Securities Commission Issues Consultation Paper on Initial Coin Offerings

The Securities Commission Malaysia (‘SC’) issued Public Consultation Paper No. 1/2019 (‘CP1/2019’) on 6 March 2019 to seek feedback from the public on the Proposed Regulatory Framework for the Issuance of Digital Assets Through Initial Coin Offerings (‘ICOs’).
The SC has sought public feedback on 11 questions set out in CP1/2019.  The consultation period ends on 29 March 2109.  
Significantly, section 5 of CP1/2019 provides a brief outline on the proposed regulatory framework for ICOs, giving the public an indication of the key requirements that are likely to be included in the guidelines on ICOs when they are issued. This note will highlight some of the requirements set out in section 5.
Assessment of the ICO
In CP1/2019, the SC has stated that an ICO issuer will be required to approach a third party to “host” the ICO and assess its Whitepaper1. The “host” will either be a recognised market operator under the SC’s Guidelines on Recognized Markets or other persons recognised by the SC as having the necessary expertise to undertake the assessment.2  The ICO issuance will be subject to the SC’s approval or authorisation.
The SC has set out eight criteria for assessing an ICO in paragraph 5.10 of CP1/2019. These include: (i) the fit and properness of an ICO issuer, its board members and senior management and controller; (ii) an assessment whether the ICO’s underlying business/project demonstrates an innovative solution or a meaningful digital value proposition for Malaysia; (iii) the adequacy of the safeguards to protect the interests of existing shareholders and token holders; (iv) an evaluation of the business/project and the business/project plan of the ICO issuer; and (v) the reasonableness of the valuation methodology and assumptions for determining the price of the digital tokens.
Eligibility criteria for an ICO issuer
It is also proposed in CP1/2019 that a company is eligible to undertake an ICO if the following criteria are satisfied: (i) it is locally incorporated and carries out its main business operations in Malaysia; (ii) the company has a minimum paid up capital of RM500,000; and (iii) it is not a public listed company. The SC has clarified that a public listed company may establish a separate entity to carry out an ICO.
In addition, the board of directors and senior management team of an ICO issuer must collectively hold 50% of the equity holding of the ICO issuer. An 18-month moratorium will be imposed on the disposal of the equity holding by the aforesaid shareholders to ensure that such persons are committed to ensuring the success of the ICO.
Requirements for White Paper
An ICO offering must be accompanied by a Whitepaper which is to be submitted by the ICO issuer to the SC for registration. In deciding whether or not to register the Whitepaper, the SC may take into consideration the pre-approval evaluation and assessment carried out by a recognised market operator or third party service provider.
Among the information to be included in a Whitepaper are: (i) a brief description of the ICO issuer including, where applicable, its group structure and details of material entities within the group; (ii) the profile of the board of directors/senior management team/promoters; (iii) a brief description of the shares and/or digital tokens held by the board of directors/senior management team/promoters; (iv) the objective or purpose and timeline of the ICO and detailed information on the underlying business/project to be managed and operated by the ICO issuer; (v) the business plan, including a detailed description of the sustainability and scalability of the underlying business/project, and the targeted date for each major phase in the business/project; (vi) the targeted amount to be raised through the ICO and a schedule for utilisation of the proceeds including the details of each utilisation; (vii) the rights, conditions or functions attached to the digital tokens issued under the ICO including any specific rights/privileges/benefits attributed to a digital token holder; (viii) a discussion on the determination of the price per digital token including the valuation methodology and assumptions adopted in such calculation; (ix) the financial information including audited financial statements or management accounts (where applicable) of the ICO issuer; (x) a detailed technical description of the protocol, platform and/or application, as the case may be, and the associated benefits of the technology; and (xi) the details of the associated challenges and risks including any conflict of interest and related party transactions.
Limit on amount of funds raised through an ICO
The SC proposes that the maximum amount that an ICO issuer may raise through an ICO be limited to 10-times of the ICO issuer’s shareholders’ funds, subject to a ceiling of RM100 million.
Trust Account
The SC has also proposed that an ICO issuer be required to deposit all funds raised through the ICO in a separate trust account with a licensed bank. The trust account is to be maintained by an independent custodian, escrow agent or entity acting in the capacity of a trustee that is registered with the SC for carrying out capital market activities.
ICO proceeds
It has been proposed that, subject to exchange control requirements, at least 50% of the ICO proceeds must be utilised in Malaysia. In the case of an asset-backed ICO, at least 50% of the assets are to be based in Malaysia.
To safeguard investors’ interest, the SC has taken the view that an ICO issuer should only be allowed to withdraw or utilise investors’ monies based on the milestones disclosed in the White Paper. Confirmation of achievement of the relevant milestones is to be provided by a third party auditor to trustee of the ICO proceeds for each draw-down. Further, the ICO issuer is required to confirm to the SC that the draw-downs have been utilised for the purposes stated in the White Paper.
Governance requirements
Amongst other requirements, the SC has proposed that the ICO issuer must: (i) ensure that its directors and senior management personnel are fit and proper persons; and (ii) appoint a responsible person from among its directors or senior management team to be the main contact with the SC. The responsible person is also responsible for, among others, identifying and reporting to the SC any breach of requirements, relevant laws or material adverse change relating to the ICO or the ICO issuer.
Other ongoing obligations
Other ongoing obligations that are proposed to be imposed on an ICO issuer include: (i) annual and quarterly reporting to the SC and to the ICO investors in relation to information as may be specified by the SC; (ii) having processes to monitor anti-money laundering requirements, including know-your-client and customer due diligence on investors; and (ii) prohibition against third party endorsement and publicity of the ICO.

1 A Whitepaper is a disclosure document that includes details of the underlying business/project for which financing is being raised under the ICO, the investors’ entitlements for participating in the ICO and the technology and processes employed.
2 The SC will introduce a separate framework in relation to the authorisation of the third party to carry out this role.