This post was written by Urszula McCormack and Jack Nelson
On 24 January 2019, the Monetary Authority of Singapore (“MAS”) announced that it had issued a warning in connection with a proposed token sale that contravened the Securities and Futures Act (Cap. 298 of the Laws of Singapore) (“SFA”).
The case highlights the narrow interpretation of the Singapore accredited investor exemption for securities, and that even social media posts count as advertising. It is also a warning shot to advisors who are keen to help build their clients’ visibility.
In this post, we outline this regulatory action in light of the increasing global interest in security tokens. We explain why this case matters, and set out the preliminary questions that prospective issuers should have in mind.
What you need to know about the case
The MAS action relates to an unnamed issuer (reported in Singaporean media to be a Singaporean company) (“Issuer”) that sought to conduct a “global” token sale.
Based on what we know, this wasn’t exactly a “new kid on the block” (pardon the pun) or “clever developer with a Whitepaper” scenario. The MAS announcement makes clear that the issuer was legally advised, and was aware that the tokens that they intended to issue would constitute “securities” for the purposes of the SFA.
As in many markets, offers of securities in Singapore are regulated. In particular, as the MAS explains, offers of securities in Singapore require registration of a prospectus with the MAS.
However, the Issuer had intended to rely on exemption to this prospectus requirement – namely, the exemption available under section 275(1) of the SFA (“Accredited Investor Exemption”). So far, this seems reasonable enough.
At a high level, the Accredited Investor Exemption provides that offers of securities that are:
- made to “accredited investors”; and
- “not accompanied by an advertisement making an offer or calling attention to the offer or intended offer”,
will be exempt from the prospectus requirement.
Unfortunately for the Issuer, the Issuer’s legal advisers published a public post on LinkedIn regarding the offer. The exact contents of this post were not disclosed by the MAS. But the MAS did state that, in their view, the LinkedIn post “call[ed] attention” to the offer. Was it an irresistible “humblebrag” about acting on a cutting edge transaction? Was it an invitation to a “private event”? Or was it a more explicit “contact us if you are interested in a security token”? We won’t know for sure, but we expect any of these might well be enough.
Accordingly, the MAS formed the view that the Issuer could no longer rely on the Accredited Investor Exemption – even if the offer was only intended to be offered to “accredited investors”.
MAS issued a warning to the Issuer, and the Issuer has now suspended its token sale. Further action is possible – for example, depending on the contents of the post, some form of disciplinary action against the lawyer by the Law Society of Singapore could be involved.
Why this case matters
There are four key messages arising from this case:
|Regulatory action is closely following the trends|
The MAS has been one of the most engaged regulators in relation to the development of the virtual asset space.
This is the second time that the MAS has issued a warning that halted a token sale, and follows a similar regulatory action in Hong Kong. The MAS has also warned eight virtual asset exchanges that they cannot facilitate trading in virtual assets that amount to “securities” or “futures contracts” under the SFA without a licence from the MAS. This, in turn, follows a similar action in the United States. It is interesting, however, that we remain in “warning” territory.
It is one thing to sound the alarm to raise awareness, but another to keep sounding it for over a year without fines or other penalties.
|Exemptions require extreme care|
Relying on exemptions to securities regulation requires extreme care.
An issuer seeking to rely on an exemption must ensure that they know exactly how the exemption applies – this will usually require professional advice.
Procedures should also be implemented to ensure compliance with the exemption – not only by staff members, but also by advisors, influencers and others you engage. This ties into the next point.
|Keeping control of communications|
Token sales often involve an array of people, other than the issuer.
The parameters in which the token sale is taking place should be made clear to all involved – including founders, team members, contractors and advisors. They need at least the following:
Terms of engagement – including precise boundaries of authority, allocation of liability and termination events.
Clear marketing guidelines – covering how you wish to be represented, when, and by whom.
Channel management – ideally, there should be a limited number of specifically defined channels of communication, and a specified spokesperson.
Monitoring and review – by a dedicated senior manager, supported by spot checks and (ideally) review by counsel.
|Different jurisdictions, different rules|
Despite the appeal of “global” token sales, securities and virtual asset regulation is jurisdiction-specific – and the rules can vary drastically between jurisdictions. In particular, the MAS action contrasts with the judgment of Hong Kong’s Court of Final Appeal in Pacific Sun Advisors Ltd v Securities and Futures Commission  HKFCA 27.
In that case, a company intended to offer securities without registering the offer with Hong Kong’s Securities and Futures Commission (“SFC”). The company intended to do this by relying on Hong Kong’s equivalent of the Accredited Investor Exemption. However, the company sent emails to a number of their existing clients regarding the securities, and also published documents on their website regarding the securities. Nowhere did the company state that the securities were only intended for “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (“SFO”) (which is akin to the “accredited investors” concept under the SFA).
The SFC considered that this constituted advertising, and charged the company and its Chief Executive Officer with issuing unauthorised advertisements contrary to section 103(1) of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (“SFO”).
The SFC ultimately lost the case on the grounds that the exemption applied, even if the intention to offer the securities only to professional investors is not expressed in the relevant advertisement. As noted in the SFC’s press release regarding the case, “[the] ruling means advertisements of [certain securities] that may be unsuitable for retail investors can be issued to the general public even if the issuer only intends to sell them to professional investors.”
Clearly, this in contrast to the position in Singapore, where reliance on the Accredited Investor Exemption requires no advertising or promotion whatsoever. This illustrates that there can be (and often are) major differences between jurisdictions, and even between jurisdictions such as a Hong Kong and Singapore that are often considered to be aligned.
Building a pathway to security token offerings
Tokens that offer equity or represent debt will be regulated in almost every market. Yet interest in security tokens continues unabated, in light of the potential efficiency, in-built regulatory compliance and transparency benefits that distributed ledger technology can bring.
As you would expect, we are passionate about the detail. There are several factors that need to be considered before issuing a security token.
If your business is considering issuing a security token, the key things we will work through include the following:
The answers to these questions will indicate both the documentation required, and the answers to key regulatory questions, including:
Creating “programmable securities” provides strong opportunities for asset diversification and compliance streamlining. However, it isn’t a walk in the park. Structuring and documenting an offer correctly for each target market, and ensuring that everyone is on the same page on advertising are key.
And remember – social media is a public forum and counts as advertising. Beware the #humblebrag.
The authors are qualified to practice Hong Kong, English and Australian law only. The authors do not practice Singaporean law. All references to Singaporean legislation or otherwise relating to Singaporean legal matters are based on public information. This post does not constitute legal advice, and is for informational purposes only.