1. What, if any, are the regulations applicable to token sales, aka initial coin offerings (“ICOs”).
The Bermuda Government has introduced legislation to govern ICOs in and from within Bermuda. The Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 (ICO Act) was recently passed by both the House of Assembly and the Senate, and has since received Royal Assent. All that remains for the ICO Act to become effective is for the Minister to publish a notice in the Gazette. This is expected to occur simultaneously with ancillary regulations that are expected to be issued during July 2018.
The Bermuda Government has also introduced the Digital Asset Business Act (DABA) which is intended to establish a licensing and governance regime for any person providing services to the public in the digital asset sector. Whilst DABA does not require an ICO to be licensed in itself, it does require those service providers that are integral to the effective operation of an ICO in or from within Bermuda to be licensed.
2. Identify the applicable federal, provincial, state regulatory agency/agencies that have asserted or may assert jurisdiction over ICOs.
ICOs have been designated as Restricted Activities under Bermuda legislation, which requires all persons seeking to conduct an ICO to first obtain the consent of the Minister of Finance (Minister). The Minister will establish and appoint a FinTech Advisory Committee (FAC), who will assist the Minister in assessing ICO applications for consent. The Minister and the FAC may also issue a Code of Conduct to provide guidance on duties and requirements of persons affected by the ICO Act. In addition, the Registrar of Companies is empowered to impose civil penalties on companies that do not comply with the requirements of the ICO Act.
The DABA licensing regime will be regulated by the Bermuda Monetary Authority (BMA).
3. Who is subject to the regulatory regime?
Any person conducting an ICO in or from within Bermuda is subject to the ICO Act and ancillary regulations. Any person offering digital asset business services in or from within Bermuda will be subject to the DABA licensing regime and ancillary regulations.
4. What regulations, if any, are applicable to sales of securities tokens v. utilities tokens?
The ICO Act does not differentiate between a securities token and a utilities token.
An ICO is defined as “an offer by a company to the public to purchase or otherwise acquire digital assets”.
Digital assets are defined as “..anything that exists in binary format and comes with the right to use it and includes a digital representation of value that –
a. is used as a medium of exchange, unit of account, or store of value and is not legal tender, whether or not denominated in legal tender;
b. is intended to represent assets such as debt or equity in the promoter;
c. is otherwise intended to represent any assets or rights associated with such assets; or
d. is intended to provide access to an application or service or product by means of blockchain;
but does not include:
e. a transaction in which a person grants value as part of an affinity or rewards program, which value cannot be taken from or exchanged with the person for legal tender, bank credit or any digital asset; or
f. a digital representation of value issue dby or on behalf of the publisher and used within an online game, game platform, or family of games sold by the same publisher or offered on the same game platform;”.
5. Is the Government expected to (further) regulate ICOs and what is the timing of any proposed regulation?
The Government of Bermuda is expected to issue ancillary Regulations to compliment and bolster the ICO Act during July 2018. This is intended to give greater certainty to and to provide more detail for the purposes of compliance with the ICO Act. It will also set out the Government fees that will be applicable to each ICO conducted in or from within Bermuda. The DABA regulations are expected to be issued and operation by September 2018.
6. Have there been any ICOs in your jurisdiction? If so, how are they normally structured?
Yes, but to date these have been prior to the introduction of the ICO Act and so do not follow any of the new requirements.
7. Describe, briefly, your assessment of the Government’s current attitudes/activities, including enforcement trends and recent developments.
The Bermuda Government is pro-actively seeking to attract technology companies to Bermuda, with a specific focus on ICOs and digital asset businesses using blockchain technology. Their focus has been to establish a regulatory environment that protects the public whilst fostering and encouraging innovation. Simultaneously with the ICO Act and DABA the Government of Bermuda has established a task force to consider and implement an electronic ID system for Bermuda. More details on this project will be forthcoming in the next few months.
8. Describe the sanctions for non-compliance with the relevant regulations.
Any person conducting an ICO in or from within Bermuda without the Minister’s consent or who [knowingly] makes or authorises a [material] untrue statement to be made in an ICO offer document commits an offence and shall be liable (i) on summary conviction to a fine not exceeding USD50,000 or imprisonment for a period of one year or both, or (ii) on conviction on indictment to a fine not exceeding USD250,000 or imprisonment for a period of five years or both. There are also civil liabilities for loss of damage sustained by reason of any untrue statement contained in an ICO offer document.
Under DABA the BMA may impose civil penalties on any person that breaches the requirements or prohibitions imposed not exceeding USD10,000,000, and/or publish a statement to this effect. The BMA also has the power to apply for injunctions against persons who it reasonably believes will contravene or will, where such has already occurred, continue to contravene DABA.
9. Other important/notable information.
There are many important and notable aspects to this new legislation which will only be increased as the ancillary regulations, Code of Conduct and other materials and guidance notes are published. There is too much to include in a Guide of this nature. Readers are recommended to seek specific advice on matters or clients that are affected by this new legislation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.