On 15 January 2020, the Securities Commission Malaysia (“SC”) released the much anticipated Guidelines on Digital Assets (“Guidelines”) that prescribe a regulatory framework governing the offering of digital tokens in Malaysia. The issuance of the Guidelines is a welcome move by the SC and is receiving overwhelming industry support as it offers an alternative channel for companies to raise funds in the country.
The Guidelines, which are expected to come into effect in the second half of 2020, provide that all offerings of digital tokens in the country shall be undertaken through an Initial Exchange Offering (“IEO”) platform that has been duly registered with the SC. To this end, the Guidelines prescribe requirements in respect of (i) IEO platforms, (ii) issuers seeking to undertake digital token offering; and (iii) investment limits.
Requirements in Respect of IEO Platforms
Unless otherwise specified by the SC, only locally incorporated companies may apply to the SC to be registered as an IEO operator. In this respect, the Guidelines set out an extensive list of criteria that the SC will consider in deciding whether to register an entity as an IEO platform. Among other things, an IEO operator must have a minimum paid-up capital of RM5,000,000 and a responsible person shall be appointed to be the main contact person liaising with the SC. Specific requirements relating to the board of directors and management team of an IEO operator are also stated in the Guidelines. Where an IEO operator seeks to facilitate the trading of digital assets, it is required to be additionally registered as a DAX operator under the Guidelines on Recognized Market.
The Guidelines also specify requirements concerning the operation of IEO platforms. For example, IEO operators shall carry out due diligence and assessment on issuers before approving a digital token offering. They should also maintain a trust account with licensed financial institutions, and keep a register of initial token holders. In addition, the Guidelines state that operators are required to establish a risk management framework and manage any conflicts of interest that arise in a prescribed manner. Lastly, IEO operators which intend to outsource their functions to third parties or cease their operation can only do so in compliance with requirements stipulated in the Guidelines.
Requirements in Respect of Issuers and Digital Offering
The Guidelines require an issuer of digital tokens to be a locally-incorporated company with business operations in Malaysia and a minimum paid-up capital of RM500,000. Other requirements relating to an issuer’s board of directors and senior management are also set out in the Guidelines.
Companies seeking to issue digital tokens are required to submit an application together with a Whitepaper to a registered IEO operator. The application should demonstrate that the underlying business of digital tokens provides an innovative solution or a meaningful value proposition for Malaysia. As far as the Whitepaper is concerned, it must contain certain minimum information (e.g. objective of the digital token offering, key characteristic of digital tokens, sustainability and scalability of underlying business, etc) as prescribed under the Guidelines.
In addition, the Guidelines specify on-going obligations that issuers have to comply with after their offering of digital tokens has been approved. For example, funds raised from the offering must only be used for the purpose stated in the Whitepaper and a mechanism to manage conflicts of interest should be established by an issuer. Other obligations such as the making of announcements in the event of material changes, reporting and audit obligations, as well as matters relating to marketing and promotion are also detailed in the Guidelines. Lastly, issuers must not be hosted concurrently on multiple IEO platforms or an equity crowdfunding platform, and the maximum amount of funds that an issuer can raise within a 12-month period is limited to 20 times of its shareholders’ fund or RM100 million, whichever is lower.
Different investment limits apply depending on the status of investors. For retail investors, a cap of RM2,000 per issuer and a total investment limit of RM20,000 within a 12-month period will apply. Angel investors can invest in the offering of digital tokens up to RM500,000 within a 12-month period, while there is no restriction for sophisticated investors.
If you have any queries arising from the above legal developments, please do not hesitate to get in touch with our team.
|Ivan Ho Yue Chan