Legal and Regulatory Issues impacting Singapore-based Token Generating Events

You often hear it said that the world of cryptocurrency and block chain is, as yet, comparatively unregulated.

That statement may be true at a headline level. But at Vuulr we have been working for a couple of months now on what we call a “Token Generating Event”, or a “TGE”, which is our name for the fund raising process that might otherwise be called an Initial Coin Offering (“ICO”). And our experience of this has taught us several things:

First, this world of TGEs is not a regulatory vacuum; there are lots of laws and regulations you need to comply with.

Second, because of the global nature of TGEs as a fund raising effort (and of Vuulr’s business) there are many territorial issues to consider.

And finally — and this partly because the regulations have not yet caught up with the crypto world — there is a great deal of uncertainty. In many cases, the answer to the questions you might ask is: “nobody knows yet.”

So let me try to help out a little by alerting you to what might lie ahead from a legal point of view if you are planning your own TGE domiciled in Singapore. Most of this material is very situation-dependent, so all I can do is raise an issue for you to consider and get your own advice on. And of course, (as lawyers are fond of saying), this post isn’t intended to be legal advice itself.

That all said, here are my top five legal and regulatory issues that a Singapore-based TGE will need to consider. Note that this post will not concern itself at all with tax issues. That fun topic will be treated in a separate post.

1. A Utility vs a security

Regardless of where you stage your TGE, it’s going to matter a lot whether your tokens are considered under the applicable law to be a “security” or a “utility”. Not as broadly defined as some places — such as the United States — Singapore has a fairly well-established set of criteria to separate these two things.

So what’s the difference?

Fundamentally, it has to do with what you can do with the token. This is all determined by your token economy design, which is published in your White Paper. If your token has genuine “utility” — meaning it has a true use value inside your platform and perhaps elsewhere — then you can hope for it to be considered a utility token. If it can’t do things like that, then it may be defined by the law as a security that has no other utility capability. This is a problem because if that’s the case then you may be deemed to be issuing an equity to the public, or perhaps even operating an investment scheme. This may trigger a whole range of regulatory issues, and may subject you to lots of requirements you don’t wish to have to deal with.

2. Corporate Structure

There are a couple of core questions here that will confront anyone considering a TGE. And they are tied up quite a lot in tax issues:

You will need a company to run the TGE. Where should you domicile that company?
Current favourite locations include Singapore, Hong Kong, Switzerland and Gibraltar, but the list is evolving all the time. The basic tax level applicable to the country is one parameter to consider. There may also be opportunities around business efficiency, strategy or government relationships that could influence your choice. But overall, perhaps the biggest determinant is the government’s posture on TGEs in the place where you choose to run it. Find a place where the government is consistently (not ambivalently) positive about this form of fund-raising. Not every government walks that talk.

Should you keep your business operations in a separate company to the one that is running the TGE?
This is mainly a commercial risk management question. In other words, you may choose to partition things this way to make sure that a problem in one area (such as a regulatory lawsuit) doesn’t contaminate the other. But if you do choose to do this, make sure you are clear where the lines are between the two companies — in terms of employees, intellectual property, business operations and other related things.

This article addresses some of these issues quite helpfully.

3. Territorial issues

If you’re running a TGE it means you can theoretically get buyers from anywhere in the world. That sounds like fun, but it needs to be carefully thought through. A few countries are particularly concerning:

Beware of the United States
The Securities and Exchange Commission (SEC) there has a very, very, broad definition of a “security”, so it’s likely that you will be offering a security there, even if you are offering a utility here (wherever “here” is). This link will give you an idea of what you are up against. So if you allow any American tax residents to buy your (in SEC’s eye, security) tokens, your company has a huge additional regulatory and reporting burden. Failure to comply with these rules may amount to fraud. The SEC isn’t known for being soft on that, and it doesn’t matter where your company is domiciled.

