SC prescribes IEO model for digital token offering

This article first appeared in The Edge Financial Daily, on January 16, 2020.
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KUALA LUMPUR: The Securities Commission Malaysia (SC) has set out the requirements for offerings of digital tokens to be carried out through an initial exchange offering (IEO) platform operator that is registered with the commission.

Yesterday, the SC published its guidelines on digital assets, which was based on feedback received from the public following the issuance of its consultation paper in March last year.

“Based on the responses received, there is overwhelming industry support for the SC’s proposal to leverage the expertise of a platform operator to review applications for issuance of digital tokens for fundraising.

“The IEO platform operator would be required to carry out the necessary assessment and due diligence to, among others, verify the business of the issuer and the fit and properness of the issuer’s board, as well as understand the features of the digital tokens,” the SC said in a statement yesterday.

The vetting aspect by platform operator sets it apart from the initial coin offering (ICO) model in which issuers promote their ICOs by themselves or with influencers. In the past, a large number of ICOs have gone unvetted, and have been subject to scams.

In the first phase of the implementation of the guidelines, the SC will work with the relevant platform operators in assessing eligible issuers.

 

Who can be an issuer?

A company seeking to raise funds via an IEO has to be a locally incorporated company with a minimum paid-up capital of RM500,000, with its main business operations in Malaysia.

While public-listed companies are not allowed to issue digital tokens directly, an unlisted subsidiary or a special purpose vehicle of a public-listed company may qualify as an issuer.

Each offering must be accompanied by a White Paper that has been assessed by the IEO operator, and which must be furnished to the SC. An issuer must prepare and publish on the IEO platform an annual report and semi-annual report which contain necessary information to enable token holders to evaluate the performance of the issuer.

As for the funds’ purpose, the issuer must demonstrate it has an “innovative solution” or a “meaningful digital value proposition for Malaysia”. The project has to provide a solution or addresses an existing market need or problem, and improves the efficiency of an existing process or service undertaken by the issuer or the industry, through the application of distributed ledger technology.

The fundraising limit is calculated as a multiple of 20 times the shareholders’ funds, and subject to a ceiling of RM100 million.

SC chairman Datuk Syed Zaid Albar said  digital tokens can provide an alternative fundraising avenue for early stage entrepreneurs.

“This initiative supports Malaysia’s Shared Prosperity Vision 2030 (SPV2030) by supporting the growth of SMEs (small and medium enterprises) and micro businesses which are targeted to contribute 50% to Malaysia’s GDP (gross domestic product).

“It [is] also aligned with SPV2030’s aspiration to create 30% high-technology Malaysian companies,” he said in the SC’s statement.

 

Who can be an investor?

Retail investors will be limited to RM2,000 per offering, and a total of RM20,000 per year. For angel investors, defined as those with gross annual income of not less than RM180,000, they are allowed a maximum investment of RM500,000 per year. There are no restrictions on investment amount for sophisticated investors.

The currency used to purchase the digital tokens will be the ringgit.

As to returns investors can get, SC executive director for digital strategy and innovation Chin Wei Min said it would depend on what the issuer has stipulated on its White Paper.

“It depends on how the token is structured [in the White Paper], for example investors may be granted rights to use the technology [they are funding], or they could get some discounts, licences or memberships,” he said in the media briefing on the guidelines.

Who can be an IEO platform operator?

An IEO operator must be a locally incorporated company with a minimum paid-up capital of RM5 million. If the company wishes to facilitate the trading of digital assets on its platform, it has to be a registered digital asset exchange operator under the SC’s guidelines on recognised market.

Aside from vetting the issuers, the IEO operator has to ensure that the trust accounts for receiving and paying out monies is maintained in licenced institutions, and to be administered by a trustee registered with the SC.

Funds will only be released by the IEO operator to the issuer after the targeted amount sought to be raised has been met, with no material adverse change relating to the offer during the period.

The SC’s guidelines will take effect in the second half of this year to allow potential issuers, platform operators and investors to familiarise themselves with the requirements in the guidelines.