Initial Coin Offering (ICO) is an alternative way used by companies to raise funds. Unlike Initial public offerings, investors in an ICO are granted tokens in return for investing in the project. One fundamental feature of ICOs is that tokens purchasers are not meant to become shareholders. Basically, the token allows purchasers to access the future service provided by the company. Moreover, investors have the choice of using fiat currencies or cryptocurrencies as means of payment. Thai authorities are carefully monitoring this growing market.
No Specific Regulations on ICOs
Indeed, ICOs raised some legal issues in terms of compliance with the Securities and Exchange Act B.E 2535 (SEC Act), the Anti-Money laundering Act B.E 2542 (AML Act) along with “Know Your Customer” (KYC) rules. Nowadays, there is no specific regulation on ICO in Thailand. However, this article will give you an overview of the strategic points to take into consideration before planning to set up an ICO in Thailand.
Security or Utility?
ICOs shall not be used as a way of diverting SEC’s rules and guidance. An ICO issuer offering tokens alike securities falls within the SEC Act. As a consequence, the issuer must comply with the SEC regulation and its tokens must be listed on an authorized exchange. Also, such an offering will have to be supported by a prospectus, a formal legal document that is required and filled with the Securities and Exchange Commission for the purpose of inviting any person to purchase the securities. The white paper provided by ICOs issuers is not a substitute for prospectus.
From this point, the question is how to make sure that you are offering tokens which do not fall within the qualification of security. Section 4 of the Securities and Exchange Act gives a definition of securities. Basically, tokens should consist in utilities e.g future access to company’s product or service, redeems and so on. Thus, tokens are not intended to be used as investment instruments giving rights as to company capital. This consideration is central when structuring an ICO.
That is the reason why a particular attention should be given to the redaction of the white paper. The white paper is a gauge of seriousness ensuring that the project is backed by a consistent business model and is not a scam. Actually, it also serves the purpose of assessing whether the token are likely to be qualified as Security by the SEC.
Applying best practice in terms of money laundering prevention
As said above, there is currently no specific regulation on ICO. Nevertheless, Thai authorities have already put in place a strong legal framework against money laundering currently applying to financial institutions and reporting entities. Mainly, it consists in introducing some procedures to “Know Your Customer” and the origin of their funds and reporting obligations in case of abnormal activities. Until Thai regulators issue clearer rules on ICOs, it is better to be proactive and comply with AML/KYC guidelines for more transparency.
Voluntary compliance with AML/KYC rules and guidelines has several benefits (i) it gives a greater credibility to the project and reinsure investors (ii) it is a good way to anticipate a possible change of legislation as the SEC may classify tokens as securities (iii) you may avoid a fine for non compliance with the Anti-Money laundering law in case of extensive interpretation of the AML Act.
Prospective legal developments
Potential new ICO regime
On 27th October 2017, the Securities and Exchange Commission published a public consultation on ICOs which outlines the potential direction of the future regulation. It is suggested to introduce a tailored definition for tokens which qualified as “investment participation”. “Investment participation” would refer to rights, with highly standardized terms and conditions, to participate in pooled benefits from pooled contributions which are collectively managed where investors have no control over day-to-day operation, but does not include the existing types of securities under the SEC Act. The idea is to create an ICO regime covering only ICOs offering tokens which qualified as “investment participation”. The SEC proposes that ICO for “investment participation” be initially allowed for institutional investors (II), venture capital funds (VC), private equity funds (PE), ultra high net worth investors (UHNW), as well as retail investors with some investment limit. Retail investors should be allowed to participate in ICOs, since they can play an important role in contributing to the development of the white paper and help increase the likelihood of project’s success. However, each retail investor should be subject to an investment limit of 300,000 baht per project to limit potential losses.
The SEC suggests to create a portal to ensure compliance with Anti-money laundering law. Thus, ICOs would have to be offered through this portal.