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New Zealand regulator embraces ICOs

Chris Hamblin, Editor, London, 6 November 2017

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Initial coin offers (ICOs) and token events are a form of fundraising by which the investor receives tokens that carry certain rights such as access to a new product or service or an interest in an underlying asset or project. New Zealand's Financial Markets Authority has declared these to be 'securities.'

In a commentary issued recently, the regulator says that a token is a debt security if investors have the right to be repaid money or interest lent to, deposited with, or owed by the person, company, or unincorporated entity that is making a token offer. A pegged cryptocurrency is a token linked to the value of a dollar or commodity like gold. These operate in a similar way to a negotiable bearer instrument (such as a cheque) issued by a bank. Both give the investor holding the token or instrument the right to redeem that token or instrument for money. To make a regulated offer of debt securities, the operator must send off a product disclosure statement, appoint a licensed supervisor, have a trust deed that sets out investors' rights and the supervisor’s job, and meet financial reporting and 'fair dealing' obligations. Similar rules apply to equity securities, managed investment products and derivatives, all of which a token might be.

The commentary goes on: "All tokens or cryptocurrencies are securities under the Financial Markets Conduct Act 2013  – even those that are not financial products. A security is any arrangement or facility that has, or is intended to have, the effect of a person making an investment or managing a financial risk. If appropriate, we can designate any security to be a particular financial product based on its economic substance. For example, a project token giving investors voting rights and a share in the company and its profits could be designated an equity security. Any designation would likely be accompanied by an exemption to modify FMC Act disclosure and governance requirements.

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