Good news for companies in the blockchain and token economy looking at running Initial Coin Offerings or Token Generating Events (ICOs or TGEs) from New Zealand. The Financial Markets Authority (FMA) is working on further guidance aimed at clarifying the New Zealand regulatory position and providing more certainty in this fast-moving space. The FMA gave a preview of this guidance at the latest meeting of the Cryptocurrency/ICO Regulatory Working Group last week.
The FMA is keen to stress that it wants to engage with businesses considering ICOs/TGEs as early as possible in the development process, to help determine whether their propositions fall within the FMA’s remit and provide further guidance where possible.
The highlights of the previewed guidance are:
Treatment of Utility Tokens
“Utility” tokens (tokens that do not have characteristics of investment/financial products and generally carry a right to access a company’s platform, product or service) will not be viewed as Financial Products (ie in this case Managed Investment Products) under the Financial Markets Conduct Act regime – simply because they may have a value on the secondary market.
This is helpful as it confirms that, as long as utility tokens are designed appropriately, they can be offered to retail investors in NZ without being subject to full licensing, governance and disclosure requirements.
It also means that utility tokens can be offered on a New Zealand crypto exchange without the need to get a financial product market licence.
White Papers and Fair Dealing Requirements
The FMA is keen to emphasise that although utility tokens are not Financial Products, they are likely to involve either a “value transfer service” or “issuing and managing a means of payment” – both of which are types of “financial service” as defined in the relevant legislation. Anyone providing a “financial service” has compliance obligations in relation to “fair dealing” and restricted communications requirements.
The FMA has also clarified that ICOs/TGEs that offer tokens that are Financial Products (sometimes called “security tokens”), but only issue those tokens to wholesale investors or to investors based outside New Zealand, are also not subject to full licensing, governance and disclosure requirements, but must still comply with “fair dealing” and restricted communications requirements.
What this means in practice is:
- Statements around ICOs/TGEs (particularly in white papers) need to be accurate and able to be substantiated.
- Statements should be very clear about which features of the proposition have already been achieved, versus features that are aspirational or conditional on assumptions being met.
- Assumptions should be stated (or links provided to additional information) and substantiation material should be immediately available for the FMA’s inspection on request.
- In the same way as is standard for ‘traditional’ investment products, communications should make it clear that past performance is not indicative of future performance. Projections about future performance should be based on reasonable assumptions and state there is no guarantee they will actually happen.
- If the overall impression of the white paper or other promotional material is misleading, it will be in breach of the fair dealing requirements no matter what the fine print says. This includes omitting material information or ‘cherry picking’ that creates a skewed impression.
- ICO/TGE issuers will probably need to be registered Financial Service Providers and members of an approved Dispute Resolution Scheme.
Other Key Points
- It doesn’t matter whether the ICO/TGE relates to a proposition that is complete, partial, or just an idea – the FMA will look at the specific rights the purchaser gets in exchange for providing funding. It will consider the location of issuers and purchasers, and the relevant definitions in the legislation for financial services and financial products, to assess the compliance obligations.
- Even if you are only targeting investors based offshore, you will still be caught by the relevant regulatory requirements if you are based in New Zealand and providing a financial service.
- “Security” tokens (or other tokens which function in the same or similar way as equivalent financial products) will be treated as such for the purposes of the regulations, and when offered to NZ retail investors, will be subject to the regulatory requirements applicable to the relevant financial product.
- Even if your platform or token falls outside the remit of the FMA and financial services regulation, remember that “fair dealing” requirements apply to all trading of assets, commodities, goods and services under the Fair Trading Act – as do existing laws preventing fraudulent conduct and obtaining money by deception. White papers and other communications will need to be on the right side of these laws in all circumstances.
- It's important to remember that the FMA will take a “case-by-case” approach to its analysis of ICOs/TGEs and the underlying coins/tokens against the legislation. Also, while the above points broadly reflect the position the FMA is taking in the market, this may change when the final guidance is published (although we would be surprised if there are major deviations).
More certainty is good news for the industry
Along with the guidance around taxation of cryptocurrencies recently released by Inland Revenue, the FMA’s guidance is good news for blockchain and crypto companies and investors.
This open and proactive approach by New Zealand regulators, along with our comparatively modern and straightforward legislation, provides clarity in a complex space. It should also encourage high quality businesses (who see regulation as an asset) and potential investors (who seek more than pure speculation) to look closely at New Zealand as a place to do business.
This guidance will not completely remove the sometimes thorny issues inherent in assessing these new and fast-changing “financial services” against an existing regulatory regime. But it does provide a helpful setting for companies, investors and their advisers to navigate the complexity.
If you are interested in discussing the specifics or are looking for tailored advice in this area, please get in touch.