The Securities and Exchange Commission (SEC) has issued a draft regulatory framework to govern initial coin offerings (ICOs) of start-up firms, companies registered in the Philippines and other companies targeting to sell security tokens to Filipino investors.
The SEC said the registration process for initial public offering (IPO) might not be fit for ICOs, thereby requiring the formulation of separate rules.
The ICO issuer is required to keep the ICO proceeds under escrow with a reputable independent escrow agent. They can be withdrawn only upon the presentation of the issuer’s work progress report. The escrow agent will return the proceeds to the investors in case the soft cap of the project is not reached or on a pro rata basis, in case the project is abandoned by the issuer before completion.
The proposed rules—which are still subject to public feedback—involve a two-pronged assessment of the ICOs: initial assessment and registration proper.
All ICOs conducted within the Philippines or by Philippine start-ups or corporations are required to undergo an initial assessment. They have to submit an initial assessment request and attached documents, including the proposed “white paper,” wherein said start-up or corporation will have the burden to prove that the tokens are not security tokens.
“Study of the white papers of various ICOs that have been conducted within the Philippines shows that the proponents of such ICOs claim that the tokens being issued are not securities and therefore not under the jurisdiction of the SEC. Allowing this practice is proven dangerous to the investing public who are left with no clear recourse once the ICOs are proven to be scams,” the SEC said in a statement.
“Therefore, the SEC will put the burden of proving that the tokens issued through an ICO in the hands of the proponents by presuming that the tokens are securities unless proven otherwise. The proposed rules are benchmarked from the rules in various jurisdictions and markets,” it added.
ICOs refer to distributed ledger technology fund-raising operations involving the issuance of tokens in return for cash, other cryptocurrencies or other assets. They involve coins (or tokens) being issued in order to raise money from the general public.
The SEC will have 20 days upon receipt of complete documents to determine whether the tokens are security tokens or not. If it finds that the tokens are indeed security tokens—and unless the ICO falls under the exemptions from registration provided under the rules or conducted exclusively through crowdfunding portals under the proposed rules for crowdfunding—the issuer must register the security tokens before the start of the preselling period.
Start-ups that will conduct ICOs of security tokens will be required to incorporate; and in the case of foreign corporations, required to maintain a branch office in the Philippines.
The SEC may require the amendment to the white paper/proposed white paper to conform to the documents submitted with the corporate watchdog and/or to include all the information required under the proposed rules.
The members of the team and the advisors of the ICO project “should possess all the qualifications and none of the disqualifications provided” under the proposed rules.
The issuer of the security tokens are required to submit, among the other documents, a code audit report issued by an independent code auditor, including but not limited to testing of the source code, know-your-client/Anti-Money Laundering Act framework, technology risks and security protocols. Regular code audit reports will also be required to be submitted for monitoring of the project, in addition to other continuing reports specified under the proposed rules.
The SEC or its duly authorized representatives will conduct an ocular inspection of the Philippine office of the issuer and its operating system before the approval of any registration for a security token ICO.