The Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 (the "ICO Act") became operative with effect from 9 July 2018. The ICO Act amends the Bermuda companies and limited liability companies ("LLC") legislation, and creates a statutory framework for the regulation of initial coin offerings in Bermuda. The Minister also published the Companies (Initial Coin Offering) Regulations 2018 and the Limited Liability Company (Initial Coin Offering) Regulations 2018 (together the "ICO Regulations") expanding on certain requirements under the ICO Act.
This advisory provides guidance as to some of the key requirements under the ICO Act and the process for making an application for consent to conduct an offer to the public for the purchase or acquisition of digital assets under Bermuda law ("ICO"). It is not exhaustive and anyone seeking further information is invited to contact a member of our team.
What digital assets are captured under the ICO Act?
Under the ICO Act, the term 'digital asset' is very broadly defined and covers anything that exists in binary format and comes with the right to use it and includes a digital representation of value that is:
- used as a medium of exchange, unit of account or store of value (other than fiat currency);
- is intended to represent assets such as debt or equity in the issuer of the ICO offer documents or digital asset (or other type of promoter);
- is otherwise intended to represent any assets or rights associated with such assets; or
- which is intended to provide access to an application, service or product by means of blockchain.
As such, the ICO Act captures most forms of digital coins, cryptocurrencies, security, utility and equity token offerings. The ICO Act does not regulate transactions in which a person grants value as part of an affinity or rewards program (provided value cannot be taken from or exchanged for fiat currency, bank credit or any digital asset), or a digital representation of value used by a publisher within an online gaming platform.
Do I need to establish a Bermuda company to Conduct an ICO?
No person is allowed to issue an ICO in or from within Bermuda unless that person is a Bermuda company or LLC that is registered with the Registrar of Companies in Bermuda. ICOs are treated as a 'restricted business activity', which means that before a company or LLC can commence an ICO, the consent of the Minister of Finance in Bermuda is required. An application for such consent (in the prescribed form, guidance on which is expected to be issued by the Registrar of Companies shortly) should be submitted to the Minister of Finance as soon as possible and ideally at the time of incorporation.
The ICO Regulations set out the 'minimum required information' in the following categories with respect to the ICO which must be included in the application for the Minister's consent and must be submitted along with a copy of the ICO offer document:
- details of all parties involved in the ICO and whether they are authorised under any other law
- details of the project itself including key features of the product and services and technologies used, means of financing and allocation of funds
- information concerning the digital asset including when it will be created and transferred to participants and planned functionalities
- details concerning any proposed transfer or trade of the digital assets and whether it can be used to pay third parties or buy goods or services
- information concerning compliance issues
A Bermuda company or LLC must have a registered office in Bermuda. Our affiliated corporate services provider, Walkers Corporate (Bermuda) Limited, can provide registered office and other corporate administration services. If you would like further information please do not hesitate to contact a member of our team.
What constitutes an offer to the public?
An 'offer to the public' under the ICO Act includes an offer that is made to any section of the public (wherever located). As with IPOs, certain offers are not treated as being an offer to the public, including offers of the same class of digital assets to existing holders and offers by exempted companies which are certified as being made available to 35 persons or less. Offers which are of a private character or which are restricted to persons whose ordinary business involves the acquisition, disposal or holding of digital assets are also out of scope.
What is the process for conducting an ICO?
A company or LLC wishing to launch an ICO in Bermuda must publish and file an ICO offer document (which is often the White Paper). The ICO offer document does not need to be filed where the digital assets are listed on an appointed stock or digital asset exchange if the rules of the relevant exchange do not require it to be filed or where the company or LLC is subject to the rules of a competent regulatory which does not require filing (unless the exemption is only by reason of the offer being available only to non-residents outside the jurisdiction).
The contents of the ICO offer document must include:
- details of the registered or principal office of the promoter;
- details of the officers of the promoter;
- the business or proposed business of the company/LLC;
- description of the project, the proposed timelines, including any milestones;
- the amount of money equivalent (in Bermuda dollars) that the ICO is intending to raise (including presale and post ICO);
- details of the allocation of the amounts intended to be raised amongst the classes of issuance;
- rights or restrictions on the digital assets that are being offered (if any);
- timings of opening and closing of the offering of the digital assets;
- a general ICO risk warning in the form required under the ICO Act; and
- a statement as to how personal information will be used.
What are the ongoing obligations?
The ICO Act requires that the company or LLC has in place appropriate measures relating to identification and verification of the identity of participants in the ICO including compliance with applicable AML/ATF requirements. The ICO Regulations set out those actions that would be deemed to be 'appropriate measures' for the purpose of the ICO Act, the required timing for identification and verification, record keeping and requirements concerning an internal compliance audit. Participants or proposed participants in an ICO may be subject to enhanced due diligence requirements in certain circumstances (laid out in the ICO Regulations), in which case, a company or LLC must take specific and adequate measures to compensate for the potential risk, examples of which are provided in the ICO Regulations.
The ICO Regulations stipulate that if a company or LLC is unable to apply such measures with respect to a participant or proposed participant, it is prohibited from opening an account or issuing a digital asset to such person and must terminate the business relationship. A company or LLC must also ensure that appropriate mechanisms are in place with respect to the security of the digital assets issued to the participants, confidentiality, disclosure of information and any connected matters arising under Bermuda law.
The Minister of Finance, in consultation with the FinTech Advisory Committee (established by the Bermuda Government), may issue a Code of Conduct for the purpose of providing guidance as to duties and requirements to be complied with, the sound principles to be observed by persons subject to the ICO provisions and related procedures. We will send a separate advisory when such a Code of Conduct is issued.
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.