SC issues guidelines for initial exchange offering

The new guidelines will prescribe an IEO model where an offering is conducted via an exchange or platform

By DASHVEENJIT KAUR / Pic By MUHD AMIN NAHARUL

THE Securities Commission Malaysia (SC) has introduced new guidelines on digital assets which prescribe the regulatory requirements to conduct an offering of digital tokens.

The guidelines will be effective from the second half of this year (2H20), after which fundraising via digital token offering must only be carried out through an initial exchange offering (IEO) platform.

The platform will have to be registered only with the SC for this purpose. SC digital strategy and innovation ED Chin Wei Min (picture) said based on the responses received through public consultation, there was overwhelming support from the industry on the SC’s proposal to leverage on the expertise of a platform operator to review applications for issuance of digital tokens.

The SC issued a public consultation paper for initial coin offerings (ICOs) in March last year after the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 came into force last January.

Compared to traditional fundraising activities such as IPOs, an ICO allows a company with an innovative business proposal to raise capital before it is able to do so through venture capitalists or lenders.

It also allows the company to raise funds without selling their equity or taking out a debt while developing their innovative ideas.

“Taking into account feedback from the industry, the new guidelines will prescribe an IEO model where an offering is conducted via an exchange or platform rather than an ICO,” Chin said in a media briefing on Tuesday.

IEO Process Flow
Unlike ICOs where anyone could publish a white paper, website or smart contract, IEO’s first step would require an issuer to submit its application including a white paper to an IEO operator for approval.

The IEO operator will then assess the issuer and white paper and, if approved, facilitate the offering of the tokens to investors.

In the first phase, the SC will be working with the IEO operator in assessing the IEO issuer.

Once approved, the public may then invest in the issuer’s tokens from the IEO platform. Funds may only be released to the issuer when the target has been met.

Finally, the issuer will utilise the funds to produce the intended product or service after which, investors can also use the IEO tokens to exchange for the issuer’s product or service.

After the offering of digital tokens has been completed, the SC will conduct post-issuance monitoring of the utilisation of the proceeds.

Issuer’s Requirements
An issuer needs to be a locally incorporated exempt private company with a minimum paid-up capital of RM500,000.

According to SC rules, digital token offering may only be carried out through an electronic platform operated by an IEO operator and offering will be assessed and approved by the operator while SC retains the power to revoke approval granted.

The prospective issuer must demonstrate that it has an innovative solution or a meaningful digital value proposition.

An issuer has to ensure that digital tokens that serve as a payment instrument may only be used in exchange for the issuer’s goods and services as prescribed in the registered white paper.

The white paper, an important aspect of an offering, must also be furnished to the SC while being assessed by the IEO operator.

The white paper must contain minimum information as prescribed by the SC, including material information on the issuer, the digital token and the utilisation funds obtained through the issuer’s fundraising exercise.

An issuer may raise funds to a ceiling of RM100 million and tap on investments from retail, sophisticated and angel investors, subject to the investment limits provided in the guidelines.

Retail investors are limited to RM2,000 per offering and RM20,000 total per year while angel investors up to RM500,000 total per year, with no limit for sophisticated investors.

“Issuer needs to specify a milestone-based disbursement schedule,” the SC said.

As for governance requirements, board and senior management must in aggregate own minimum 50% equity in issuer on the issuance date and may only transfer less than 50% of initial equity holding until completion of the project.

IEO Operator’s Requirements
Platform operators would be required to be registered as a Recognised Market Operator (RMO) and once the guidelines are brought into force in 2H20, existing RMO operators, as well as new interested parties, can apply to be an IEO operator.

An IEO operator will have to be a locally incorporated company with a minimum paid-up capital of RM5 million.

In terms of governance, the SC has stated that should the IEO operator be of a public company, there should at least be one independent director, a conflict of interest framework and risk management framework including business continuity management and cyber-resiliency, among others.

There are also a number of obligations for the IEO operator, among which is carrying out due diligence and assessment on the issuer, including assessing the issuer’s white paper.

An operator has to also ensure the issuer complies with the requirements under the Digital Assets Guidelines, notifying the SC on any breaches of securities laws and material changes in the IEO.

The operator is also obliged to maintain a register of initial token holders, have in place policies and procedures on anti-money laundering and cyber security, as well as operate a trust account for both fiat currencies and digital tokens.