Statement on PH SEC Draft ICO Regulation

We commend the Securities and Exchange Commission in particular the Market Securities Regulation Department (MSRD) for proposing a balanced regime in regulating the public offering of security tokens. We praise the regulator's appreciation of the difference of various types of cryptoassets, and in not treating all Initial Coin Offerings (ICO) as securities offering.

The SEC takes a bold step forward in developing a regulatory path for security tokens to be legally registered according to established Philippine securities law.

The implications of SEC's proposed regulatory framework could not yet be fully imagined but only because the SEC's approach is unprecedented. We are hopeful that this will have a positive impact to blockchain projects as well as startups and Small and Medium Enterprises (SMEs) who can now leverage this innovative way of raising capital to finance their business and operational requirements.

Overall, we agree with the policies proposed by the SEC and how it recasts traditional securities law and principles to enable regulation to adapt and potently deal with ICOs.

We do not expect perfect rules which is not realistic when a government authority trailblazes a progressive regulatory approach. But we hope the SEC will be agile and open-minded enough to quickly react and deploy amendments when the experience, feedback and circumstances demand urgent updates. We shall be vigilant and will actively participate in developing the regulatory framework for ICOs by pointing out concerns that could require rule changes.

The draft ICO regulation is remarkable, precise in its policy and requirements, and in our view will need only minor polishing in relation to some details. Thus, the specific comments and proposed changes reflected in our position paper.

Key points in our position paper:

(1) Availability of ICOs for foundations

Initial Coin Offering (ICO) as a use case for blockchain technology (i.e., as fundraising facility) could also be leveraged by foundations either for social, charitable or scientific purposes, or to build open source protocols (e.g. Ethereum Foundation).

We have seen several foundations established to develop open source technologies issue pure utility tokens. So far, we have not seen a foundation issue financial instrument in the form of a security token, although we don’t think this is necessarily impossible – legally speaking - as long as the foundation retains its non-stock and non-profit character.

Non-stock corporations, especially foundations, should not be barred from launching an ICO. It could even be argued that because of their non-stock and non-profit nature, there is greater need for them to take advantage of alternative fundraising mechanisms.

(2) An ICO does not need to relate to a blockchain project

From our understanding, the ICO in itself is a use case for blockchain. Not only blockchain companies or projects can leverage this innovative way of raising funds. It is thus inaccurate to assume that an ICO is being launched to fund the development of a blockchain project. ICO can be a method of financing an activity completely unrelated to blockchain or distributed ledger technology. As a matter of fact, most security tokens will likely be unrelated to the development of a blockchain-based application or platform.

There are passages in the draft that seems to suggest that an ICO should relate to a blockchain project. We stress that an ICO as an innovative funding exercise can be availed of by any company seeking to raise capital.

(3) The Initial Assessment Request should contain only information relevant to the Utility / Security token question

In our opinion, the Initial Assessment Request should deal only with the determination on whether the token being offered to be sold publicly is a security token or otherwise. Therefore, all requirements that are not relevant in the determination of this question should not be required from the prospective token issuer. We propose the deletion of some immaterial requirements in the submissions for the Initial Assessment Request.

(4) The motive of the utility token buyer

The purchase of a pure utility token is not viewed by its buyer as an investment but rather as an opportunity to acquire a token to be consumed at later stage at a discounted pre-selling price.

The current state of the ICO token market apparently has made it incredible that somebody will actually buy a token to support a project or to enjoy discounts arising from the pre-sale (which is common in other industries by the way). Utility tokens can be designed to ensure it will have no features of a financial instrument, and its buyers purchase the tokens just like any commercial products intended to be consumed or used. Precisely because the SEC should not treat all tokens as security, it should not be assumed that all token purchases are motivated by an expectation of profits on the part of the buyer or a desire to consider the transaction as an investment.

If today's token market shows that virtually everyone who puts in money in ICO treats them as an investment, that explains why we can't blame some regulators to treat all or most ICOs as securities offering. But if we're advocating that the regulator should be able to differentiate a pure utility token from a security token - which will determine whether SEC registration will be legally required, we should challenge the assumption that even purchases of a utility token are motivated by expectation of profits.

(5) ICO rules should be aligned with the Full Disclosure Regime

In relation to Section 27 (Rejection of the Application for Registration), the Commission’s discretion to reject application for registration of security tokens on the vague possibility of "injur(ing) investors" seems inconsistent with the policy shift from a merit-based registration to a full-disclosure regime established by the Securities Regulation Code.

(6) Policy on celebrity endorsements

We suggest to add as one of the prohibited advertising the practice of celebrity endorsements, unless the endorser discloses the nature, source, and amount of any compensation paid, directly or indirectly, by the issuer in exchange for the endorsement.

(7) Accreditation regime for ICO platforms

We recommend establishing a special accreditation regime for ICO platforms, analogous to how the proposed Crowdfunding regulation envisions an accreditation process for crowdfunding portals. ##