The first case of initial coin offering (ICO) appeared in 2017, generating much interest and new financing opportunities. But many ICO teams have declared failures or vanished soon after completing fundraising operations due to lack of government supervision. To revive the sluggish market sentiment, industry players have called for regulatory supervision over the securities token offering (STO).
In response to the call, Taiwan's Financial Supervisory Commission (FSC) has announced that it will formulate relevant regulations by the end of June, and it already hosted on April 12 a public hearing session for representatives from the industry, government, and academic sectors to express their opinions on draft regulatory rules.
The move received a lot of media attention. Indeed, the FSC is worthy of praise for daring to map out a brand-new bill governing the emerging STO business operations. But since the full text of the draft bill was not available at the public hearing, some of the points may deserve more attention or need to be clearly explained. The following are three preliminary suggestions for the writing of a law in the direction of "developing a sound STO, conducting efficient supervision, and building international connection." It is hoped that Taiwan's STO market can take off and grab future international financing opportunities for STOs.
Introducing an additional international STO version to govern issuances by foreign companies or overseas fundraising activities
The draft bill available at the public hearing confines STO issuers to companies in Taiwan, excluding offshore firms. As STO technology boasts the trait of facilitating cross-nation fundraising operation, it is advisable that besides the current domestic version of the STO draft bill, an international version should be devised to govern STO issuance by foreign companies or to simply regulate overseas fundraising. The international version must also include relevant procedures such as those for registration to facilitate overall management and help access and develop international markets, so as to effectively boost international visibility of Taiwan's STO development
Meanwhile, the draft bill stipulates that any dedicated STO investor is required to have a minimum wealth of NT$30 million, but sets maximum STO subscription amount at only NT$100,000. Most attendees at the public hearing regarded the wealth bar as too high and the subscription ceiling too low. The draft stipulations observe the international practices that STOs are less open to retail investors; and to safeguard the interests of investors, the FSC adopts the high criteria for dedicated investors by taking reference from the regulations governing offshore structured products. But the draft bill should also consider flexible credit lines as set for margin trading and short selling of marketable securities. In accordance with different risk tolerance capabilities of different investors, the minimum wealth requirement criteria and the maximum subscription amount can be flexibly adjusted along with risk degrees, so as to fulfill the purpose of protecting investors on the one hand and to develop the securities token-based capital market and attract international funds on the other hand.
Clarifying the relationship between STO platform operators and issuers
The draft bill requires STO issuers to channel their issuances through STO platform operators (securities dealers). But what about the relationship between platform operators and issuers - total underwriting or commissioned underwriting? The answer cannot be found from the public information. The draft bill asks, on the one hand, STO platform operators to screen the regulatory compliance by issuers in launching securities tokens on the platforms. And it also allows, on the other hand, the operators to engage in STO trading after completing the screening process by offering quotes based on market conditions to profit from the spread between token buying and selling prices. Do the dual roles played by platform operators contradict each other? Furthermore, the existing draft regulations also blur the boundary between the primary and the secondary STO markets. Accordingly, the regulator should incorporate the role of an intermediary into the draft bill and the relationship between STO platform operators and issuers be further clarified and clearly stated.
Innovativeness of financial regulatory sandbox
In case of the STO fundraising amount exceeding NT$30 million, the draft bill stipulates that the issuer must enter the financial regulatory sandbox experimentation, for which a so-called "innovativeness" is required. Accordingly, if there is only one issuer applying for entering the sandbox experimentation, other issuers cannot develop the same or similar business until the issuer completes its experimentation. In order to accelerate multiple developments of the STO industry, the FSC should broaden the definition of "innovativeness" of individual STO projects, so as to allow more opportunities for issuers to meet financial regulatory sandbox requirements.
(Kelvin Chung is senior attorney and sub-leader of Cryptoassets and Token Economy Taskforce of KPMG in Taiwan)
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