ASIC weighs in on initial coin offerings

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The Australian Securities and Investments Commission (ASIC) has published guidance on the legal responsibilities of Australians when it comes to conducting, or investing in, initial coin offerings (ICO).

An ICO is a form of internet-based crowdfunding that can be a source of capital for startups. In return for investor cash, the organisations involved offer virtual coins such as bitcoin or ethereum, and the transaction is recorded over the blockchain.

As the independent government body points out in its ICO information sheet, anyone with access to the internet can create or invest in an ICO.

ICOs are not banned in Australia and are mostly unregulated.

“We want to ensure innovative firms understand the regulatory framework they may be operating under and ensure they meet any obligations they may have when raising funds in Australia,” ASIC Commissioner John Price said.

“ICOs are highly speculative investments, are mostly unregulated, and the chance of losing your investment is high.”

While ASIC recognises ICOs have the potential to make an important contribution to the options available to businesses to raise funds and to investment options available to investors, it said an ICO must be conducted in a manner that promotes investor trust and confidence, and complies with the relevant laws.

In Australia, the legal status of an ICO is dependent on its circumstances, which ASIC explained includes how the ICO is structured and operated, as well as the rights attached to the coin or token offered through the ICO.

The ICO will only be subject to the general law and the Australian consumer laws regarding the offer of services or products, in some cases, and in others, the ICO may be subject to the Corporations Act.

However, whether the Corporations Act applies to an ICO will depend on the type of ICO offering and what rights attach to the coins from the ICO itself, ASIC explained.

Anyone who operates a financial market in Australia must obtain a licence to do so or otherwise be exempted by the minister. In the event that the ICO or underlying coin is found to be a financial product, ASIC said it must adhere to the aforementioned rule.

Although ICOs are explained as a form of crowdfunding, ASIC urges distinction, noting ICOs will not be covered by the crowd-sourced funding (CSF) regime that comes into effect on Friday.

Australian law also prohibits misleading or deceptive conduct in a range of circumstances, including in trade or commerce, in connection with financial services, and in relation to a financial product. As a result, ASIC said care should be taken to ensure promotional communications about an ICO do not mislead or deceive potential investors, and do not contain false information.

“Consumers should understand the risks involved, including the potential for these products to be scams, before investing,” Price added.

Earlier this month, China banned ICOs, with a recent ruling from the People’s Bank of China labelling them “illegal”. As the offerings are often based on speculation, the country’s regulators believe they are likely linked to “illegal financial activities [which] seriously disrupt the economic and financial order”.

It was revealed that a hacker had made off with roughly $7.4 million in ethereum during the July ICO of CoinDash, a trading platform for cryptocurrencies. Veritaseum lost $8.4 million at its ICO, and a similar attack followed against Enigma in which at least $500,000 in ethereum was stolen.

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