When Singapore experienced its initial wave of digital token issuances, principally in 2017 and into 2018, many issuers focused on structuring their tokens as “utility tokens”. Broadly, these were tokens which gave the holder the right to receive a service and which avoided categorisation as “securities” under the Securities and Futures Act (“SFA”), offers of which are subject to regulatory restrictions in most jurisdictions. Similarly, many digital token exchanges (“Exchanges”), not wishing to operate as regulated securities exchanges, refrained from listing tokens that qualified as securities under the SFA or equivalent frameworks outside Singapore, and would typically require the issuer to provide a legal opinion1 confirming that the tokens did not constitute securities in at least one jurisdiction.⁽²⁾

While many digital fundraisings continue to rely on utility tokens, Singapore and other key fundraising centres are experiencing a surge in interest in security token offerings (“STOs”). Digital tokens will qualify as securities if, broadly, they constitute shares (i.e. ownership interests in a corporation or other entity) or debentures (i.e. debt owed by the issuer to the holder).

STOs give rise to a range of additional regulatory considerations which have a substantial bearing not only on the operations of issuers, but crucially, also on advisers, Exchanges and other service providers who support the fundraising process. Key considerations include licensing and prospectus requirements, among others. To the extent that participants in the STO ecosystem are not able to comply with these requirements or avail themselves of relevant exemptions, they can effectively pose barriers to entry for those participants.

REGULATORY DEVELOPMENTS IN 2018

Moreover, the second half of 2018 brought three significant regulatory developments that will have long-term effects on blockchain players in Singapore:

• On 8 October 2018, a variety of changes to the SFA went into effect, including revising the definition of the term “security” (the “SFA Amendments”) This development is significant because the conclusions of legal opinions issued before that date regarding the status of a token in Singapore could change based on the SFA Amendments.
• On 19 November 2019, the draft Payment Services Bill (which was passed by the Singapore parliament in January 2019 and is now referred to as the Payment Services Act (the “PSA”) was tabled for a first reading in Although the PSA is not yet effective (we expect it to go into effect by the end of this year or early 2020), the draft included extensive licensing requirements applicable to most issuers of utility tokens which are either (i) incorporated in Singapore or (ii) offer their token or services in Singapore.
• On 30 November 2018, the Monetary Authority of Singapore (the “MAS”) published an updated Guide to Digital Token Offerings (the “Guide”). The Guide provides generally guidance on the application of securities laws in relations to offers or issues of digital tokens in Singapore, including illustrative case studies and a discussion of the expected implementation of the PSA.

LICENSING CONSIDERATIONS

As a result of the foregoing, the licensing regime for the blockchain community is undergoing considerable change. We set out below a discussion of some Singapore licensing considerations for key actors in the blockchain space, as well as the financial services industry in general, as well as some practical tips for compliance:

Issuers

• A company will ordinarily not need to be licensed solely by virtue of issuing securities to investors. However, depending on the specific features of the issuer and issuance, a licensing requirement for dealing in capital markets products may arise for the issuer under the SFA (for example, if recurrent issuance of securities is part of its business model or it facilitates further transactions in securities). In this case, the issuer would require a licence under the SFA, or would need to structure its activities to fall within an exemption (e.g. by conducting securities transactions with or through an appropriately regulated bank or broker). Any offer of securities to a person in Singapore gives rise to a requirement under the SFA to register a prospectus with the MAS, unless an exemption applies. Exemptions are available for offers to, for example, accredited investors and institutional investors, subject to conditions.
• Additionally, issuers of security tokens should consider the licensing requirements under the PSA. For example, the issuer may need to be licensed under the PSA for providing a digital payment token service if the tokens are intended to constitute a medium of exchange accepted by the public for the payment of goods or services, or for providing an e-money issuance service if the tokens are denominated in, or pegged to, a fiat currency (e.g. SGD or USD), represent a claim on the issuer and are accepted by a person other than the
• Practical tip: If you are going to launch an STO as part of a private placement, make sure you abide by applicable publicity In January 2019, the MAS announced that it warned a prospective issuer of securities tokens regarding the failure to comply with advertising restrictions.⁽³⁾

Advisers and consultants

• Professional advisers and consultants involved in a securities offering can become subject to a range of licensing requirements. For example, persons who conduct the activity of “advising on corporate finance” within the meaning of the SFA need to be licensed for under the SFA or The definition of advising on corporate finance under the SFA is broad.⁽⁴⁾ Limited licensing exemptions are available, for example for advising “accredited investors” (comprising certain high-net worth persons), “expert investors” (broadly, investment professionals) and/or “institutional investors” (principally, regulated and government entities) in respect of securities offerings that are not to be made to the public.
• Additionally, a person who gives advice on the merits of investing in a security (e.g. by issuing recommendations on which security to invest in, or simply expressing an opinion on the desirability of such investment) may trigger a licensing requirement under the Financial Advisers Act. Limited licensing exemptions are available, e.g. for advising only institutional
• Practical tip: Start-up incubators, management consultants and “STO Advisors” should carefully review their business models to ensure that, if they do not have a license or exemption to advise on corporate finance, their activities are not regulated by the SFA. Advising, or holding yourself out as advising, on “tokenomics” or “fundraisings” in a securities offering are likely to raise questions, as may taking a percentage of the proceeds raised. As a matter of prudence, advisors not wishing to conduct regulated activities may wish to include a disclaimer in their marketing materials and contracts that they do not conduct such activities.⁽⁵⁾

Transactional facilitators / brokers

• In connection with a securities offering, certain persons may be tasked with brokering or facilitating transactions in the security tokens. For example, a person may introduce investors to the issuer or to another intermediary, in exchange for a This may trigger a licensing requirement, e.g. for dealing in capital markets products under the SFA, which is very broadly defined and includes “inducing” or “attempting to induce” a securities transaction.
• Separately, where the tokens constitute digital payment tokens under the PSA and the facilitator or broker comes into possession of these (e.g. by purchasing and on-selling them), this may trigger a licensing requirement under the PSA for providing a digital payment token service.
• Practical tip: There is no bright line for “introducers” or “finders” to follow in order to conduct their business without conducting the regulated activity of dealing in capital markets Factors include whether the intermediary receives a percentage of the proceeds raised or is involved in the negotiations between the buyer and seller of securities.

