By Hung Ou Yang
On July 27, 2019, the Securities and Futures of the FSC announced a press release regarding the Regulation Framework for Security Token Offering ("STO") in response to the FSC's earlier statements regarding the securities type token. The Regulation Framework are as follows.
1. The FSC has regarded security tokens as securities and will supervise STOs by classifications.
2. STOs are classified into two categories based on the amount of money that the issuer seeks to raise:
(1) When an issuer aims to raise NT$ 30 million or less through an STO ("Micro-STO"), the issuer would be exempted from the registration requirement under Article 22 of the Taiwanese Securities and Exchange Act ("SEA").
(2) Secondly, when the fundraising amount of an STO exceeds NT$ 30 million ("High Amount STO"), the issuer should enter a regulatory sandbox and run the experiment in accordance with the Taiwanese Financial Technology Development and Innovative Experimentation Act.
3. Regulation Framework on the Micro-STOs:
a. The qualifications of issuers: the issuers of Micro-STOs must be companies limited by shares incorporated under the Taiwanese Company Act and the stocks of the issuers are not listed on a security exchange or traded over the counter or on the emerging stock market. Here, although it appears to limit all the foreign issuers absent subsidiaries set up per the Taiwanese Company Act from entering the Taiwanese market, we particularly inquired the FSC on this point and it responded that probably foreign issuers might still be given a chance by using the regulatory sandbox under the Financial Technology Development and Innovative Experimentation Act. Therefore, a foreign issuer which has no subsidiary in Taiwan may try to apply for a permission of entering a regulatory sandbox if it wants to launch a STO in Taiwan no matter how much money it attempts to raise.
b. The investors and the investment quota: Only professional investors are allowed to participate in Micro-STOs. Professional natural persons should have a minimum wealth of NT$ 30 million. The maximum subscription amount for professional natural persons in one Micro-STO is NT$ 300,000. The details for the qualifications of the investors, please refer to Paragraph 3 of Article 3 of Regulations on Offshore Structured Products.
c. Issuance procedures: issuers should issue its security tokens on only one STO platform. STO platforms should check the issuers' qualifications and review their whitepapers. However, if a STO platform plans to issue its security tokens, it should obtain the approval from Taipei Exchange ("TPEX").
(2) With respect to transactions:
a. STO platforms must obtain a securities dealer license. STO platforms are responsible to offer reasonable prices based on market conditions. Security tokens are traded by STO platforms through price negotiation between STO platforms and the sellers. A STO can only be traded on one STO platform.
b. Limitations on trading amount: The daily trading volume of a Micro-STO shall not exceed 50% of the circulation. The balance of a Micro-STO for a professional natural person cannot exceed NT$ 300,000.
c. The FSC will make a mechanism for stabilizing prices to cool down unusual price fluctuations in the market.
(3) With respect to STO platforms:
a. STO platforms must obtain a securities dealer license. The minimum paid-in capital of a STO platform is NT$ 100 million. STO Platforms must deposit NT$ 10 million as operation guarantee in the banks designated by the FSC.
b. If the cumulative fund raised by a STO platform exceed NT$ 100 million, the STO platform may not conduct any Micro-STO. STO platforms must wait for one year to conduct the same issuer’s Micro-STO.
c. Transfer and custody of security tokens: STO platforms must sign agreements with Taiwan Depository and Clearing Corporation ("TDCC"). STO platforms must transmit transaction data and balance statements to the TDCC for backup record every day. The TDCC provide investors with enquiry services of Micro-STO balance to help each investor to confirm the correctness of Micro-STO transactions.
d. In order to control the risks of money laundering activities and prevent the anonymity risk in the purchase or transactions of virtual currencies, subscriptions and sales of Micro-STOs must use real name and be remitted and deposited in New Taiwan Dollars with the account under the same name.
e. The FSC has authorized the TPEx to draw up the regulations with respect to the issuance of Micro-STOs, the methods and limitations of purchase and sale, and regulations on STO platforms.
4. Regulation Framework on High Amount STOs:
(1) According to the Taiwanese Financial Technology Development and Innovative Experimentation Act, if the applicant is a foreign company, it must have a Taiwan branch office registration, which is not an easy decision for foreign companies. Therefore, the FSC further suggests that a foreign company interested in launching a High Amount STO in Taiwan can send its High Amount STO plan to the FSC for consultation. In addition, according to the Taiwanese Financial Technology Development and Innovative Experimentation Act, the fundraising amount cannot be more than NT$ 200 million. This is another limit that foreign issues have to pay attention to.
(2) Issuers should specify the buyers' qualifications and its risk management mechanism in its High Amount STO plan.
(3) We have further checked with the FSC because they have not had a solid framework on how High Amount STO will be regulated in terms of offer and sale. Here, it seems that it will depend on the issuer's plan and the outcome of the consultation with the FSC.
It should be noted that since supplement regulations have not been drafted, it is necessary for readers to check follow-up announcements of the FSC.
Further to the press release on July 27, 2019, the FSC ordered on July 3, 2019, that it will use the Howey test, originally adopted and developed in the United States, to decide whether a token constitutes a security type token which shall be subject to the oversight of the FSC under the Taiwanese Securities and Exchange Act. That being said, any token will be regulated by the Taiwanese Securities and Exchange Act when the following four elements are satisfied:
(1) the investment of money,
(2) investing in a common enterprise or project,
(3) expectation of profits derived from efforts of others, and
(4) reliance on the efforts of issuers or others.
This FSC order has already been effective since July 3, 2019. Accordingly, any ICOs in Taiwan will be reviewed on a case-by-case basis for the purpose of the Taiwanese Securities and Exchange Act. If a token matches the above elements, it will be classified as a “security” in accordance with the FSC. The Taiwanese Securities and Exchange Act and the related regulations of the FSC will then apply. For example, the tokens that offer interest payment as bonds, and the tokens that attach a right to share profits are security type tokens. Hence, these two kinds of tokens will fall into the oversight of the FSC.
Here, we can observe that any ICOs in Taiwan have been included in the review of the Taiwanese Securities and Exchange Act by the enhanced and centralized control of the FSC. Although it looks like that the FSC aims to facilitate the market and its growth of virtual currencies in Taiwan, on the one hand, the minimum wealth requirement of NT$ 30 million for professional natural persons seem to set up too high a threshold to invite small investors joining this game. On the other hand, the maximum subscription amount of NT$ 300,000 for professional natural persons in one Micro-STO does not appear to be able to entice those qualified professional natural persons to join this game, either. The problems probably have been further deepened by using the Howey test. As the Howey test has already been used in the U.S. to decide whether tokens are investment contracts and thus securities subject to the control of the U.S. Securities and Exchange Commission, the token issuers in the U.S. have already had to spend lots of time and costs to determine whether the tokens issued will be viewed as a security under the U.S. securities laws and regulations. It is hard to imagine that token issuers in Taiwan will be able to have a more efficient legal environment under the Howey test case-by-case analysis.
Authour: Hung Ou Yang
Copyright Brain Trust International Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.