Malaysia’s New Regulation Permits Digital Token Offering Through IEOsby Vincent Fong January 15, 2020
Securities Commission Malaysia (SC) today published a regulatory guideline on digital assets that outlines the framework for digital token offerings in Malaysia or more commonly known as ICOs to some.
The guideline incorporated feedback received by the regulator following the issuance of the consultation paper. According to their media statement, the industry was overwhelmingly in support of leveraging platform operators to review applications for issuance of digital tokens for fundraising.
In essence, digital token offerings will be done via Initial Exchange Offering (IEO). IEOs are basically the same as ICOs except that it is done through crypto exchange instead of the token issuer themselves.
Under Malaysia’s new guideline, it is illegal for issuers to offer any digital tokens before the IEO’s approval has been obtained, Securities Commission also stressed in their media statement that until the coming into force of the Guidelines, no person is permitted to offer or issue any digital tokens in Malaysia.
The Guidelines will be brought into force in the second half of 2020 to allow potential issuers, platform operators and investors to familiarise themselves with the requirements in the Guidelines.
IEO Platform Operator Requirements at Glance
IEO platforms will be required to carry out the necessary assessment and due diligence on the issuers as well as the features of the digital tokens. During the first phase of the implementation SC will work with platform operators in assessing eligible issuers.
The guideline also states that IEO operators must have a minimum paid-up capital of RM 5 million and must be locally incorporated unless specified otherwise by the regulator. The operators will also be required to maintain a trust account for monies received from investors with a license Malaysian financial institution.
Should the operator be also looking at trading these digital assets they will be required to separately be registered as Digital Asset Exchange (DAX) platform operator.
Digital Token Issuer Requirement at a Glance
Much like the IEO operators, SC requires for issuers to be locally incorporated and have its main business carried out locally, it further specifies that the issuers must have at all times, at least two directors whose principal or only place of residence is in Malaysia.
As for minimum paid-up capital, issuers are required to have a minimum of RM 500,000.
In order to be approved as an issuer, the guideline also specifies that the underlying project and business most provide an innovative solution or a meaningful digital value proposition for Malaysia. It further described “innovative” as projects that “provide a solution or addresses an existing market need or problem” or “improves the efficiency of an existing process or service undertaken by the issuer or the industry’
Fundraising for issuers is subjected to a limit of 20 times of shareholders’ funds and a ceiling of RM 100 Million and issuers are not allowed to raise funds one an IEO platform and Equity Crowdfunding platform concurrently.
The guideline also specifies that digital tokens that are intended as payment instruments. only be used in exchange for the issuer’s goods and services.
Interestingly the guideline requires for all issuers include the following disclaimer :
“Investors are reminded that Bank Negara Malaysia (the Bank) does not recognise digital tokens as a legal tender nor as a form of payment instrument that is regulated by the Bank and that the Bank will not provide any avenues of redress for aggrieved token holders”.
Much like equity crowdfunding and peer-to-peer financing, there is a limit imposed for both retail investors and angel investors. Retail investors are limited to RM 2,000 per issuer with a total investment limit not exceeding RM 20,000 within a 12 months period.
Angel investors are subjected to a maximum of RM500,000 within a 12-month period whereas sophisticated investors have no restriction on investment amount.
Initial Impression Malaysia’s New Digital Asset Guidelines Guidelines
It encouraging to see Securities Commission Malaysia tackling these new innovations in finance head-on. In recent years we’ve seen the regulator issuing guidelines and providing clarity in with equity crowdfunding, P2P financing, cryptocurrency exchanges and most recently digital token offerings.
We are of the view that the approach of using IEOs to conduct assessments and due diligence is a good step in minimising questionable projects and safeguarding consumers.
However, we do hope that down the line the limit of RM 2,000 per issuer to be raised to a more meaningful amount for comparison sake retail investors are allowed to invest up to RM 5,000 per issuer for equity crowdfunding.
Full details on the guideline can be found here.