SC cautions investors over initial coin offering risks, public urged to seek legal advice

When contacted, Advancecon group chief executive officer Datuk Phum Ang Kia said it was unable to give a new date for the prospectus launch at this juncture, pending queries from the SC.

PETALING JAYA: Following pronouncements of initial coin offerings or ICOs by regulators in many parts of the world, the Securities Commission (SC) has issued a statement cautioning investors on the potential risks involved in these schemes.

The regulator reminded ICO scheme investors to seek legal or other professional advice to address any doubts on the legitimacy of such schemes, seeing that the terms and features of ICO schemes may differ across cases.

“Investors should take note that scheme operators may not have a presence in Malaysia.

“Hence, it would be difficult to verify the authenticity of the scheme and the recovery of foreign-invested monies may be subject to foreign laws or regulations,” said the SC.

An ICO is a fund-raising exercise that raises capital via digital tokens, in exchange for rights to a future product or service, share of returns from the project or new cryptocurrency ventures.

ICOs seem to be not under any regulations of financial authorities, and are also referred to as initial token offerings, token pre-sale and token crowd-sale. Investors pay for digital tokens issued and sold by ICO scheme operators, typically via other virtual currencies like Bitcoin and Ethereum.

The SC also added that since some of the ICO schemes operate online and may not be regulated, investors may be exposed to heightened risks of fraud, money laundering and terrorism financing.

“Investors should fully understand the features of an ICO scheme, and carefully weigh the risks before parting with their monies.

“For example, investors should be aware that ICO scheme operators issue a whitepaper, which typically contains descriptions of the ICO scheme, but may also carry disclaimers that absolve the operators from certain responsibilities and obligations,” the SC said.

This week, the People’s Bank of China banned fundraising by way of token-based digital currencies, deeming the practice illegal.

The Chinese central bank’s move to ban ICOs is one of the strongest regulatory challenge to date.

Following the move by China, the Hong Kong Securities and Futures Commission (SFC) said digital tokens invested in an ICO that distributes a share of returns in the scheme to its investors shall be regarded as securities.

Hence, such ICO schemes and the secondary trading of ICO digital tokens shall be subject to Hong Kong securities laws.

Hong Kong SFC’s stance on ICOs follows its US counterpart, the Securities and Exchange Commission (SEC), which said ICOs can be considered as securities and that federal securities law apply to those who issue securities in the US, regardless of the securities being transacted in virtual currencies or US dollars, and regardless of the securities being allotted via distributed ledger technology or certificates.

As for Singapore, the Monetary Authority of Singapore (MAS) has issued an investor warning, advising the public to “exercise due diligence to understand the risks associated with ICOs and investment schemes involving digital tokens”.

MAS also suggested that consumers should check if the entity issuing ICOs is regulated by it. This follows a previous MAS statement highlighting that certain forms of token sales can qualify as securities offerings, similar to the SEC’s standpoint.

In addition, the SC noted that the other risks involved in ICO schemes include risks of insufficient liquidity or volatile and opaque pricing of digital tokens traded on a secondary market, as well as limited legal protection and recourse for investors against scheme operators, due to the structure of the schemes.