Start-ups’ U-turn on crypto funding as scrutiny rises

Not long ago, lawyers across Asia were devising clever schemes to keep new cryptocurrencies as far from regulators as possible. This year they are trying to come up with ways that make sure crypto offerings fall squarely within securities laws across the region.

So-called initial coin offerings exploded on the start-up scene in 2017 as an alternative to initial public offerings. Unlike IPOs, the market for ICOs has enabled small companies to bypass banks and traditional underwriters of capital raisings by selling digital tokens backed by crypto technologies directly to investors online.

Most ICO issuances have been structured to avoid securities laws. In many cases, the tokens sold by companies did not grant investors rights to share in the profits of the companies, nor did they act as a type of debt that had to be repaid at a certain date. Instead, such instruments often granted access to the company’s products and services.

The technological development has been hailed as a democratisation of fundraising and investment but also quickly attracted scrutiny from regulators around the world, which have accused some companies of issuing securities-like instruments without the proper licensing. Financial watchdogs in Asia have been particularly heavy-handed, with China and Hong Kong all but banning ICO activities.

The solution this year has been to meet the law head-on. Start-ups and their lawyers are exploring ways to make ICOs compliant. They call it a security token offering, or STO. It could become the next big crypto trend in Asia, and around the world, lawyers say — if companies can find a market for them.

“With ICOs, we saw people trying very hard to fall outside of the regulated space,” says Lena Ng, a partner at Clifford Chance, who leads the firm’s financial regulatory practice in Singapore. “STOs are clearly subject to regulation.”

ICO issuance took off in 2017, with companies raising about $7bn through these instruments, up from less…

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