SEC releases draft rules on initial coin offerings

THE SECURITIES and Exchange Commission (SEC) has issued draft guidelines for the conduct of initial coin offerings (ICOs), in a bid to keep up with the number of start-ups using this scheme to raise funds from the public.

In an e- mailed statement to reporters, the corporate regulator said the draft guidelines were patterned after rules in other jurisdictions and markets.

The draft circular defines an ICOs as “distributed ledger technology fund- raising operations involving the issuance of tokens in return for cash, other cryptocurrencies or other assets.”

The benefits of an ICO include profits through the increase in the value of tokens which can later be sold, voting or governance rights, and usage rights.

Under the draft circular, the SEC will assess an ICO in two stages, namely: the initial assessment and registration proper.

The initial assessment will require ICO proponents to prove that the tokens they have are not security tokens. Security tokens are defined as “payment, utility, and/or asset tokens that satisfy the definition of securities under the Securities Regulation Code, its implementing rules and regulations, and other issuances of the SEC.”

The SEC in a statement said it observed that several ICOs conducted prior to the release of the draft rules claimed that the tokens issued were not securities and should not be under the jurisdiction of the SEC.

“Allowing this practice has proven dangerous to the investing public who are left with no clear recourse once the said ICOs are proven to be scams. 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 SEC explained.

It will take the commission up to 20 days to complete the initial

assessment of individual ICOs to determine whether the tokens to be sold are securities.

Should the SEC find that the tokens are securities, it will order the proponent to register the coins and proceed to registration proper.

During the registration proper, the issuer will be required to submit documents providing the name, address, contact details and brief description of the corporate background of the issuer, problems in the Filipino market that the proposed ICO looks to solve, the use of the funds to be generated from the ICO, timetable of the ICO campaign and the target market, and risks in participating in the ICO, among others.

The issuer will likewise be required to submit an audit report issued by an independent code auditor. This should include results of the testing of the source code, technology risks and security protocols, among others.

The SEC will also conduct an ocular inspection of the local office of the issuer, as well as a system walkthrough of the operating system before it approves the registration of an ICO.

The SEC is asking banks, investment houses, the investing public, and other interested parties to submit comments on the proposed rules by August 31.

The founder of financial technology firm Acudeen Technologies — which recently conducted an ICO in Singapore — said the development will help filter legitimate ICOs from scams.

“I was very happy that the SEC finally came out with the rules… because right now legitimate ICOs are lumped together with less-than-legitimate ICOs,” Acudeen Founder Januario Jesus Gregorio B. Atencio III said in a phone interview.

“This will not only protect the public, but also filter those startups who are serious about fund raising.”

Mr. Atencio likened the regulations to the rules applied to companies seeking to conduct an initial public offering at the stock market, which encourage transparency and regular reporting of financial conditions.

Last January, the SEC stopped the ICO of online marketplace KROPS, headed by businessman Joseph H. Calata, for failing to register the securities to be sold 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 had been taking part in the ICO.