The Philippines’ Securities and Exchange Commission has released, for public comment, its proposed rules on initial coin offerings (ICOs).
Under the draft rules, tokens issued by startups or companies conducting an ICO would be regarded as a security under Section 3.1 of the Securities Regulation Code, and therefore, required to be registered with the SEC and provide the necessary disclosures for the protection of the investing public.
The SEC noted that “despite being analogous to securities, the present registration process for initial public offering (IPO) may not be tailor fit for ICOs. Hence, the proposed rules have been formulated for the registration of security tokens offered through initial coin offerings.”
The key points of the proposed rules are as follows:
• The proposed rules shall cover the conduct of ICOs wherein convertible security tokens are issued by start-ups and/or registered corporations organized in the Philippines, and start-ups and/or corporations conducting ICOs targeting Filipinos, through online platforms.
• The proposed rules shall involve a two-pronged assessment of the ICOs: (a) initial assessment and (b) registration proper.
• All ICOs conducted within the Philippines or by Philippine startups or corporations shall be required to undergo an initial assessment by submission of initial assessment request and attached documents (including the proposed whitepaper) wherein said startup or corporation shall have the burden to prove that the tokens are not security tokens.
• The SEC shall have 20 days upon receipt of complete documents for initial assessment to determine whether the tokens are security tokens or not. If it finds that the tokens are indeed security tokens, and unless the ICO falls under the exemptions from registration provided under the rules or conducted exclusively through crowdfunding portals under the proposed rules for crowdfunding, the issuer must register the security tokens (registration proper) before the start of the pre-sale.
• Startups who will conduct ICOs of security tokens shall be required to incorporate; and in the case of foreign corporations, required to maintain a branch office in the Philippines.
• SEC has the power to require the amendment to the whitepaper/proposed whitepaper to conform to the documents submitted with the Commission and/or to include all the information required under the proposed rules.
• The members of the team and the advisers of the ICO project should possess all the qualifications and none of the disqualifications provided under the proposed rules on initial coin offerings;
• The Issuer of the security tokens are required to submit, among the other documents, as exhibits to the registration statement a code audit report issued by an independent code auditor, including but not limited to testing of the source code, KYC/AMLA framework, technology risks and security protocols.
• Regular code audit reports shall also be required to be submitted for monitoring of the project, in addition to other continuing reports specified under the proposed rules.
• The SEC or its duly authorized representatives shall conduct an ocular inspection of the Philippine office of the Issuer and system walkthrough of the operating system before the approval of any registration for a security token ICO.
• The proposed rules define the allowable means of advertising and prohibited advertising practices (including deceptive advertising).
• Entities that conducted an ICO prior to the implementation of the proposed rules are given 3 months to submit the initial assessment request to the Commission; and, the issuer of a security token ICO is required to keep the proceeds under escrow with a reputable independent escrow agent. The Escrow Agreement should be submitted as part of the exhibits attached to the registration statement and should provide, among others, (1) that the said proceeds shall be withdrawn only upon the presentation of the Issuer’s work progress report, and (2) that the Escrow Agent will return the said proceeds to the investors in case the soft cap of the project is not reached or in a pro rata basis in case the project is abandoned by the issuer before completion.
The SEC noted that a studies of the whitepapers of various ICOs within the Philippines show that the proponents of such ICOs claim that the tokens being issued are not securities and therefore not under the jurisdiction of the SEC.
“Allowing this practice is proven dangerous to the investing public who are left with no clear recourse once the said ICOs are proven to be scams,” said the SEC press release.
“Therefore, the SEC will put the burden of proving that the tokens issued through an ICO in the hands of the proponents by presuming that the tokens are securities unless proven otherwise. The proposed rules are benchmarked from the rules in various jurisdictions and markets,” it concluded.