SEC prepares guidelines on initial coin offerings

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By Arra B. Francia, Reporter

THE Securities and Exchange Commission (SEC) will be releasing within the year guidelines for companies seeking to conduct initial coin offerings (ICOs).

SEC Commissioner Emilio B. Aquino, who also heads the agency’s Enforcement and Investor Protection Department, said the commission is now drafting the new guidelines.

“We need to act now because ICOs are sprouting globally, not necessarily in the Philippines. We want also to come out with our own set of regulations,” Mr. Aquino said in a press briefing at the Philippine International Convention Center in Pasay City on Monday.

He said the commission will be talking with financial technology (fintech) groups from the United States and Australia to come up with a model on how to regulate ICOs, given that no concrete guidelines have been set in other jurisdictions.

“We are sitting down with a fintech group from the US, we’re also sitting down with the Australian group to present to us some of their models… In short, we are sharing notes,” Mr. Aquino said.

Some companies and individuals around the world are using ICOs to raise money for their businesses and projects. Typically, investors in ICOs exchange currency such as US dollars or cryptocurrencies in exchange for a digital asset called coin or token.

Authorities in China and South Korea have already banned coin offerings, citing the heightened risks of scams.

In the United States, SEC Chairman Jay Clayton in a statement last December warned that some coins could be considered as securities and would be in violation of securities law if not registered.

Bloomberg reported start-ups have raised around $450 million in ICOs in January, citing Coinist. In 2017, ICOs raised $3.8 billion.

Mr. Aquino said the SEC is considering the inclusion of an “accredited investors plan” in the new guidelines, which it says would ensure investors participating in the ICO have the necessary background to understand the transaction.

“We would like to believe that some people, with certain levels of financial literacy, will understand the risk of investing. We might consider that, it should be somebody who understands the risks involved,” Mr. Aquino said.

SEC Director for Markets and Securities Regulation Department Vicente Graciano P. Felizmenio, Jr. noted the guidelines for ICOs would have similarities in principle with the new rules for crowdfunding, scheduled to be released within the first quarter.

“There are some basic principles that apply to an ICO. One because there is a public offer, then it would be covered by the SRC (Securities Regulation Code) for raising the funds. It just so happens that it is related to cryptocurrency… So the same exercise, but the focus would be different… because in this case the idea about the cryptocurrency itself is very much important to understand,” Mr. Felizmenio said.

In the absence of these regulations, companies seeking to conduct an ICO in the Philippines would have to comply with the SRC and disclose to the SEC all material information related to the investment.

“We’re not altogether banning ICOs. So long as you’re able to comply, you submit to us, we feel that investor protection issues are duly addressed and we get to see our investors, and then of course following strict disclosure requirements under the SRC, then more likely we will allow it,” Mr. Aquino said.

The SEC last week stopped the ICO of online marketplace KROPS, headed by businessman Joseph H. Calata, for failing to register the securities with the commission. A cease-and-desist order was served on KROPS, as well as Black Cell Technology, Inc., Black Sands Capital, Inc., and Black Cell Technology Ltd., which have been taking part in the ICO.

With the investigation on KROPS, Mr. Aquino said all other companies that have conducted ICOs but did not register with the SEC will be considered illegal.

The commission is now in the process of investigating entities that conducted such transactions without their knowledge, and will look into complaints from investors.