1. Compliance
  2. Cryptocurrencies
  3. Initial coin offers

Initial coin offers

Initial coin offers (ICOs) and token events are a form of fundraising where you receive tokens that carry certain rights, such as providing access to a new product or service, or an interest in an underlying asset or project.

What are coin and token events?

Initial coin offers (ICOs) and token events are a form of fundraising where you receive tokens that carry certain rights, such as providing access to a new product or service, or an interest in an underlying asset or project.

Are they regulated?

How an ICO is regulated depends whether:

  • the token you are offering is a ‘financial product’ (this will depend on the specific characteristics and economic substance of that token)
  • you are providing a ‘financial service’ (this will depend on the specific structure and features of the ICO) 
  • the person buying the token is a member of the general public (known as a ‘retail investor’) or a very experienced investor (known as a ‘wholesale investor’) 
  • the investor is based in New Zealand or overseas.

Do fair dealing requirements apply?

ICOs must comply with fair dealing requirements under New Zealand law. These requirements prohibit you from engaging in misleading conduct or making deceptive statements in your white paper, website, or other promotional material associated with your ICO (such as on social media).

See our fair dealing and ICOs guidance for more information.

Types of financial products

The Financial Markets Conduct Act 2013 (FMC Act) sets out four types of financial products:

When a financial product is offered to retail investors in New Zealand this is called a ‘regulated offer’ and attracts more substantial compliance obligations (compared to other types of offers). These obligations are summarised below.    

Debt securities

A token is a debt security if investors have a right to be repaid money or paid interest on money lent to, deposited with, or owed by a person, company, or unincorporated entity making a token offer. For example, a token linked to the value of a dollar or commodity could be a debt security if:

  • investors can purchase a token with money;
  • investors holding the token have the right to redeem that token for money; and
  • an investor holding the token is not the beneficial owner of funds from which redemption proceeds are paid.

To make a regulated offer of debt securities, you must:

Are asset backed tokens debt securities? 

What are asset backed tokens?

Asset backed tokens typically give investors an ownership right to an underlying tangible or intangible asset, like gold or real estate, where the distributed ledger is used as a record of ownership. Investors usually have the right to redeem the token in exchange for the   underlying asset – exchanging one token for one gram of gold for example.  

Are asset backed tokens financial products?

While each ICO must be looked at on an individual basis, asset backed tokens that give investors a right to redeem the token in exchange for the asset are not considered debt securities (unless the asset is cash).  This is because the token does not give an investor the right to be repaid ‘money’. 

Do asset backed token ICOs involve financial services?

When you offer asset backed tokens through an ICO, you are providing the financial service of ‘operating a value transfer service’. You may also be providing the financial service of ‘issuing and managing a means of payment’ – where tokens can be used to obtain products or services otherwise acquired using legal tender (such as NZ dollars). These services are regulated by us. 

How do I comply?

If your asset backed token ICO is providing a financial service, you must comply with the fair dealing provisions in Part 2 of the FMC Act.  These provisions prohibit you from making misleading, deceptive or unsubstantiated statements, for example about the extent to which the tokens are backed by the asset. So if you state in a white paper that an asset backed token is ‘100% gold backed’ there must be enough gold available (at an official mint, for example) to allow all investors to redeem their tokens. 

Other obligations may also apply. For more information, see our guidance on ICOs and financial services, and fair dealing and ICOs.

Equity securities

A token is an equity security if investors buy, or have the option to buy, for example, a share in a New Zealand incorporated company or any body corporate incorporated outside New Zealand. A token that provides an option to buy a share is an offer of both the token and the equity share. 

If you make a regulated offer of equity securities, you must:

Investor interests and rights will be set out in the company’s constitution. This means a trust deed is not required. 

Managed investment products

A token is a managed investment product (an interest in a ‘managed investment scheme’) if investors:

  • contribute money or cryptocurrency to receive interests (tokens) in a scheme (a structure or project that allows investors to pool their money)
  • have a ‘right to receive a financial benefit’ (as defined in the FMC Act) from the scheme – such as money, rights to a share in profits, cryptocurrency, additional tokens, or changes in the tokens’ value and these benefits are principally produced by someone else, and
  • do not have day-to-day control over the project or business (even if they have the right to be consulted or to give directions).

The manager of a managed investment scheme must be licensed by us in order to make a regulated offer to retail investors in New Zealand. The manager is the person, company, or unincorporated entity issuing the tokens. When you make a regulated offer of managed investment products, you must also:

Are utility tokens managed investment products? 

What are utility tokens?

Utility tokens (sometimes called “application tokens”) typically give investors the right to access and/or use a company’s platform, product or service. 

Are utility tokens financial products?

While each ICO must be looked at on an individual basis, utility tokens are not considered managed investment products simply because they can be traded on a cryptocurrency exchange or other secondary market.  This is because any profits an investor receives by trading those utility tokens on a cryptocurrency exchange are not ‘rights to receive a financial benefit’ under a managed investment scheme. 

