Author's note : Malaysia ’s IEO guidelines may be the world ’s first compulsory legal norms for IEOs , and they have regulatory features (proactive and prudent, a combination of principles and rules, the introduction of third-party supervision, two-tier supervision, and focus on ex-ante and in-process supervision) .
Although the market heat of IEO (Initial Exchange Offerings, in short, a model of digital token issuance through digital asset exchanges) has faded, it has not completely disappeared.
Since IEOs are similar to ICOs, they are all token issuance financing activities. IEOs also face compliance issues in countries and regions that prohibit ICOs. For example, in March of last year when the IEO market was the most popular, the Beijing Internet Finance Industry Association issued a risk alert on IEO for illegal financial activities. Recently, the United States Securities and Exchange Commission (SEC) warned investors about the risks of IEO, believing that IEO may be unregistered securities and violate US securities laws.
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As of now, only Korea and Malaysia may recognize the positive role of IEO and issue relevant guidelines or specifications for IEO. In November 2018, the Cryptocurrency Research Center of Korea University, the Korea Blockchain Industry Promotion Association, and the Korea Blockchain Entrepreneurship Association jointly issued the IEO guidelines, but this policy is not a mandatory legal norm. On January 15, 2020, the Malaysian Securities Commission (SC) promulgated the Guidelines on Digital Assets ("Guidelines")  to regulate IEO behavior in the country.
Based on the SC's regulatory measures and guidelines on digital currency related activities in Malaysia in recent years, the author notices that SC's supervision of IEO is quite distinctive (active and prudent, the combination of principles and rules, the introduction of third-party supervision, and double-layer supervision , Focusing on ex-ante and in-event supervision), or may provide references for regulators in other countries to supervise digital token issuance and exchanges, as well as supervision concepts and supervision models.
I. SC 's regulatory measures on digital token related activities
As a small Southeast Asian country, Malaysia may never be a hot spot for ICOs or IEOs favored by project parties, exchanges and investors, but the wave of blockchain and cryptocurrencies has also poured into Malaysia.
Judging from the following regulatory measures taken by SC in digital token related activities in recent years, SC intends to impose appropriate supervision on digital token related industries in order to play the positive role of blockchain and digital tokens while reducing the associated risks .
(1) On September 8, 2017, after China issued the "94 Policy", the Malaysian SC also issued a statement on ICOs to remind investors to pay attention to potential risks, but did not completely ban ICOs.
(2) In 2018, SC suspended several ICO projects (such as CopyCash, Lavidacoin), and initiated the development of the regulatory framework for ICOs and digital asset exchanges.
(3) January 15, 2019, Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 ) " takes effect. The decree treats digital currencies and digital tokens as securities and is regulated under Malaysia's securities laws. The entry into force of this law means that future issuance of digital currencies and digital tokens and related activities must comply with the provisions of the country's securities regulations and obtain SC's permission.
(4) On January 31, 2019, SC announced the newly revised Guidelines on Recognized Markets,  which specifically added a chapter related to the regulation of digital asset transaction operators (DAX Operator) , Requiring these operators to apply to the SC for registration as a Recognized Market Operator (RMO). In June 2019, out of more than 40 digital asset exchanges in Malaysia, three exchanges (Luno Malaysia Sdn Bhd ("Luno"), SINEGY Technologies (M) Sdn Bhd and Tokenize Technology (M) Sdn Bhd) The RMO registration application was conditionally approved by SC, with Luno taking the lead in obtaining full approval in October 2019.
(5) On March 6, 2019, the SC issued a public consultation document to solicit opinions from the public on the background and basics of the ICO, risks, the need for supervision, and the proposed regulatory framework.
(6) On January 15, 2020, the SC issued guidelines to regulate IEO as a digital token issuance model that can be carried out according to law.
Second, the main content of the guidelines
The guidelines for the supervision of IEO are mainly divided into two aspects, one is to impose supervision on issuers, and the other is to impose supervision on IEO operators (that is, the entities that operate the IEO platform, usually the operators of digital asset exchanges).
