SEC’s proposed rules on ICO
Credit to Author: KELVIN LESTER LEE | Date: Tue, 07 May 2019 16:25:01 +0000
The Securities and Exchange Commission (SEC) has published the proposed rules on initial coin offering (ICO) on its website dated Dec. 28, 2018.
To begin with, ICO is defined as, “fundraising activities commonly conducted by start-ups wherein tokens are issued in return for cash, other cryptocurrencies or other assets”. With these proposed rules, the SEC became one of the first jurisdictions that took the initiative towards regulating ICOs and cryptocurrencies.
While in the process of revising the proposed rules to conform to the industry practices, the SEC observed the ongoing shift from the concept of ICO to digital assets and security tokens offering.
Therefore, in the light of the SEC’s objective to remain on top of the developments in the capital market including digital technology, it changed its direction towards the regulation of digital asset offering.
The proposed rules on digital asset offering cover the registration and disclosure requirements for digital asset offerings conducted by start-ups and corporations domiciled in the Philippines, and digital assets issued by foreign start-ups and corporations and offered to Filipinos.
All issuers who conduct digital asset offering will be required to undergo an initial assessment. This will allow the SEC to determine whether or not the digital asset being offered to the public has the characteristics of a security as defined under Section 3.1, letters (a) to (f) of the Securities Regulation Code. In addition, this will allow the SEC to assess the qualifications and disqualifications of the issuers vis-à-vis the registration requirements.
If determined to be one of security, the digital asset will undergo the registration proper phase. The registration phase requires the issuer of security digital asset to submit a prospectus and supporting exhibits. The prospectus shall contain information on the digital assets to be offered, the company offering the digital assets and the team behind the aigital asset project.
Aside from submitting the documentary requirements, the SEC will also conduct an ocular inspection and system walkthrough of the issuer’s digital asset platform. This, in turn, will allow the SEC to verify the information disclosed in the prospectus.
To ensure the funds collected from the public in the digital asset offering will be used accordingly as stated in their prospectus, the issuer will be required to deposit the private key to their wallet and collected funds in an escrow account. Recognizing the advances in technology and the innovations in the digital asset environment, issuers can utilize other methods (such as ‘smart contracts’) aside from escrow agreements, provided the issuer can show the chosen method will sufficiently protect the funds.
The issuer will also be required to submit ongoing reporting requirements such as annual financial statements, code audit reports, quarterly unaudited financial statements and project updates.
In view of the noble duty to promote public interest and protect investors, the proposed rules also include qualifications and disqualifications of issuers, team members and advisors, allowed and disallowed advertising and required contents of the whitepaper.
Lastly, to give a chance for existing digital asset projects, digital asset issuers are allowed three months from implementation of the proposed rules to file for initial assessment of their digital assets.
The proposed rules for digital asset offering will be complemented by the proposed rules for digital asset exchange currently being drafted by the SEC. These rules aim to protect investors and promote public interest while supporting innovations in digital technology.
Kelvin Lester K. Lee is a Commissioner of the Securities and Exchange Commission (SEC). The views and opinions stated herein are his own. You may email your comments and questions to oclee@sec.gov.ph.
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