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Fund-raising through Initial Coin Offering

Tata Panlilio

As interest in virtual currencies (VCs), blockchain technology, and initial coin offerings (ICOs) continue to heat up, governments around the world are evaluating the benefits and potential risks of these innovations while considering the regulatory issues surrounding them.

Recognizing that VCs have the potential to revolutionize the delivery of financial services while, at the same time, pose consumer protection and financial stability risks, as well as money laundering and terrorist financing risks, the Bangko Sentral ng Pilipinas (BSP) issued in 2017 a Circular providing guidelines to regulate VCs when used for the delivery of financial services. The BSP Circular focused on VCs as a means for making payments/remittances and required a VC exchange to obtain a Certificate of Registration to operate as a remittance and transfer company.

Following the lead of the BSP, the Securities and Exchange Commission (SEC) issued on Dec. 27, 2018, the proposed Rules and Regulations Governing ICOs (the “Proposed SEC Rules on ICO”), and invited banks, investment houses, the investing public, and other interest parties to submit their comments.

In broad terms, VC refers to a financial value recorded by electronic means, which may be used to pay for goods or services and which may be exchanged reciprocally. A coin is a unit of value employed as a means of exchange within the blockchain. For the Proposed SEC Rules, VC or coin does not include legal tender and electronic money. Also not included are grants of value as part of a rewards program, which cannot be exchanged for legal tender, bank credit, or any digital/crypto asset. Likewise, not included are digital representations of value used within an online game platform.

Under the Proposed SEC Rules, ICOs or token sales are “distributed ledger technology fund-raising operations involving the issuance of tokens in return for cash, other cryptocurrencies or other assets for the purpose of raising money or capital from the general public” to fund a venture, project, or other investment schemes. Once the project reaches a certain stage, “benefits to token holders may include: a) gains through profits or increase in the value of tokens which can be sold if the project is successful; b) voting or governance rights; or c) usage rights.”

The Proposed SEC Rules primarily govern the “conduct of ICOs wherein convertible security tokens are issued by start-ups and/or registered corporations organized in the Philippines, and non-resident foreign start-ups or corporations doing ICOs targeting Filipinos, through online platforms.” While VC or coin are broad terms, the Proposed SEC Rules apply specifically to convertible security tokens. Convertible meaning it is a VC that has an equivalent value in real currency and can be exchanged back and forth for real currency. Security tokens satisfy the definition of securities under the Securities Regulation Code (SRC) and related SEC rules. Security tokens can be in the form of payment tokens (used for the payment of goods and services or as a means of money/value transfer), utility tokens (grants the bearer access to a decentralized platform or service), and/or asset tokens (represent assets or rights thereto, such as a debt or equity claim on the issuer).

In terms of corporate structure, those that wish to conduct an ICO involving security tokens are required to register as a corporation. For non-resident foreign start-ups or corporations, their ability to register security tokens targeting Filipinos is subject to reciprocity and depends on the existence of information sharing arrangements. If the security tokens are already registered in another jurisdiction, the issuer can submit proof thereof and the regulatory framework applicable to it. In the absence of these requirements, the foreign issuer must establish a branch office in the Philippines.

Those who propose to conduct an ICO are required to comply with the following procedures:

1. Not later than 90 days before the pre-sale (i.e., token sale before the main crowd sale), submit to the SEC an initial request assessment with the required attachments for the SEC to determine if the token is security.

More important attachments include the detailed description of the ICO project; proposed whitepaper; and the legal opinion whether the tokens are securities. The description of the ICO project contains the business plan and feasibility of the proposed project. The important contents of the whitepaper include the hard cap (maximum amount of capital that the project aims to raise) and soft cap (minimum amount needed for the project to proceed); use of the proceeds; detailed description of the ICO tokens, such as price/value and the blockchain technology to be used; returns, rights, and other privileges of the tokens; description of the currency or other assets that will be received as payment for the tokens; and description of the investment risks.

2. Within 20 days from the receipt of the initial assessment request (extendible to another 20 days), the SEC determine if the tokens qualify as securities.

