduct a public offering.
There are a number of risks associated with ICOs, including:
The tokens may be worthless or may not appreciate in value as expected.
The project may not be completed or may not be successful.
The issuer may be fraudulent or may not be able to raise the funds it needs to complete the project.
Investors should carefully consider the risks before participating in an ICO.
The difference between an ICO and a token offering is that an ICO is typically used to raise funds for a new cryptocurrency project, while a token offering can be used to raise funds for any type of project. Tokens issued in a token offering may or may not be considered securities under the SFA.
In Singapore, the MAS has taken a cautious approach to ICOs and token offerings. In 2018, MAS warned eight digital token exchanges in Singapore not to facilitate trading in digital tokens that are securities or futures contracts without MAS' authorization. MAS also warned an ICO issuer to stop the offering of its digital tokens in Singapore.
MAS has stated that it will continue to monitor the ICO and token offering landscape and will take appropriate action to protect investors.
Application of Securities Laws on Offers or Issues of Digital Tokens in Singapore
Offers or issues of digital tokens may be regulated by MAS if the digital tokens are capital markets products under the SFA. Capital markets products include any securities, futures contracts, contracts or arrangements for the purposes of leveraged foreign exchange trading.
Digital Tokens which Constitute Capital Markets Products
A digital token may constitute –
1. a share, where it confers or represents ownership interest in a corporation, represents liability of the token holder in the corporation, and represents mutual covenants with other token holders in the corporation;
2. a debenture, where it constitutes or evidences the indebtedness of the issuer of the digital token in respect of any money that is lent to the issuer by a token holder; or
3. a unit in a collective investment scheme (“CIS”), where it represents a right or interest in a CIS, or an option to acquire a right or interest in a CIS. A unit means a right or interest in a collective investment scheme, and includes an option to acquire any such right or interest in the collective investment scheme.
A collective investment scheme is an arrangement in respect of any property bearing all of the following characteristics:
participants have no day-to-day control over management of the property;
property is managed as a whole by or on behalf of a manager;
participants’ contributions and profits or income of the arrangement from which payments are to be made to the participants are pooled; and
purpose or effect of the arrangement is to enable participants to participate in or receive profits, income or other payments or returns arising from acquisition, holding, management or disposal of, the exercise of, the redemption of, or the expiry of any right, interest, title or benefit in the property or any part of the property.
Offerors of Digital Tokens which Constitute Securities or Units in a CIS
Offers of digital tokens which constitute securities or units in a CIS are subject to the same regulatory regime of the SFA, as offers of securities or units in a CIS respectively made through traditional means. 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 of the SFA. 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”).
An Offer may nevertheless be exempt from the Prospectus Requirements where, amongst others –
1. the Offer is a small offer of securities of an entity, or units in a CIS, that does not exceed S$5 million within any 12-month period. A small offer must be a personal offer. A personal offer is one that is made to a pre-identified person, which includes offers made to persons who have previous professional or other connection with the offeror. As the word “personal” suggests, each personal offer must be made personally by the offeror, or by a person acting on its behalf, to the pre-identified person, and may only be accepted by the pre-identified person to whom the offer was made;
2. the Offer is a private placement offer made to no more than 50 persons within any 12-month period;
3. the Offer is made to institutional investors only; or
4. the Offer is made to accredited investors.
The exemptions for a small offer, a private placement offer and an offer made to accredited investors, are respectively subject to advertising restrictions.
In addition, where an offer is made in relation to units in a CIS, the CIS is subject to authorisation or recognition requirements. An authorised CIS or a recognised CIS under the SFA must comply with investment restrictions and business conduct requirements.
Intermediaries who Facilitate Offers or Issues of Digital Tokens
The following types of intermediaries typically facilitate offers or issues of digital tokens:
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. a person who provides financial advice in respect of any digital tokens;
3. a person who operates a platform at which digital tokens are traded (“trading platform”).
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, he must hold a capital markets services licence for that regulated activity under the SFA, unless otherwise exempted.
A person who provides any financial advice in Singapore in respect of any digital token that is an investment product, must be authorised to do so in respect of that type of financial advisory service by a financial adviser’s licence, or be an exempt financial adviser. An investment product means any capital markets product or any life policy.
A person who establishes or operates a trading platform in Singapore in relation to digital tokens which constitute securities or futures contracts, may be establishing or operating a market. A person who establishes or operates a market must be approved by MAS as an approved exchange or recognised by MAS as a recognised market operator under the SFA.
Extra-Territoriality of the SFA and FAA
Where a person operates a primary platform, or trading platform, partly in or partly outside of Singapore, or outside of Singapore, the requirements of the SFA may nevertheless apply extra-territorially to the activities of that person under SFA.
Where a person who is based overseas, engages in any activity or conduct that is intended to or likely to induce the public in Singapore to use any financial advisory service provided by the person, the person is deemed to be acting as a financial adviser in Singapore.
Money Laundering and Financing of Terrorism Concerns
The relevant MAS Notices on Prevention of Money Laundering and Countering the Financing of Terrorism may apply (“AML/CFT Requirements”). Digital tokens that perform functions may be subject to legislation for combating money laundering and terrorism financing, in particular the following:
1. Obligations to report suspicious transactions with the Suspicious Transaction Reporting Office, Commercial Affairs Department of the Singapore Police Force pursuant to Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap. 65A);
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.
Intermediaries will be required to put in place policies, procedures and controls to address money laundering and terrorism financing risks relating to the dealing or exchange of virtual currencies for fiat or other virtual currencies. These will include requirements to conduct customer due diligence, monitor transactions, perform screening, report suspicious transactions and keep adequate records.
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. 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
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. 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. If Company B holds a capital markets services licence for dealing in securities under the SFA, Company B is exempt from holding a financial adviser’s licence to act as a financial adviser in Singapore in respect of any financial advisory service. Instead, Company B will be subject to certain reporting requirements, including the requirement under Financial Advisers Regulations (Rg2) to lodge a notification to MAS that it is commencing business in a financial advisory service under the FAA.
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. The arrangement established by Company C in relation to Token C will be a CIS (“Arrangement”). On this basis, Token C will be a unit in a CIS, and constitute securities under the SFA. Company C will need to comply with Prospectus Requirements in respect of the offer of Token C, unless otherwise exempted under the SFA. The Arrangement will have to be authorised or recognised under 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 SFA, the SF(OI)(CIS)R and the Code on CIS. Company C will likely require a capital markets services licence for carrying on business in the regulated activity of fund management under the SFA. 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.
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. 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. 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), 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.
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. 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. 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. 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. 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. 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.
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. 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.
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