United Arab Emirates: Initial Coin Offerings In The United Arab Emirates

Last Updated: 11 July 2019
Article by Hasan Anwar Rizvi

An introduction to the legal and regulatory position in respect of ICO's in the UAE, DIFC and ADGM

Introduction

Initial Coin Offerings ("ICO")1 refers to the innovative mechanism by which start-up businesses and other companies can digitally raise funds from the public.

In 2017 alone, over US$3 billion was raised through ICOs globally. In April 2018, it has been reported that ICOs have now raised more capital in the first three months of 2018 than the total capital raised in 2017. The subject of ICOs has also sparked an interest in the United Arab Emirates ("UAE") as exemplified by the recent launch of the mCoin ICO in Dubai in April 2018.

Despite the growing trend and interest surrounding ICOs, some countries across the globe have expressly banned ICOs; including the People's Republic of China ("PRC"), where the main regulators jointly outlawed ICOs. In South Korea, the Financial Supervisory Board decided to ban all forms of virtual currencies. More recently, in April 2018, India's Central Bank announced its ban on the sale and purchase of digital currencies2.

The UAE's position on the legal and regulatory treatment of raising capital through ICOs is still under-developed.

What is an ICO?

ICOs allow start-up businesses and other companies to digitally raise funds. The investor(s) are provided with the opportunity to participate in the ICO by exchanging fiat currencies such as the Euro or the USD for digital tokens in a business ("Digital Tokens"). The Digital Tokens issued to the investor(s) may represent for example: ownership in the business and/or rights over the business. ICOs have notably been classified as high-risk and speculative investments and various regulators such as the Financial Conduct Authority in the United Kingdom has issued warnings against their use.

The Digital Token(s) utilise the 'decentralised' blockchain technology to operate. The value of the Digital Token(s) can increase or fluctuate depending on the performance and growth of the issuing business.

The ICO Process and Legal Documentation

Before a business issues an ICO, it will market the ICO to potential investors though a white paper ("White Paper").

Similar to a prospectus or information memorandum in initial public offerings, the White Paper in essence is a marketing tool which provides information on the issuing company, a description of its business, the proposed project for which it is raising funds for, and the rights and structure of the Digital Token(s) being issued. The White Paper is commonly available through the issuing company's website or through an online platform.

The terms and conditions of the purchase of the Digital Token(s) is typically recorded in a digital token purchase agreement which sets out the rights of each party. The purchase agreement should comply with the specific rules and local legislation of the country in which the Digital Token(s) are being marketed. However, ICOs are a recent phenomenon and like many other countries, the UAE, has no specific statutory provisions or rules that an issuer should comply with when issuing ICOs.

The UAE's Position on ICOs

UAE (Onshore, excluding the DIFC and ADGM)

In the UAE, the Securities and Commodities Authority ("SCA"), the governmental body that regulates the UAE's financial and commodities markets issued a circular on 2 April 20183 (the "Circular") in which it warned investors against digital, token-based fundraising activities which includes ICOs. The SCA reiterated that it does not recognise, regulate or supervise any ICOs, and by investing in any ICOs, the investors are doing so at their own risk.

Through the Circular, the SCA raised awareness surrounding the risks associated with ICOs. In particular, the SCA highlighted the following:

  • that some ICOs are not subject to regulation and therefore may be subject to fraud risks;
  • that ICOs may be issued abroad, and therefore are subject to foreign laws and regulations that can be difficult to verify, and therefore, tracking and recovering funds in cases where ICOs have collapsed may prove to be extremely difficult;
  • that ICO trading on the secondary market is subject to opaque, volatile pricing and may possess insufficient liquidity;
  • that investors, in particular retail investors may not be able to comprehend the risks, costs, and expected returns associated with ICOs; and
  • that the information made available to potential investors through the White Paper or otherwise may be unaudited and/or incomplete and may present the relevant investment in an unbalanced and/or misleading manner.

The Dubai Financial Services Authority (the "DFSA")

Similarly, the DFSA, the independent regulator of financial services conducted in or from the Dubai International Financial Centre ("DIFC") issued a warning on 13 September 20174 to potential investors of ICOs.

In its warning, the DFSA made it clear that it does not regulate "these types of product offerings or licence firms in the DIFC to undertake such activities". In addition, the DFSA urged potential investors to exercise caution and undertake its own due diligence to better understand the associated risks before engaging with firms offering such investments in the DIFC, and/or before making any financial contributions towards such investments.

The Abu Dhabi Global Markets (the "ADGM")

The ADGM, through the Financial Services Regulatory Authority ("FRSA") issued its own guidance to investors proposing to invest into ICOs. The guidance provided by the ADGM on 8 October 2017 (the "Guidelines"),5 aims to inform investors on the legal and regulatory treatment of raising funds through ICOs in the ADGM.

The Guidelines should be read in conjunction with the Financial Services and Markets Regulations 2015 ("FSMR"). If tokens in an ICO are assessed to exhibit the characteristics of a 'Security' then such tokens can be classified as 'Security Tokens' and thus may be subject to the ADGM's regulatory obligations/requirements.

Guidance Note 3.10 further clarifies that not all ICOs will constitute an Offer of Securities under the Market Rules or FSMR. If the tokens do not exemplify the features and characteristics of Securities, the offer of such tokens is not likely to be an Offer of Securities (each as defined in the FSMR and the ADGM Glossary) and neither is the trading of such tokens likely to constitute a Regulated Activity under the FSMR.

If an issuer is proposing an ICO in or from the ADGM then it should aim to approach the FSRA at the earliest opportunity to ensure it can rely on certain exemptions and avoid falling foul of the ADGM regulatory regime6.

On 30 April 2018, the FSRA published a consultation paper on a proposed framework to administer spot crypto asset activities to be undertaken in the ADGM.7 It is clearly evident that the FSRA is seeking to instil proper governance, transparency and oversight in and over crypto asset activities. The proposed crypto asset regulatory framework supplements the FSRA's Guidance on Initial Coin/Token Offerings and Crypto Assets released in 2017. However, until the proposed framework comes into force, ICOs comprising tokens which exhibit the characteristics of securities will continue to be treated as such within the FSRA's regulatory framework.

The information mentioned in this article is current at the date of publication of this article and available from public sources. Nothing in this article constitutes legal advice and should not be construed as any form of advice. For further information, please do not hesitate to contact RIAA Barker Gillette.

Footnotes

1 An ICO is also known as a "coin sale" or "token sale".

2 http://www.bbc.com/news/world-asia-india-43669730 accessed on 29 April 2018 at 15:10 pm.

3 https://www.sca.gov.ae/English/News/Pages/Articles/2018/2018-2-4.aspx accessed on 29 April 2018 at 16:50 pm.

4 https://www.dfsa.ae/MediaRelease/News/DFSA-Issues-General-Investor-Statement accessed on 29 April 2018 at 16:52 pm.

5 https://www.adgm.com/media/192772/20171009-fsra-guidance-for-icos-and-virtual-currencies.pdf ADGM Guidance Note accessed on 29 April 2018 at 17:27 pm.

6 Guidance Note 3.3 of the Guidelines.

7 https://www.adgm.com/mediacentre/press-releases/abu-dhabi-global-market-proposes-a-regulatory-framework-for-spot-crypto-asset-markets/ accessed on 2.5.2018 at 13:00 pm.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions