Fundraising crypto-style
The legal status of initial coin offerings is uncertain but as Hamish McNicol reports, interest is rising.
It's important to be innovative and to look to the future. Andrew Suggate
Most people would have heard of bitcoins, cryptocurrency and digital tokens, but few may realise how big a business raising capital with them has become.
Even fewer probably realise the complicated nature of initial coin offerings (ICOs), which so far this year have raised more than US$2 billion (NZ$2.77b), and the legal uncertainty which surround them.
New Zealand investors have definitely been involved in ICOs, but it is not clear whether anybody has ever done an ICO here.
And while some overseas regulators have issued guidance on ICOs – China even went as far as to declare them illegal – New Zealand regulators have yet to explicitly comment on them.
Minter Ellison Rudd-Watts senior associate Andrew Suggate said interest in doing an ICO in New Zealand had surged, but how existing securities law applied to them was uncertain.
It was therefore important to consider innovatively adapting our laws to ensure we uncover this possible diamond from the rough, he said.
‘‘It’s just a question of how do we apply all of the old law and the old learnings from investment offerings onto that new framework and make sure that investors are protected but that we don’t kill an industry in New Zealand and that we enable it to grow.
‘‘It’s important to be innovative and to look to the future.’’
The law firm recently issued research on how the law might be applied to ICOs and digital tokens after it found the trickle of capital raisings overseas had become a torrent.
An ICO was similar to an initial public offer (IPO) of shares in a company, but was different in that it offered digital tokens and that anybody could do one.
Some companies had raised hundreds of millions of dollars doing them this year, while hotel heiress and former reality star Paris Hilton and boxer Floyd Mayweather have both backed different offerings.
Suggate said market commentary here only went as far as saying some forms of digital tokens could be considered financial products.
The law here was that if an offer of securities to investors fitted into one of four types of financial product, it needed to comply with the regulations and disclosure required.
But because digital tokens were a new technology, Suggate said some of the offerings looked like financial products, whereas others were harder to classify.
‘‘The reason why it’s difficult is because they’re quite amorphous.
‘‘The rules of the particular tokens that are being offered can be whatever whoever’s coding it wants it to be.’’
Broadly there were four classes of tokens, including things like asset-backed tokens, which gave a digital right to an asset such as gold, as well as intrinsic tokens, which were not backed by an asset or promised any return, such as Bitcoins.
Suggate said he understood the Financial Markets Authority (FMA), which had the power to declare a security a financial product, had been looking at the issue.
An FMA spokesman said the regulator was working on a market update which it aimed to release in the next couple of months.
This had followed discussions with businesses, law firms and advisers and the FMA was supportive of innovation and fintech.
‘‘The FMA’s role is to ensure risks from new technology and products are appropriately mitigated.
‘‘If anyone is currently considering launching an ICO in New Zealand, we encourage them to approach us directly to talk through their proposal.’’