The Australian Securities and Investments Commission (ASIC) has released an update to Information Sheet 225 Initial coin offerings and crypto-assets (INFO 225). These updates follow the Australian Treasury’s release of its issues paper in January this year, and a subsequent consultation period with stakeholders. Baker McKenzie was involved in the consultation process and delivered a written submission addressing token categorisation, secondary trading in the ICO market, and the current Australian regulatory framework pertaining to ICO activity. Baker McKenzie’s written submission on Treasury’s ICO issues paper can be found here.
ASIC’s update to INFO 225 provides important guidance on the regulator’s approach to ICOs and crypto-assets in a more mature market. For businesses wishing to explore the realm of digital assets, the following key takeaways are apparent in INFO 225:
- ICOs and crypto-assets will often be financial products for the purposes of the Corporations Act.
- There is an expectation that entities will be able to justify why their ICO does not involve a regulated financial product, should the entity make this assessment.
- Entities should know who their investors are, and should be able to distinguish between their wholesale and retail investors (in order to apply the appropriate Corporations Act 2001 (Cth) (Corporations Act) provisions).
- Characterisation of an ICO or crypto-asset can change over the course of product development. Where changes occur, ongoing disclosure to investors is essential.
- Even where an ICO or crypto-asset is not a financial product, the prohibitions against misleading or deceptive conduct apply under the Australian Consumer Law.
- ICOs should not be viewed as a form of crowd funding, and there are specific provisions under the Corporations Act to deal with crowd-sourced funding (CSF), including specific Australian financial services (AFS) licensing requirements for CSF providers.
- Overseas categorisations of crypto-assets do not automatically translate to equivalent products in Australia. In fact, the definition of a financial product in Australia can be broader than in overseas jurisdictions.
- ASIC strongly suggest that ICO and crypto-asset entities seek professional advice.
Financial Product Characterisation
The refresh of INFO 225 draws upon ASIC’s experience with ICO issuers and other crypto-asset businesses over the past two years, as the digital asset industry in Australia has expanded and matured. ASIC notes that, in their experience, many ICOs involve interests in a managed investment scheme (MIS). Interests in an MIS are financial products and therefore an MIS requires an AFS licence. Where interests in an MIS are offered to retail investors, a product disclosure statement is required. Notably, ASIC has made clear that an issuer (as trustee of a wholesale MIS) cannot rely on a corporate authorised representative appointment from another AFS licensee in order to issue interests in the MIS.
Financial products that reference crypto-assets and the role of market operators
The updates are also relevant to issuers of financial products that reference, invest in, or otherwise enable consumers to have exposure to crypto-assets. In INFO 225, ASIC indicates that AFS licensing or variation for these sorts of products are likely to involve a “novel” licensing application, and will include an iterative process alongside ASIC.
Notably, the Australian regulator seems to impose an obligation on licensed Australian market operators to play a “gatekeeper” role in assessing the suitability of issuers and products where a financial product is proposed to be listed on their markets.