Bermuda Launches ICO and Digital Assets Legislative Framework

About Jeremy LeeseJeremy Leese

Jeremy’s practice focuses on corporate finance, mergers and acquisitions, corporate reorganisations and restructurings, banking and international real estate finance, structured finance, as well as regulatory and legislative compliance.

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During April 2018, the Government of Bermuda tabled the Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 (the “ICO Act”), introducing a statutory framework for initial coin offerings (“ICOs”). By implementing this new legislation, the Bermuda Government is hoping to lay the foundation for the jurisdiction to become a leading global blockchain and ICO centre. The ICO Act regulates offerings of ‘digital assets’, which are meant to capture all of the various categories of digital coins and tokens (whether they be utility, securitized, equity or otherwise) being issued as ICOs and via token sales. The purpose of the ICO Act is to only regulate those ICOs and token sales which are public crowd funding or similar type projects. It is not intended to regulate either private sales or those which are engaged in the business of pure virtual currency issuances. Digital asset offerings will be conducted in accordance with the requirements of published regulations as well as ongoing supervision and compliance requirements, including AML/ATF.

The ICO Act provides that offerings of ICOs will be treated as a restricted business activity that will require the consent of Bermuda’s Minister of Finance. It is intended that a FinTech Advisory Committee will be appointed to assist with initial reviews of applications and to ensure that they meet certain minimum criteria regulations.

A company wishing to launch an ICO can incorporate using Bermuda’s usual incorporation procedures. However, it will not be able to commence its ICO offering without first obtaining the Minister’s approval. As part of that process, the applicant must provide a copy of the draft ICO offering document and any other documents required by the Minister. The Minister may, if he deems necessary, impose appropriate conditions on the applicant or on its ICO.

The minimum criteria which should be included in the application for consent are matters such as:

  • details about the founder(s), promoter, and any other persons connected to the business and the underlying digital assets offered for sale;
  • details regarding licences, permissions or other authority regarding financial markets in any other jurisdiction;
  • details regarding the development and implementation of any product, service or other project related to the ICO, including timelines for completion;
  • details about the target market and any restrictions regarding participants;
  • the amount of money intended to be raised via the ICO and intended purpose/use for the funds;
  • details regarding the underlying digital asset including accompanying rights, features, functionality, documentation of participants and intended transferability;
  • details regarding the technology to be used; the ability of the technical platform to enable the collection, and confirmation and storage of purchaser identity information; and
  • details regarding compliance and auditing of ICO transactions.

The ICO offering document must also be filed with the Bermuda Registrar of Companies. The offering document must include a certification by counsel or an officer of the applicant that it includes certain minimum requirements (similar to the minimum requirements which apply to the offering of securities to the public pursuant to the Companies Act 1981). These include matters such as:

  • details regarding the promoter including business lines and company officers;
  • the business or proposed business of the company;
  • the amount of money intended to be raised pursuant to the ICO;
  • disclosure as to the allocation of the amounts to be raised amongst the classes of any issuance (pre-sale, post ICO);
  • rights and restrictions in relation to the digital asset issued;
  • proposed timeline for any project to be completed with funds raised via the ICO;
  • information regarding the opening and closing of the ICO offer period;
  • all commissions payable on the sale of the digital assets that are being offered;
  • relevant risk warnings; and
  • statements on how personal information will be used.

A general risk statement is required to be included in the ICO offering document which sets out substantial project risks, impacts to the purchasers in the event that the project fails and any disclaimers of warranties or guarantees that may impact the participants. The participants are also provided with a cooling off period during which they may withdraw from the ICO offering. In the event that information in the ICO offering document becomes inaccurate in any material respect, there is an obligation that the offering document is updated as soon as reasonably practicable, and that supplementary particulars are filed with the Registrar of Companies. There are also penalties for publication of untrue statements or misstatements that are not corrected.

The ICO Act is part of a wider initiative to provide regulatory certainty and a reliable legal framework with a view to creating an environment within which companies focused on blockchain, virtual currencies and other digital assets will thrive, whilst also implementing the highest standards of corporate governance, transparency and consumer and market protections.

As part of this progressive programme, it has been announced that further legislation would be introduced over the course of the coming months, including the Virtual Currency Business Act 2018, set to be tabled during May 2018, a Bermuda digital identification platform (E-ID) in July 2018, and Virtual Currency Exchange targeted for September 2018.

The Virtual Currency Business Act 2018 (the “VCB Act”), along with published regulations and a code of conduct, will establish a licensing and supervisory regime for entities engaged in virtual currency business and the provision of services related to digital currencies and assets, including custody and exchange activities, e-wallets and similar structures. . The VCB Act has already been published in draft form, along with a consultation paper, for industry feedback.

The Government of Bermuda emphasised its commitment to this space, highlighting the collaborative approach to the development of the digital assets regulatory framework. The framework was described as the product of work across multiple government ministries and departments, and the focused engagement of the Bermuda Monetary Authority, as well as internationally recognised advisors and industry experts. The stated objective of both the government and the regulator is to be a global market leader, setting the standard for market best practices and effective, efficient regulation and supervision of digital assets and related businesses.

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