(1) Supervision of the issuer
At the rule level, SC's supervision of issuers is mainly reflected in the clear provisions of the guidelines, which involve the qualifications of issuers, directors and executives, requirements for projects, issuance platforms, white papers, restrictions on the amount and use of raised funds, and information disclosure. Measures to prevent risks and conflicts of interest, marketing and more.
At the operational level, SC mainly supervises issuers through IEO operators. For example, (a) the issuer should submit an issuance application to the IEO operator for approval by the IEO operator; (b) the white paper needs to be approved by the IEO operator. At the same time, the SC reserves the right to impose supervision directly, such as (a) the issuer needs to submit a copy of the white paper to the SC, confirm with the SC that the use of funds meets the description of the white paper; (b) the SC has the right to consider it necessary (such as to ensure The market is fair and orderly or in order to protect the interests of the currency holders or the public interest), at any time, issue relevant instructions to the issuer (such as not transferring funds or assets to anyone, performing or stopping performing related acts, and removing related directors or senior executives Wait).
1. Basic requirements for issuers
The basic requirements of the guidelines for issuers mainly involve the organizational form (need to be a company, but not a listed company or an exempt private company), the place of establishment (need to be in Malaysia), the paid-up capital (not less than RM500,000 (about 125,000) USD)), personnel (directors, senior executives, etc.), etc.
2. Shareholding requirements for directors and executives
In order to bind directors and executives, promote the smooth completion of the IEO project, protect the interests of investors, and guide the restrictive requirements on the number of shares and transfer of shares held by issuers' directors and executives in the issuer: (a) in the issue of tokens On the date, the directors and senior executives' shareholding in the issuer must not be less than 50%; and (b) after the token issuance and before the project is completed, the number of issuer shares that the first director and senior executives are entitled to transfer does not exceed their 50% of the respective shares. During this period, if the first director or senior executive transfers shares to the new director or senior executive, the number of shares that the new director or senior executive can transfer is 50% of the number of shares purchased from the first director or senior executive.
3. Requirements for the project
Not all token issuing projects can apply for IEO, and projects that can conduct IEO need to provide Malaysia with innovative solutions or meaningful digital value propositions.
4. Issuing platform requirements
Issuers can only issue tokens on one IEO platform, and cannot issue tokens on other IEO platforms or on crowdfunding platforms at the same time.
5. Requirements for raising funds
(1) Fundraising quota
The amount of funds raised by the issuer must not exceed 20 times the funds invested by the shareholders of the issuer within 12 consecutive months, and the total amount of financing must not exceed RM100 million (approximately US $ 25 million).
(2) Use of funds
The use of funds raised by the project is in accordance with the description in the white paper. After the token issuance, if the issuer needs to change the use of funds that will affect the interests of the holders, it is necessary to obtain the prior consent of the holders who hold more than 75% of the tokens.
6. Requirements for investors
(1) Investment limit
SC sets different investment amount standards for three types of investors of different nature. Among them, (a) experienced investors are not restricted by the investment amount; (b) angel investors have a period of 12 months. The domestic investment shall not exceed RM500,000 (approximately US $ 125,000); (c) Retail investors (ie retail investors) shall not exceed RM2,000 (approximately US $ 500) in a 12-month period.
(2) Cooling-off period
The project party needs to give investors a cooling-off period of 6 months (counting from the date the IEO operator receives the investment funds). If the investor regrets within this period, the IEO operator shall return to the investor the investment amount it has paid.
7. Information disclosure requirements
The issuer needs to publish annual and semi-annual reports on the IEO platform (including the number of tokens in issuance and circulation, the issuer's use of raised funds, project progress, and audited financial statements of the previous year) to enable currency holding People understand the operation of issuing and evaluating projects.
(II) Requirements for IEO operators
Under the Malaysian regulatory system, IEO operators must ensure compliance on the one hand, and on the other hand, ensure compliance by IEO issuers. The guidelines place requirements on IEO operators around these two aspects.
For the IEO operator to perform the regulatory functions granted by the SC, under the circumstances specified in the guidelines, the SC has the right to revoke the approval, order suspension or postponed token issue of the IEO project by the IEO operator.
