Securities Commission Public Consultation Papers: (A) Proposed Regulatory Framework for the Issuance of Digital Assets through Initial Coin Offerings (ICOs) and (B) Property Crowdfunding
The Securities Commission (“SC”) has, on 6 March 2019, published two consultation papers calling for feedback from the public on the framework to be used for ICOs and property crowdfunding. We set out brief details below.
A. PUBLIC CONSULTATION PAPER IN RESPECT OF A PROPOSED REGULATORY FRAMEWORK FOR THE ISSUANCE OF DIGITAL ASSETS THROUGH ICOs
ICOs are an alternative fundraising avenue that leverage distributed ledger technology including blockchain. In an ICO, an issuer who is typically an early-stage venture, creates and issues its own digital assets in exchange for established digital currency or fiat currency. The proceeds from the ICO are then purportedly used to build and develop its venture. The digital asset received by the investors is often representative of their interests, rights or benefits in the ICO issuer or the product or services of the ICO issuer. Examples of such rights and returns could include rights to monetary returns, projected returns from trading, access to facilities or discount entitlement on products.
This consultation paper sets out some background as to the nature of digital assets as well the risks involved in investing in such digital assets. It then proceeds to focus on the proposed regulatory framework for the issuance of digital assets through ICOs taking into account the needs of the industry on the one hand and investor protection on the other.
A two-pronged regulatory approach has been proposed by the SC, i.e.
- an authorisation for the offering / issuance of the ICO; and
- the registration of a disclosure document (“Whitepaper”) which complies with minimum requirements set by the SC.
In relation to (a), the SC proposes undertaking an assessment of the ICO by applying specific criteria for the assessment of the ICO as well as imposing eligibility criteria on the issuer of the ICO. Accordingly, the consultation paper discusses, among other things, issues such as the fit and properness of an ICO issuer and its directors and management and the digital value proposition of the ICO’s underlying business / project. It is proposed that a potential ICO issuer must be a locally incorporated company which has its main business within Malaysia and has a minimum paid up capital of RM500,000. In the initial phase of the ICO framework, the SC also proposes that the issuer should not be a public listed company. Other proposals include limiting the amount of investment that can be raised through an ICO, requiring at least 50% of the proceeds of an ICO to be utilised in Malaysia (or if the ICO is asset-backed, ensuring that at least 50% of the assets are based in Malaysia) and restricting the withdrawal or utilisation of investors’ monies by the ICO issuer to milestones disclosed in the Whitepaper.
The SC also proposes that an ICO issuer be required to approach a third party to agree to “host” the ICO and assess its Whitepaper prior to it submitting a formal application to the SC. It is proposed that the third party “host” be a recognised market operator or other person recognised by the SC as having the necessary skills and expertise.
In relation to (b), the SC proposes that any offering of an ICO must be accompanied by a Whitepaper which must be submitted for registration by the SC. Such Whitepaper will need to meet the disclosure requirements stipulated by the SC. In deciding whether or not to register a Whitepaper, the SC may take into consideration the pre-approval evaluation and assessment carried out by the third party service provider, or recognised market operator (as discussed above).
B. PUBLIC CONSULTATION PAPER IN RESPECT OF A PROPOSED REGULATORY FRAMEWORK FOR PROPERTY CROWDFUNDING
Property crowdfunding aims to provide an alternative source of financing, particularly tailored to first-time homebuyers. It is intended to enable a first-time homebuyer to access funding to purchase his or her first property. At the same time, it will enable investors to access a new type of investment product.
As a concept, property crowdfunding refers to a form of online fundraising that envisages a homebuyer obtaining funds to pay for the purchase price of a property through investments from a relatively large number of investors via an online platform publicising and facilitating such transactions. Investors who are platform members can browse through a list of properties offered on the platform to find opportunities that meet their investment criteria (for example, the location, property type, entry level, estimated returns and the background of the proposed homebuyer). The investors put in their investment sum, which is then held by the platform operator until the fundraising target is achieved.
This consultation paper starts by laying down the basic mechanism of a property crowdfunding scheme and the relevant risks to be considered. It then proposes several regulatory requirements to be imposed on the property crowdfunding scheme and its participants to mitigate risks involved with such a scheme, such as –
- imposing requirements on platform operators- such as criteria to qualify as a platform operator, obligations of a platform operator and permissible and non-permissible activities of a platform operator;
- imposing requirements on homebuyers, such as criteria for homebuyers who can seek funding on the platform, funding limits and obligations of homebuyers; and
- specifying the criteria of the type of properties that can be hosted on the platform.
The SC envisages that a property crowdfunding scheme must have in place an avenue for investors to exit their investment at the end of the scheme’s tenor. Some exit options include –
- sale of the property at a price determined by an independent valuer whereby the returns to the investors, if any, will be the difference between their initial investment and the amount of money raised from the sale of the property;
- a platform operator providing a warehousing facility, where a homebuyer may sell the property to the platform operator based on a market value determined by an independent valuer; or
- having in place an underwriting agreement with a bank to provide a loan to pay off the amount due to investors.
Finally, the consultation paper proposes allowing secondary trading of investment notes relating to a property crowdfunding scheme on its platform to enable investors to sell their investment notes and cash out their position without the need to wait for the scheme’s tenor to end.
Both abovementioned consultation papers are available at the SC website (https://www.sc.com.my/regulation/consultation-papers). Written comments from the public in relation to the consultation papers are to be submitted to [email protected] by 29th March 2019.
If you have any queries arising from the above developments, please do not hesitate to get in touch with our team.
|Ivan Ho Yue Chan
|Tan Gian Chung