Initial coin offers (ICOs) and token events are a form of fundraising where you receive tokens that carry certain rights, such as providing access to a new product or service, or an interest in an underlying asset or project.
How an ICO is regulated
It depends whether:
- the token you are offering is a ‘financial product’ (this will depend on the specific characteristics and economic substance of that token);
- you are providing a ‘financial service’ (this will depend on the specific structure and features of the ICO);
- the person buying the token is a member of the general public (known as a ‘retail investor’) or a very experienced investor (known as a ‘wholesale investor’);
- the investor is based in New Zealand or overseas.
ICOs must comply with fair dealing requirements under New Zealand law.
These requirements prohibit you from engaging in misleading conduct or making deceptive statements in your white paper, website, or other promotional material associated with your ICO (such as on social media).
ICOs that offer tokens that are financial products to wholesale investors, or to investors based outside New Zealand, will not be subject to full licensing, governance and disclosure requirements under the FMC Act. However, fair dealing requirements under Part 2 of the FMC Act still apply.
ICOs and financial services
While each ICO must be looked at on an individual basis, most ICOs involve the financial service of ‘operating a value transfer service’.
ICOs may also involve the financial service of ‘issuing and managing a means of payment’ – where the tokens can be used to obtain products or services that are otherwise acquired using legal tender (such as NZ dollars), for example. Often this applies when the ICO offers a ‘utility’ or ‘application’ token.
If your ICO provides financial services, you must:
- comply with the fair dealing provisions in Part 2 of the FMC Act. These prohibit you from engaging in misleading conduct or making false, deceptive or unsubstantiated statements
- belong to a dispute resolution scheme if you offer financial services to retail clients.
In addition, if you are based in New Zealand, you must be registered on the Financial Service Providers Register (FSPR), and pay the applicable fees and levies, for each category of financial service you are in the business of providing. Anti-money laundering obligations may also apply.
How Can We Help You?
Given the nature of ICOs we suggest you contact us early in the development phase if you’re considering making an offer. We can provide guidance around whether your ICO involves a financial product or a financial service, and whether fair dealing requirements are met.
We highly recommend you not seeking to raise funds while discussions with the Regulators are ongoing.