The basic requirements of the guidelines for IEO operators mainly include: organizational form (need to be a company), place of establishment (need to be in Malaysia, paid-up capital (not less than RM5,000,000 (approximately US $ 1.25 million)), personnel (directors, executives) , Person-in-charge, controller), etc. need to be qualified.
2. Registration requirements
The entity intending to operate the IEO platform shall apply to the SC for registration as an IEO operator according to the requirements of the guidelines.
In addition, if the IEO platform has digital asset (including digital currency and digital token) transaction functions, IEO operators must also apply for registration as RMOs in accordance with the "Recognized Market Guidelines".
Due to the inevitable demand for circulation transactions after the issuance of tokens, IEO operators usually provide not only token issuance but also currency trading services to issuers through their platforms. In fact, IEO platforms are mostly digital asset exchanges. You need to apply to the SC for registration as an RMO.
3. Other major requirements for IEO operators
The guidelines set out a series of duties and responsibilities for IEO operators, including but not limited to:
(1) Formulate rules and policies for issuers to issue tokens on their platforms, but these rules and policies are subject to SC approval;
(2) Review and approve IEO. Before approving the IEO, the IEO operator needs to conduct due diligence and evaluation on the project party to understand and verify the project party's business, confirm the appropriateness of directors and executives, and understand the characteristics of the token and the Rights; (ii) judge and evaluate whether the issuer meets the requirements of the guidelines; and (c) evaluate the white paper submitted by the issuer to ensure that the content is compliant and true, accurate, not misleading or omitted;
(3) Publish white papers, annual and semi-annual reports of the issuer on its platform, and ensure that the disclosed information is true and not misleading;
(4) Open a trust account for the funds raised by the issuer and ensure that these accounts are managed by an independent trustee registered with the SC; supervise the extraction and use of the funds raised by the issuer;
(5) If the IEO operator holds the equity of the issuer, its shareholding ratio must not exceed 30%;
(6) IEO operators shall not provide financial assistance directly or indirectly to investors for the purpose of investing in tokens;
(7) Its business outsourcing, business termination and deregistration must comply with the guidelines;
(8) Subject to Malaysia's anti-money laundering, anti-terrorist financing, and personal information protection regulations.
3. Reasons for SC to regulate IEO
Judging from SC's regulatory measures and related legislative backgrounds imposed on Malaysia's digital token related activities in recent years, the author understands that SC's attitude towards ICOs has not been completely banned, but has gone through risk warning, case supervision, and legislation The regulatory process is intended to play a positive role in the issuance of tokens in promoting technological and financial innovation, expanding SME financing channels, and diversifying investment varieties, while preventing and combating fraud, money laundering, terrorist financing, market manipulation, etc. risk.
Although the measures adopted by SC were aimed at ICOs before the introduction of the guidelines, the final target of the guidelines was IEOs, not ICOs. So far, in Malaysia, only IEO can be carried out according to law, and other models of token issuance and financing activities such as ICOs have not been recognized by the regulator due to lack of legal basis.
The author understands that SC should consider the advantages of IEO over ICO when selecting the target of legal regulation. ICO is just a one-man show of the project party, and an exchange in IEO performs on the same stage with the project party. The entry of the exchange will be more beneficial to the protection of investors' rights and interests. Generally speaking, for the sake of its reputation, the exchange will attract more traffic, and it will have the incentive to screen higher-quality project parties. In order to obtain the endorsement of the exchange and successfully complete the fundraising, there is also an incentive to improve the quality of the project.
Regarding the IEO bound by the project party and the exchange as a regulatory object, it may be a more assured choice for regulators and investors.
Fourth, the SC 's regulatory characteristics of IEO
Looking at the SC's previous regulatory measures on digital token related activities in Malaysia and the main content of the newly issued guidelines, SC's supervision of the country's IEO is quite unique. For regulators in other countries, they may refer to the SC's regulatory philosophy and regulatory model to implement proper supervision of digital token issuance and exchanges in their country.
1. Active and prudent supervision
The promulgation of the guidelines shows that the positive role of IEO in innovation, financing and other aspects has been recognized by the Malaysian regulators. IEO has a clear legal basis since then, and project parties can proceed according to law.
