ASIC clamps down on dodgy ICOs and crypto asset funds

Fund raisers reminded of legal obligations

The Australian Securities and Investments Commission (ASIC) today revealed it had stepped in to stop five initial coin offerings (ICOs) from raising capital since April.

The commission said the ICOs were going ahead “without the necessary investor protections” and were therefore illegal.

“These ICOs have been put on hold and some will be restructured to comply with the applicable legal requirements,” ASIC said in a statement today.

Action is also being taken against an ICO which completed.

ASIC added that it is clamping down on the issuing of Product Disclosure Statements (PDS) for crypto-asset managed investment schemes. PDSes are legal documents that contain information about a financial product, including the benefits, risks, cost and fees.

In a case last week, ASIC issued a final stop order on a PDS from Investors Exchange Limited for units in its New Dawn Fund.

“The Fund was proposing to invest in a range of cryptocurrency assets,” ASIC said, adding that Investors Exchange Limited swiftly consented to the stop order.

Commenting generally, ASIC said crypto-asset managed investment schemes commonly use of misleading or deceptive statements in sales and marketing material; are unregistered and are offered by organisations without an Australian financial services licence.

“If you raise money from the public, you have important legal obligations. It is the legal substance of your offer - not what it is called - that matters,” said ASIC Commissioner John Price.

“You should not simply assume that using an ICO structure allows you to ignore key protections there for the investing public and you should always ensure disclosure about your offer is complete and accurate,” he added.

In advice issued on ASIC’s Moneysmart website, the commission warned consumers to be wary of ICOs.

“You could lose a lot of money if you buy into an ICO without doing your research first. There has been a lot of hype around some popular cryptocurrencies, but not all ICOs are cryptocurrencies. Some are high-risk investments in start-up blockchain projects that may be nothing more than an idea. Some have turned out to be scams,” the advice states.

In September last year, ASIC released guidance for businesses that undertake ICOs. In it, the commission recognises the fundraising approach’s “potential to make an important contribution to the options available to businesses to raise funds and to investment options available to investors”.

ASIC’s corporate plan from a month earlier notes that the crypto-asset sector was small but growing fast, “resulting in increased regulatory monitoring”.

Jonathon Miller, managing director of Bit Trade, one of Australia’s first cryptocurrency exchanges when it was founded five years ago, said ASIC’s statements had been expected.

“We have been expecting ASIC to make bolder statements about the trend and look forward to seeing a more formal pathway for startups and small businesses to make use of regulated token offerings. We believe that Security Token offerings will be the next wave of innovation and look forward to working with ASIC to ensure that Australian companies and investors can take advantage of the technology,” he said.

Miller explained that ICOs present a lower cost alternative to other global capital raising approaches.

“This presents a significant opportunity for ASIC to work with technology businesses to create growth in capital markets services in Australia, else businesses will go offshore to raise funds. In the interim it is likely that some Australian companies looking to use a non-regulated token offering will do so in offshore jurisdictions,” he said.

IC Oh No

Globally, regulators are beginning to wake up to the public risk posed by ICOs.

The UK government’s Treasury Committee this week released a report calling the cryptocurrency market a “Wild West situation”.

The UK’s Financial Conduct Authority does not currently regulate cryptocurrencies but said in April that dealing, advising or providing services related to cryptocurrencies or tokens issued through ICOs would likely require its authorisation.

The same month regulators from the US Securities and Exchange Commission and House Financial Services Committee members argued over how ICO should be regulated. Some called for a “balanced approach” while others wanted a “total banning”.

Malta’s stock exchange meanwhile, last week signed an MOU with crypto exchange Binance to jointly launch a security token digital exchange. The nation’s pro-crypto stance has earned it the nickname “Blockchain Island”.

Others have toyed with the idea, although earlier this month there were reports that Goldman Sachs Group were pulling back on plans to introduce a cryptocurrency trading desk – sending digital coin values plummeting. The likes of Facebook, Google, Twitter and Snapchat have all banned cryptocurrency-related advertising from their platforms.

Given the regulatory void in Australia a number of the domestic banks refuse to bank with cryptocurrency exchanges, a source of complaint from the nascent industry.

ANZ bank told Computerworld in February that “these businesses are currently unregulated and therefore not within ANZ policy”. 

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