Do utility token ICOs involve financial services?

When you offer utility tokens through an ICO, you will typically be providing the financial service of ‘operating a value transfer service’.  You may also be providing the financial service of ‘issuing and managing a means of payment’ – where the tokens can be used to obtain products or services that are otherwise acquired using fiat currency. These services are regulated by us. 

How do I comply?

If your utility token ICO is providing a financial service, you must comply with the fair dealing provisions in Part 2 of the FMC Act.

Other obligations may also apply. For more information, see our guidance on ICOs and financial services, and fair dealing and ICOs.

Derivatives

A token may be a derivative if, under the terms of the token, the issuer or holder may be required to pay an amount or provide something else in the future, and the amount to be paid or the value of the token is derived from the value or amount of something else, such as a commodity or asset.

The issuer (person, company, or unincorporated entity) of the tokens must also be licensed by us in order to make offers to retail investors in New Zealand.

If you make a regulated offer of derivatives, you must:

ICOs and wholesale or offshore offers

ICOs that offer tokens that are financial products to wholesale investors, or to investors based outside New Zealand, will not be subject to full licensing, governance and disclosure requirements under the FMC Act. However, fair dealing requirements under Part 2 of the FMC Act still apply.

See our information about offers to wholesale investors, including the criteria for ‘wholesale’ . Also see our information on how to ensure your ICO complies with the ‘fair dealing’ requirements. 

ICOs and financial services

While each ICO must be looked at on an individual basis, most ICOs involve the financial service of ‘operating a value transfer service’. 

ICOs may also involve the financial service of ‘issuing and managing a means of payment’ – where the tokens can be used to obtain products or services that are otherwise acquired using legal tender (such as NZ dollars), for example.

Often this applies when the ICO offers a ‘utility’ or ‘application’ token.

If your ICO provides financial services you must:  

  • comply with the fair dealing provisions in Part 2 of the FMC Act.  These prohibit you from engaging in misleading conduct or making false, deceptive or unsubstantiated statements.   

In addition, if you are based in New Zealand, you must be registered on the Financial Service Providers Register (FSPR), and pay the applicable fees and levies, for each category of financial service you are in the business of providing. You must also belong to a dispute resolution scheme if you offer financial services to retail clients.

Anti-money laundering obligations may also apply. 

ICOs that do not involve financial products or financial services

Even if you are not providing a financial service or financial product, ‘fair dealing’ requirements still apply to white papers and other communications about your ICO under the Fair Trading Act 1986.  See our fair dealing and ICOs guidance for more information.

We can designate tokens issued as part of an ICO to be a particular financial product if, based on their economic substance, this is necessary to promote fair and efficient financial markets in New Zealand or any of the other purposes of the FMC Act. For example, a project token giving investors voting rights and an interest in the company and its profits could be designated an equity security.  A designation could be accompanied by an exemption to modify FMC Act disclosure and governance requirements. 

Designations are only made after consultation with industry and do not apply retrospectively.  This means that only ICOs that happen after a relevant designation is in place are regulated by the FMA.    

 

Can tokens be offered through crowdfunding platforms?

No, crowdfunding in the form of an ICO is not the same as crowdfunding covered by the FMC Act. We license crowdfunding platforms to provide an intermediary service via a facility, such as a website, where companies make offers of equity securities to retail investors.

Equity crowdfunding under the FMC Act enables companies to raise up to $2 million in any 12-month period, without registering a PDS.

How we can help

We can grant exemptions to promote the FMC Act’s objectives. One objective is to promote innovation and flexibility in our financial markets. We can also, if appropriate, grant exemptions to ensure FMC Act requirements are fit for purpose for ICOs. This may include modifying PDS or governance requirements.

As this sector develops, we will continue to monitor and consider what additional regulatory support and requirements may be appropriate for the offer of these products and services. Other ideas mentioned to us regarding the possible regulation of ICOs and token offers include creating a new category of prescribed intermediary service similar to the equity crowdfunding model. This would require law reform and that can take a long time. Instead of proposing alternatives at this early stage we’d rather hear from you about any ideas on how token offers could be regulated effectively.

We want to play our part in making markets work, and greater regulatory scrutiny of token offers may be necessary to ensure this innovation can become a sustainable method of fundraising. Our focus is to enhance New Zealand’s reputation by promoting fair, efficient and transparent financial markets.

Talk to us early

Given the bespoke nature of ICOs we encourage you to approach us early in the development phase if you’re considering making an offer. We can provide guidance around whether your ICO involves a financial product or a financial service, and whether fair dealing requirements are met. We expect you to refrain from seeking to raise funds while discussions with us are ongoing. 

Get in touch at: questions@fma.govt.nz

We’ll keep this information up to date, based on general developments in the ICO space, our regular engagement with other regulators and those developing token offers.