SEC’s ICO Rules Are Out — Here’s Why We Need Them

For many Filipinos, lack of funding is the biggest obstacle to starting a business. It’s hard to find investors, and most banks do not lend without collateral, track record, or both. Because of this, a lot of local startups go belly up within their first year. Discouraged, some aspiring entrepreneurs even end up not trying at all.

Initial Coin Offerings (ICOs) have significantly turned the tide. Through ICOs, startup founders have raised capital more efficiently than they did by traditional fundraising. This year alone, ICOs all over the world have racked up US$6.3 billion in investments.

As far as regulations go, however, there is still a lot to be done.

Most jurisdictions do not yet have the regulatory framework to protect ICO investors. As a result, bad actors have exploited the situation and used ICOs as a means to defraud investors. Armed with just a wild idea on a white paper, fraudsters raise money in exchange for tokens that do not represent tangible assets, utility, or claims against a company.

Last Thursday, the Securities and Exchange Commission (SEC) took the necessary first steps in cleaning up the ICO market by issuing their proposed rules on ICOs and token sales. The rules require issuers to, among other things, submit their projects for review and inspection, make public disclosures, and implement controls to protect investors.

Whenever tokens backed by future expectations are sold, buyers deserve the protection afforded by our securities laws.

Ensuring investor protection

Many people argue that ICO tokens are different from securities and therefore should not be regulated. But this argument misses the mark. Whenever tokens backed by future expectations are sold, buyers deserve the protection afforded by our securities laws.

By imposing requirements, the SEC will be able to distinguish between the legitimate and the bogus tokens. People who want to raise funding through an ICO will have to register with the SEC and justify what the raised funds will be used for. They will also have to publish regular progress reports, undergo an on-site inspection, and submit to an audit of their code base.

The registration requirements are substantial, and, hopefully, the desired effect can be achieved: an ICO market free of fraudulent tokens.

Developing financial markets

Blockchain technology’s most powerful feature is its ability to track the transfer of digital assets — unequivocally and without intermediaries. By issuing ICO rules, the SEC encourages the use of Blockchain technology to make more investment opportunities available to Filipinos.

For decades, we have relied on intermediaries to facilitate the flow of capital from investors to firms. We’ve depended on transfer agents, depositories, custodians, banks, brokers, trustees, and nominees to record what we own. This is the reason why access to equity and debt markets remains expensive for both issuers and investors. With the use of tokens, however, the cost of trading can go down, empowering ordinary Filipinos to participate in the capital markets either as investors or entrepreneurs.

Without meaningful regulation, we will not be able to usher in new waves of financial instruments, which, eventually, will allow our country to leapfrog decades of development.

The SEC’s ICO rules open up the possibility for new asset classes to be made available in the Philippines for the first time. To date, Filipinos have not had financial markets for commodities, Real Estate Investment Trusts (REITS), futures, and other derivatives. Thanks to our regulators’ support of Blockchain technology, this may change sooner rather than later.

The argument that regulatory action stifles innovation has been laid down countless times all over the world. In the case of digital assets and Blockchain technology, however, the opposite seems to hold true. Without meaningful regulation, we will not be able to usher in new waves of financial instruments, which, eventually, will allow our country to leapfrog decades of development.

The road ahead will be bumpy, since both our markets and laws had hardly been built to withstand disruptions. But with support coming from all directions — especially from regulators — our adoption of technological marvels such as the Blockchain might turn out to be a lot more seamless than we think.

Disclaimer: We are not an investment advisor, and this post is for educational purposes only. Any information contained in this blog is not meant to be taken as financial advice.