China
Has a very dim (and diminishing) view of foreign-run TGEs. Everyone knows that they banned ICOs/TGEs late last year. But don’t think that by running yours offshore that you are in clover. Even running an offshore TGE, if you allow Chinese nationals to buy your tokens, you are very likely to be breaking the law there. And China has shown no reluctance in the past to prosecute — even imprison — the directors and executives of companies who do that.

The Others
Another cluster of countries may cause difficulty too. Countries such as Syria, Iraq and Libya often appear on international sanctions lists (like this one here) and (rightly or wrongly) are often suspected of harbouring terrorism in one form or another. This causes big problems in execution of the KYC (or “Know Your Customer”) process you will have to undergo before you allow anyone to buy your tokens.

And finally, if you’re doing active marketing in a particular market — such as a road show — consider looking more closely at that market to make sure what you’re doing on the ground there is compliant with their laws. Theoretically, some laws may have extra-territorial reach, which means you can’t get on the plane and fly away from any problems that might emerge in that country.

4. Documentation

At least three important documents are involved in a TGE process, and, as they all have legal weight, you need to be careful to get them right:

The White Paper
This is a very broad analogue of the prospectus in an Initial Public Offering of shares, and for that reason, you need to get it right. It explains your company’s business, the process you’ll follow for the TGE and your token economy design — amongst many other things. It’s probably the first, and perhaps the most challenging, document you have to prepare for your TGE.

Terms and conditions applicable to your TGE
When you sell tokens to people or companies, you’re entering into a contract with them. And it can be quite a complicated contract, so you need to have well-written terms and conditions governing the sale (in areas such as payment methods, liability issues, token offer limits, choice of law etc). You will also need a privacy policy to explain how you will handle personal data shared with you by your token purchasers.

Legal advice documents
Both on your offering generally and on regulatory questions such as KYC, AML and CFT (see next section) — You will very likely want to convince your purchasers that your token is a utility token. Some of them will believe you, but many of them will not, until you produce legal advice confirming this view. This, amongst other things, is why you need comprehensive written legal advice from a reputable law firm in the domicile jurisdiction of your TGE. They’ll also need to advise you on the compliance regulations applicable to your market.

5. Compliance issues

In Singapore, these are the big four compliance issues that apply to a TGE. This doesn’t mean that there aren’t others, by the way:

Know your Customer
KYC has been rocketing to the top of the compliance charts over the past two years. It’s even become a verb! Now banks, law firms and other providers are “KYC-ing” you before they let you become a customer. And if you are running a TGE, you have to do this too. You have to know who is buying your tokens and take reasonable steps to ensure they’re not doing so for nefarious reasons such as money-laundering or some other crime. The requirements are strict and if you don’t comply, you may be called on to explain if a later problem emerges. You will probably have to retain a specialist KYC firm to help you with this.

Anti-Money Laundering
There is no central AML legislation in Singapore. The requirements are set out in various legislation, regulations, guidelines and notices etc that may apply, to some extent, to any situation. But they are deadly serious about it. To paraphrase the Corruption, Drug Trafficking and other Serious Crimes Act: If you know (or should know) that property is in any way associated with crime, there are criminal penalties for not disclosing this to the authorities, especially if you deal in that property. You really have to know where the lines are in this area.

Countering the Funding of Terrorism (CFT)
The Terrorism (Suppression of Financing) Act in Singapore criminalises terrorism financing and prohibits any person from dealing with or providing services to a terrorist entity. There is also United Nations legislation that requires Singapore to be extremely strict on any terrorism-related financial support activities. So you need to be extremely careful who (or what) you sell those tokens to.

Privacy and Data Protection
This is important, but reasonably easy to comply with if you develop and adhere to a comprehensive privacy policy. But be aware of things such as the need to appoint in your company a Data Protection Officer and to comply with all the instructions given to you by private individuals about their personal data. The best place to start is Singapore’s Personal Data Protection Commission.

David Holloway is a trained lawyer and Head of Business Affairs with Vuulr. Connect with David on Linkedin: https://www.linkedin.com/in/davidaholloway/