We have seen a marked increase in interest in the region for Initial Coin Offerings, but at present, other than in countries that have expressly banned ICO activities (such as China and South Korea) there are no specific regulations governing ICOs.
Countries such as the United States, through the Securities and Exchange Commission (SEC), have indicated that virtually all tokens in the United States are deemed to be securities and that, as a result, token offerings should comply with all applicable federal and state securities laws.
Switzerland, through the Swiss Financial Market Supervisory Authority (FINMA), which is at the forefront of ICO regulation, released guidelines on 16 February 2018, explaining a plan to regulate ICO activity using a three-tier system for identifying tokens, although these have not yet been implemented.
With respect to the UAE, from an issuer’s perspective, the relevant regulatory bodies to consider are the Dubai International Financial Centre (DIFC), the Securities and Commodities Authority (SCA) and the Abu Dhabi Global Markets (ADGM).
Generally, the position in the UAE is that ICOs are not currently regulated and there is, therefore, no source of legislation that deals specifically with the topic, nor any restrictions that apply to the manner in which a token offering should be implemented.
The Abu Dhabi Global Market (ADGM) issued supplementary guidance through the Financial Services Regulatory Authority (FSRA) on the ‘Regulation of Initial Coin/Token Offerings and Virtual Currencies under the Financial Services and Markets Regulations (FSMR)’ in October 2017 (the ‘guidelines’).
The guidelines seek to provide some direction as to how ICOs are to be treated by local authorities and regulators. They state that if ICOs are deemed to be an offering of ‘Security Tokens’, as opposed to ‘Utility Tokens’, they will be subject to governance by the FSRA.
The guidelines specifically state that whether an ICO is to be regulated will be assessed by the FSRA on a ‘case-by-case basis’ and, significantly, if ICO tokens are deemed to exhibit the characteristics of a security, the FSRA may subject them to the same regulatory obligations.
Specifically, under Sections 58 to 71 of FSMR and Chapter 4 of the Markets Rules, “when an Issuer wishes to make an Offer of Securities to the Public in or from the ADGM, these requirements include, for example, the obligation to publish a Prospectus under Section 61 of FSMR”.
The guidelines further explain that “not all ICOs constitute an Offer of Securities under the FSMR or Market Rules”.
“Where tokens do not have the features and characteristics of Securities such as Shares, Debentures or units in a fund, the offer of such tokens is unlikely” to be considered as a securities offer, the guidelines state, and are therefore not likely to be regulated as one.
As a result, an issuer seeking to launch an ICO in or from the ADGM should approach the FSRA at the earliest opportunity to ensure that its offer is properly categorised and, therefore, exempt from FSMR regulations.
The Dubai Financial Services Authority (DFSA), which is the financial regulator of the DIFC, issued a warning to potential investors of cryptocurrency and ICOs in September 2017, stating that ICOs should be treated as “high-risk investments”.
It went on to state that the DFSA does not currently regulate these types of product offerings or license such firms in the DIFC. The DFSA’s current position is that it neither condones nor prohibits ICOs, but that anyone who invests in such a venture should do so with extreme caution and with the knowledge that ICOs are not regulated.
The Securities and Commodities Authority (SCA), which regulates the UAE’s financial and commodities markets, issued a circular on 2 February 2018 warning investors against digital, token-based fundraising activities (including ICOs). The SCA further reiterated that it does not recognise, regulate or supervise any ICO presently and that ICO investments are not offered legal or regulatory protection.
Although there is currently no specific legislation or regulation in place in the UAE that governs ICO activity, it is something that the regulatory bodies have on their radar and the level of regulatory scrutiny is likely to increase as time goes on.
Moreover, existing securities regulations and requirements may be applicable to your proposed model now, even if your documentation (Information Memorandum and White Paper) seeks to clarify that your token offering is one of utility and not as a security. There remains a risk that regulators will treat the ICO as a securities offering, including potentially retrospectively.
As such, it is important to notify the relevant regulatory body in advance of launching such an offer to ensure that there are no breaches of local law or regulation that may lead to fines or penalties.
We have found that ICOs being launched in the UAE will frequently have a foreign nexus, sometimes with an international issuer and/or investors subscribing from various other jurisdictions. As a result, it is imperative that issuers seek early legal advice from an international law firm familiar with the changing landscape in various key jurisdictions.