Initial coin offerings (ICOs) are a rapidly emerging area in the financial services market, domestically and internationally, with Coinschedule reporting global ICO raisings of over $7.3b so far this year, as against $3.8b for 2017 and $95m for 2016. Regulators are seeking to keep pace, with ASIC the latest to warn that it "is focussed on misleading or deceptive conduct in the marketing and selling of digital or virtual tokens via initial coin offerings."
That focus has already borne fruit. ASIC reports that as a consequence of its inquiries with ICO issuers and their advisers, some ICOs have been halted and others potentially modified.
The regulator's remit in this area, which would ordinarily focus on conduct involving financial products or services, has expanded. ASIC reports that it has been delegated power by the ACCC and may now intervene, pursuant to the Australian Consumer Law, even if the allegedly misleading or deceptive conduct does not involve financial products or services. This may set ASIC apart from equivalent regulators in foreign jurisdictions and remove the heat from the debate over whether ICOs are securities.
ASIC has also updated its Information Sheet 225: Initial Coin Offerings and Crypto-currency, stating that ICOs and crypto-assets are subject to the general law and, depending on whether they are a "financial product", either the Corporations Act 2001 (Cth) or the Australian consumer laws (both of which contain prohibitions against misleading or deceptive conduct).
What might be misleading or deceptive conduct with ICOs?
The updated guidance lists the following as examples of conduct that may be misleading or deceptive to consumers:
- the use of social media to generate the appearance of a greater level of public interest in an ICO;
- undertaking or arranging for a group to engage in trading strategies to generate the appearance of a greater level of buying and selling activity for an ICO or a crypto-asset;
- failing to disclose adequate information about the ICO; or
- suggesting that the ICO is a regulated product or the regulator has approved the ICO if that is not the case.
ASIC stresses that ICOs and crypto-assets may be subject to Australian law and regulations, even if they are issued or sold by a foreign entity; a point it considers particularly important given the international nature of the sector.
Making sure your ICO complies
While ASIC's guidance may apply differently depending on the unique features of an individual ICO, it has a clear message. As stated by Commissioner John Price, "If you are acting with someone else's money, or selling something to someone, you have obligations. Regardless of the structure of the ICO, there is one law that will always apply: you cannot make misleading or deceptive statements about the product. This is going to be a key focus for us as this sector develops."
So what should issuers and their advisers do to comply?
First, seek advice (including legal advice) on all the circumstances of the issue or sale, not just part of the sale. That advice should be obtained early in the process and it should be updated as the design of the ICO evolves. Remember that the prohibition against misleading or deceptive conduct may apply even if the ICO is not a "financial product" and even if it is issued or sold by a foreign entity.
Second, have an internal quality control process to ensure that representations about the ICO are accurate. Make sure that only certain people can create and publish external messages.
Third, have a strong internal review process so that any erroneous messages can be spotted and corrected quickly.