First published by Appleby
Further to our News Alert dated 12 April 2018, in which we provided an overview of Bermuda's plans to develop and implement a globally recognised standard for regulating the Fintech sector in Bermuda, the Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 (ICO Act) was passed by the Bermuda House of Assembly on 27 April 2018. Once the ICO Act receives the approval of the Senate and Royal Assent, it will become operative by notice of the Minister of Finance (Minister), which is expected to occur during May 2018.
This News Alert is not intended to be a comprehensive review of the ICO Act, but seeks to provide details of the most pertinent provisions as well as other ancillary requirements.
The ICO Act will regulate all aspects of offering digital assets to the public as a means for a Bermuda company to raise capital. A digital asset covers all forms of cryptocurrencies, digital coins and tokens issued in connection with initial coin offerings (ICOs).
Who does this affect?
Persons who are interested in creating, promoting, investing in and using ICOs and digital assets as well as companies who are seeking to raise capital through initial coin offerings.
The ICO Act does not seek to regulate persons or companies who are concerned solely with private sales or whose ordinary business involves the acquisition, disposal or holding of digital assets.
Application of the ICO Act
Only companies registered under the Companies Act 1981 (as amended) and Limited Liability Company Act 2016 (as amended) who have the consent of the Minister are permitted to issue ICOs in or from within Bermuda.
Application to the Minister for Consent
Under the ICO Act, ICOs will be treated as a restricted business activity requiring prior consent from the Minister. To assist with the vetting of applications, a FinTech Advisory Committee will be formed to assist in the review of each application and make recommendations to the Minister.
The following details must be included in an application for consent:
i. names of the persons managing the business, conducting the ICO and the underlying digital asset offered;
ii. details on the development and implementation of any product, service or other project related to the ICO, including timeline for completion;
iii. projected amount of money to be raised through the ICO;
iv. description of the rights, features, functionality and intended transferability of the digital asset offered;
v. description of the technology to be used and confirmation of the ability of the technical platform to enable the collection, confirmation and storage of purchaser identity information; and
vi. details on compliance and auditing of the initial coin offerings.
ICO Offer Document
Once consent is received a company must publish an ICO offer document in electronic form. Subject to specific statutory exemptions (including but not limited to whether the digital assets are listed on an appointed stock exchange or appointed digital asset exchange), a company is required to file such document with the Bermuda Registrar of Companies.
In addition to requirements which may be prescribed by the Minister, the Code of Conduct or any regulations ancillary to the ICO Act, the ICO offer document must contain the following minimum details:
i. information of the promoter;
ii. information of the officers of the promoter (where a corporate body);
iii. the business or proposed business;
iv. a description of the project, the proposed timeline for the project including any proposed project phases and milestones;
v. amount of money equivalent (in Bermuda dollars) that the initial coin offering is intended to raise;
vi. disclosure as to the allocation of the amounts intended to be raised amongst the classes of any issuance (i.e. pre-sale or post-initial coin offering);
vii. rights or restrictions on the digital assets that are being offered;
viii. date and time of the opening and closing of the offering of digital assets;
ix. general initial coin offering risk warning; and
x. a statement as to how personal information will be used.
The particulars listed above must be kept accurate during the offer period of the digital asset concerned. Failure to do so could lead to the responsible persons (including directors and officers of the issuer, promotors of the ICO, etc.) being liable to civil penalties.
The general risk warning statement mentioned in ix. above should include (i) information regarding any substantial risks to the project which are known or reasonably foreseeable; (ii) information as to a person's rights or options if the project which is the subject to the initial coin offering in question does not proceed; (iii) a description of the rights (if any) in relation to the digital assets that are being offered and (iv) information regarding any disclaimer in respect of guarantees or warranties in relation to the project to be developed or any other asset related to the ICO.
The risk warning statement must appear in the ICO offer document and on an ICO platform. The ICO platform is an electronic public forum that the promotor or the company shall maintain once the offer is open such that relevant parties to the ICO have an opportunity to enquire more about the ICO. The ICO platform should also specify how a participant in an ICO may withdraw its application; as such application can be withdrawn by the participant for up to three business days after an application is made.
The ICO Act also requires issuers to have appropriate procedures in place to ensure that they verify the identity of the participants in the ICO and also ensure that all confidentiality, disclosure of information and connected matters are complied with by the issuer under Bermuda laws.
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.