ICO Legislation Takes Effect and ICO Regulations Published
About Jeremy 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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The Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 (the “ICO Act”) became operative on 9 July 2018 and the underlying Companies and Limited Liability Company (Initial Coin Offering) Regulations 2018 (the “ICO Regulations”, together with the ICO Act, the “ICO Legislation”) were published on 10 July 2018.
The ICO Legislation governs all aspects of offering digital assets to the public in or from Bermuda. A digital asset covers anything that exists in binary format, including all forms of cryptocurrencies, digital coins and tokens issued in connection with an Initial Coin Offering (an “ICO”), which themselves are fundraising mechanisms similar to Initial Public Offerings, or IPOs, except that tokens, rather than shares, are issued.
To Whom Does The ICO Legislation Apply?
It is worth pointing out that the ICO Legislation does not seek to regulate persons or companies who are concerned solely with private sales of or whose ordinary business involves the acquisition, disposal or holding of digital assets. However, it does apply to anyone who is interested in creating, promoting, investing in and using an ICO and digital assets as well as companies who are seeking to raise capital through an ICO.
Once you have determined that you wish to conduct an ICO utilising the Bermuda legislation, you must incorporation a Bermuda registered vehicle to do so, as only companies registered under the Companies Act 1981 (as amended) or the Limited Liability Company Act 2016 (as amended) who have the consent of the Minister of Finance (the “Minister”) are permitted to conduct ICOs in or from within Bermuda
What Is the Application Procedure?
Under the ICO Legislation, an ICO is treated as what is known in Bermuda as a “restricted business activity”, which needs the prior consent from the Minister (who will be assisted by a FinTech Advisory Committee in reviewing all applications).
Such application for consent has to be submitted to the Minister and shall include:
(i) the ICO offer document (please see the ICO Act with regard to the required contents), commonly referred by the industry as a white paper (a “White Paper”), which, as soon as reasonably practicable after its publication in electronic form, must be signed by or on behalf of the directors of the company and filed with the Registrar of Companies; and
(ii) certain minimum required information as set out in the ICO Regulations
The intended application fee to obtain the consent of the Minister to an ICO is BM$5,000. The government filing fee for the White Paper is BM$95. It should be noted that an ICO fee will also be due on or after closing of an ICO, to be calculated based upon the value raised. We await further information on the specifics of the scale of such ICO fee.
There are certain statutory exemptions in the ICO Legislation that excuse an issuer from needing to file White Paper, including, but not limited to, whether the digital assets are listed on an appointed stock exchange or appointed digital asset exchange or whether the company is subject to the rules or regulations of a competent regulatory authority which does not require filing.
What Are the Initial and Ongoing Compliance Obligations?
The ICO Legislation requires issuers to have in place suitable procedures to ensure that they verify (on an enhanced due diligence basis, as necessary) the identity of the participants in the ICO and that the issuer itself complies with all confidentiality, disclosure of information and connected matters under Bermuda laws. The identification and verification of participants should occur prior to the issuance of any digital assets, subject to certain exemptions (including if the rights and functionalities are such that the digital asset can only be used for services and products provided by the ICO issuer).
Once the ICO has gone live, the promoter shall at all times maintain and make available an electronic facility (the “ICO Platform”), so that relevant parties to the ICO have the opportunity to assess and enquire more about the ICO. The ICO Platform must (i) contain a general risk warning statement and (ii) specify how a participant in an ICO may withdraw its application. Under the ICO Legislation, an application can be withdrawn by a participant three business days after such application is made.
After an ICO, the issuing company must carry out an internal compliance review with respect to the conduct of its ICO and its financial operations and prepare a compliance report, which has to be filed with the Registrar of Companies within 90 days following the issue date for the ICO.
We will keep you updated on further developments in the fast-evolving FinTech space in Bermuda, as efforts continue to mark the jurisdiction as a global leader in the regulation and promotion of digital asset business.