Regulatory Treatment Of Digital Securities
15) As set out in the ICO Guidance, the FSRA's assessment of whether an offering of a digital/virtual token is regulated under FSMR is conducted on a case-by-case basis (in keeping with FSRA's treatment of 'conventional' Securities). If a digital/virtual token being offered is assessed to exhibit the (economic and legal) features and characteristics of a Security, the FSRA will deem the digital/virtual token (being a "Digital Security") as a Security pursuant to Section 58(2)(b)6 of FSMR. This approach has been taken by the FSRA to ensure the protection of investors, noting that while a Digital Security may have the characteristics of a Security, this position is not always clear and accordingly requires review by the FSRA.
16) To use its powers under Section 58(2)(b), the FSRA expects that an Issuer will provide to it such information as is required to demonstrate that the proposed Digital Security meets the requirements of a "Security" (as defined in FSMR). In circumstances:
a) requiring the submission of an Approved Prospectus to the FSRA, the FSRA will use the documentation submitted as part of this approval process to determine whether it will deem a Digital Security a Security under Section 58(2)(b) of FSMR; or
b) relating to an Exempt Offer, the FSRA will review the Exempt Offer documentation for the purposes of being able to make a determination under Section 58(2)(b). The FSRA's review will not be for the purposes of approving the Exempt Offer itself.
17) In either scenario, the FSRA may also request further supporting documents from an Issuer (e.g., constitutional documents, relevant legal opinions).
18) For regulatory purposes, Offers of Securities (as defined in Section 258 of FSMR), whether through a DLT platform, digital platform or other means, will be subject to consistent regulatory treatment by the FSRA. As such, similar to the treatment of a conventional Issuer of Securities, Issuers / market participants who seek to raise funds in a regulated, robust and transparent manner using new business models or technologies (such as DLT), are encouraged to engage with the FSRA regarding the proposed Offer as early as possible in the fund-raising process.
19) Where appropriate, Issuers should consider the appointment of (legal) advisers to assist with the preparation and submission to the FSRA of its relevant diligence materials (as part of any submission to the FSRA pursuant to Section 58(2)(b) of FSMR).
20) To ensure appropriate safeguards are in place to protect both investors and market integrity, an offer of a 'Utility Token' falls outside the FSRA's regulatory remit and is not permitted under the Markets Rules (MKT).
6Section 58(2) of FSMR sets out that the FSRA may, by written notice 'deem any investment which is not a Security to be a Security for the purposes of these Regulations and the Rules made under these Regulations.'