3. If the tokens are considered securities, the issuer must register the ICO not later than 45 days before the pre-sale period. For this purpose, the issuer must submit to the SEC a Registration Statement, including a Prospectus.

In addition to the information in the ICO project description and whitepaper, the Registration Statement includes: a) code audit report on the testing of the source code, Know Your Customer (KYC)/Anti-Money Laundering Act (AMLA) framework, and technology risk and security protocols; b) audited financial statements (AFS) with supplementary schedules dated within 135 days from the filing of the prospectus; and c) Manual on Corporate Governance.

More importantly, the issuer is required to contract an independent and reputable escrow agent for keeping the proceeds of the ICO, unless the issuer can prove to the SEC that other mechanisms will be used to satisfy the role of the escrow agent. A copy of the escrow agreement on the conditions and schedule of the release of the proceeds must also be submitted as part of the Registration Statement documents.

4. Upon submitting the complete Registration Statement, the SEC shall conduct an ocular inspection of the office of the issuer and operating system walkthrough of the ICO.

5. After the order of registration and permit to sell is issued, the issuer shall submit within 105 days after each fiscal year (starting from the year of issuance of the permit to sell) reportorial requirements, such as AFS, interim quarterly FS, and semi-annual report on the status of ICO project. The escrow agent is also required to submit a progress report.

While the BSP focused on VC as a means for delivering financial services and making payments/remittances, the SEC is taking a broader view by treating ICOs as an innovative way of raising funds using blockchain and cryptocurrency technology. Essentially, it can be gleaned from the Proposed Rules that the SEC is strongly inclined to consider ICOs as securities and to regulate them as such by requiring Issuers to secure a prior permit to sell and submit voluminous information designed to protect the investing public.

In addition to the United States and the United Kingdom, Singapore and Hong Kong have, in recent years, become hubs for ICOs, according to reports by Fintech News and Consultancy Asia. In a 2017 advisory, the Monetary Authority of Singapore (MAS) clarified that, while it does not regulate virtual currencies, it recognized that a digital token may fall within the definition of “security” under the Singapore Securities and Futures Act (SFA). In this case, issuers would be required to register a prospectus and secure a license before offering such tokens. Moreover, any platform doing secondary trading would have to be a MAS-approved exchange or market operator.

According to MAS, “if the use of a digital token relates to ownership of or interest over an issuer’s assets or property, it could be considered an offer of units in a collective investment scheme; or if the digital token represents a debt owed by an issuer, it may be considered a debenture. In either case, the token would be deemed “securities” under the SFA.

While MAS adopted a similar treatment, it took a more measured and flexible approach by issuing advisories to guide issuers and the investing public alike, instead of passing binding legislation that definitively characterized digital tokens solely as securities.

The Philippine SEC decidedly took a more conservative approach in deeming ICOs as securities and regulating them in a manner similar to initial public offerings (IPOs), even requiring the appointment of an escrow agent to safeguard ICO proceeds. However, there are notable differences between an IPO and an ICO. An ICO specifically caters to start-up projects, while an IPO proponent has to have a minimum track record. An IPO proponent relies on banks, underwriters, and financial advisors. An ICO issuer targets the investor directly and uses blockchain technology precisely to speed up transactions and bypass the usual procedures of banks or investment houses. Funds raised through an ICO are generally used for specific projects, while the proceeds of an IPO are used for the company’s long-term development.

The Philippine SEC clearly recognizes the potential of ICOs as a means to raise capital for start-ups and other small businesses, as well as increasing public participation in capital markets. It is hoped that they continue to monitor future developments in ICOs and be nimble and flexible enough to support innovations in this field by adjusting existing rules and regulations.

With the BSP and SEC at the forefront of formulating rules governing VCs and ICOs, the Bureau of Internal Revenue has demonstrated in recent issuances governing online retailing and ride-sharing services that it, too, can take the cue from other regulators in crafting rules that would address the tax implications of emerging transactions.


Tata Panlilio-Ong is a Director of the Tax Advisory and Compliance Division of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.


As published in BusinessWorld, dated 22 January 2019