Exchanges

• Exchanges that facilitate trading in securities or other capital markets products need to be licensed under the SFA. While the MAS has issued a consultation paper (the “Sandbox Express Consultation Paper”) on a Sandbox Express for recognised market operators (“RMOs”), the timeline for that Sandbox Express to be implemented and the criteria for admission are not yet finalised. Even if an RMO is admitted to the Sandbox6, the Sandbox Express Consultation Paper highlights that the RMO would be expected to comply with all applicable rules after a six-month period. Meanwhile, Exchanges that do not facilitate trading in securities could be required to have a license under the PSA for facilitating the exchange of digital payment tokens.7

• Practical tip: Many existing Exchanges do not have anyone on their teams with experience working at a regulated exchange. Apologies for stating the obvious: Exchanges should seriously consider hiring a full-time employee or consultant who has meaningful operational experience with the operations and/or requirements of a regulated securities exchange. When MAS guidelines for the operation of Exchanges are published, we expect those guidelines to be substantially similar to the expectations of regulated securities exchanges.

Custodians

• Providing custodial services for securities is regulated under the SFA. In addition, providing custodial services for e-money is regulated under the PSA. Although providing custodial services is not a distinct, regulated activity under the PSA, in the provision of such services a custodian may necessarily undertake regulated activities. For example, depending on the custodian’s operating model, a digital payment token wallet provider could conceivably be deemed to be undertaking the regulated activity of facilitating the exchange of digital payment tokens.

OTHER CONSIDERATIONS

In addition to the foregoing, depending on the precise activities undertaken other licensing requirements may be triggered. For example, if credit is provided to support the acquisition of security tokens, this may trigger a licensing requirement for product financing under the SFA.

A further – important – factor to consider is that the Singapore licensing rules have extraterritorial effect and may apply to activities conducted outside Singapore. Various types of touchpoints with Singapore suffice to trigger a licensing requirement – for example where an adviser located overseas recommends a particular security token to an investor in Singapore or brokers a security token transaction on behalf of a Singapore issuer.

While the licensing requirements outlined above only apply where the relevant activity is carried on by way of business, the threshold for satisfying this business test is low, and persons (e.g. advisers or intermediaries) who conduct the activity in a professional capacity or otherwise for commercial benefit will likely meet the test.

CONCLUSION

Generally speaking, a person carrying on any activity forming an integral part of the financial services value chain could be viewed to be carrying on the regulated activity.8 We advise all market participants to carefully review their licensing status, preferably over a coffee with Holland & Marie.

About the Authors

Holland & Marie is a compliance, C-Suite and legal solutions firm based in Singapore. We have extensive experience resolving typical compliance issues including regulatory inspections, satisfying regulatory requirements and maintaining best practices in corporate governance to navigate the rapidly changing regulatory landscape.

For further information, contact:

Chris Holland: Partner | Holland & Marie | 201802481R 7 Straits View, Marina One East Tower, #05-01 Singapore 018936

Disclaimer: The material in this post represents general information only and should not be relied upon as legal advice. Holland & Marie Pte. Ltd. is not a law firm and may not act as an advocate or solicitor for purposes of the Singapore Legal Profession Act.

⁽¹⁾ While the opinion requirements of Exchanges have varied historically, going forward we believe it will be best practice for Exchanges that are not licensed under the SFA to require a legal opinion from a Singapore qualified lawyer that (i) each token listed on the Exchange is not a security for purposes of the SFA and (ii) confirms the status of the token under the Payment Services Act. Moreover, an Exchange should require that the legal opinion be refreshed in the event that the features or rights of a listed token are materially changed.

⁽²⁾ Depending on the jurisdictions in which any Exchange has customers or does or solicits business, the Exchange may require legal opinions in multiple jurisdictions to comply with applicable law.

⁽³⁾ See – http://www.mas.gov.sg/News-and-Publications/Media-Releases/2019/MAS-halts-Securities-Token-Offering-for-regulatory-breach.aspx.

⁽⁴⁾ See Part II of the Second Schedule of the

⁽⁵⁾ Disclaimers alone will not be sufficient to establish that an advisor has not conducted a regulated activity.

⁽⁶⁾ On 1 May 2019, ICHX Tech Pte Ltd entered the sandbox for activities including RMO

⁽⁷⁾ Under the PSA, “facilitating the exchange of digital payment tokens” means establishing or operating a digital payment token exchange, in a case where the person that establishes or operates that digital payment token exchange, for the purposes of an offer or invitation (made or to be made on that digital payment token exchange) to buy or sell any digital payment token in exchange for any money or any digital payment token (whether of the same or a different type), comes into possession of any money or any digital payment token, whether at the time that offer or invitation is made or otherwise.

⁽⁸⁾ CMS Cameron McKenna Nabarro Olswang LLP, “Financial services in Singapore: The Securities and Futures Act,” accessed on 1 May 2019,   https://www.lexology.com/library/detail.aspx?g=5f36dd8f-d948-4917-bb43-55887f2434b7