On the other hand, SC has formulated comprehensive and detailed supervision guidelines for IEO, and has imposed strict requirements on project participants, IEO operators and investors participating in IEO, reflecting the prudent supervision of token issuance in Malaysia.
2. Supervision combining principles and rules
Some countries have incorporated the issuance of tokens into the country's existing regulatory framework for securities issuance without separately enacting new laws (such as the United States), while others have formulated specific applications for tokens based on the specific conditions of their markets. (Eg Malta).
Malaysia's supervision of the IEO is a combination of principles and rules. In addition to considering digital currencies and digital tokens as securities, the SC applies Malaysia's existing securities regulations. At the same time, it has also developed specific, detailed and specific regulatory rules for IEO. This combination of thickness and fine, old and new, not only takes into account the general nature of new things (in most cases, digital tokens are essentially similar to securities that have long been legally regulated in various countries), but also Considering the particularity of new things.
3. Introduce third-party supervision
The executors of the rules can be other parties than the authors themselves. Drawing on its experience in supervising equity crowdfunding and P2P financing, SC has also introduced the role of a third-party supervisor in the supervision of IEO-the IEO operator (usually the operating entity of the digital asset exchange), authorizing it to project Side for supervision.
Although the IEO operator is not a completely independent and uninterested third party in the IEO, the reason why the SC is so arranged may be due to the following considerations: (a) The IEO operator itself is the organizer of the IEO and Participants know the project better than SC and other parties; (b) As the operator of digital asset exchange, IEO operators have extensive and in-depth industry experience and resources, and have the ability to evaluate and screen projects; (c) IEO operators' "sit-on" with the project party is more conducive to protecting the interests of investors (if the IEO operator has not fulfilled the project evaluation obligations, the project party is not in compliance, and it is the IEO operator who needs to bear responsibility in addition to the project party) ; And (d) using the IEO operator to supervise the project party can save SC's regulatory resources.
4. Double-layer supervision
SC ’s supervision of IEO is “indirect plus direct” two-layer supervision: On the one hand, SC indirectly supervises project parties through its authorized and regulated IEO operators (eg, IEO operators are responsible for reviewing IEO applications and White paper), on the other hand, the SC can also directly supervise the project party (if necessary, the SC can issue instructions to the project party at any time).
Under this regulatory model, IEO operators are both regulators and regulated; while IEO operators perform the functions conferred by the SC, they also accept SC supervision. This supervision model of SC is somewhat similar to the relationship between mother-in-law (SC), daughter-in-law (IEO operator) and grandson (project owner) in the traditional family in the past-mother-in-law (SC) can manage daughter-in-law (IEO operator), The daughter-in-law (IEO operator) can manage the grandson (project party), and the mother-in-law (SC) can also directly manage the grandson (project party). Although the daughter-in-law (IEO operator) is responsible for supervision, the head of the family is still the mother-in-law (SC). If the grandson (project party) fails to manage it, the daughter-in-law (IEO operator) will be punished.
5. Focus on ex-ante and in-event supervision
SC's supervision of IEO is more focused on ex-ante and in-event supervision (such as the approval of the IEO operator before the project party issues tokens, the use of raised funds must be subject to the supervision of the IEO operator, and the use of funds must be confirmed with the SC. Under certain circumstances, the SC may revoke the approval of the IEO operator, request suspension or postponement of the issuance), and stifle the non-compliance of the project party in the early stage or process.
These regulatory models differ from the SEC's regulatory approach to ICO / STO. In the United States, the ICO / STO regulation applies the framework of the securities law. In addition to the issuer's STO in accordance with Reg A + rules, the securities must be registered with the SEC, and the SEC is subject to full supervision. Ex-post supervision. At the time of token issuance, the project party can determine whether to register for securities in accordance with the US securities laws and other regulations. The SEC generally does not actively intervene, but if the SEC later discovers that the token issued by the project party is a security token, the registration is not registered Yes, the SEC will come to punish at any time.
Author: Zhang Ling, a partner at law firm Han
Disclaimer: This article only represents the personal opinions of the author and does not represent the opinions of the institution. The content of this article does not constitute legal advice and investment advice. If you need to reproduce or cite any content from this article, please indicate the author's name.
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