Malaysia’s Securities Commission urges investor caution over ICO schemes

• Highlights possible limited/no legal protection and recourse against scheme operators
• Possible exposure to heightened risks of fraud, money laundering, terrorism financing

WHILE China has issued regulatory policy over the rise of bitcoin based fundraising schemes, the Securities Commission Malaysia (SC) has issued a press release cautioning investors over the emergence of digital token based fundraising activities/investment schemes in Malaysia and elsewhere, which are typically referred to as “initial coin offerings”, “initial token offerings”, “token pre-sale” or “token crowd-sale” which are collectively referred to as ICO schemes.

ICO scheme operators typically raise funds through the issuance and sale of digital tokens, in exchange for investors paying for these tokens through virtual currencies, such as Bitcoin or Ethereum. The SC notes that while all ICO scheme operators seek to raise funds from investors, these schemes can be structured in many forms, which may include:

• Direct investments in projects with an aim to enable token holders to participate in a share of the returns from the projects.
• Seeking funding through Foundations where investors are not entitled to seek any returns on their investments.
• Issuance of tokens which entitle the investors to enjoy rights to a future product or service generated by the project managed by the operator.

Urging investors to be mindful of the potential risks involved in ICOs schemes, the SC advices them to take note of a number of possibilities:

• Scheme operators may not have presence in Malaysia and it would be difficult to verify the authenticity of the scheme and the recovery of invested monies may be subject to foreign laws or regulations.
• Some ICO schemes and the parties involved operate online and may not be regulated, investors may be exposed to heightened risks of fraud, money laundering and terrorism financing.
• Digital tokens traded on a secondary market may give rise to risks of insufficient liquidity or volatile and opaque pricing.
• The structure of these ICO schemes might limit the legal protection and recourse for investors against scheme operators

Highlighting the different terms and features the ICO schemes may take, the SC is also urging investors who wish to invest in ICO schemes to seek legal or other professional advice if they have doubts on the legitimacy of these schemes.

“Investors should also fully understand the features of an ICO scheme, and carefully weigh the risks before parting with their monies. For example, investors should be aware that ICO scheme operators issue a whitepaper, which typically contains descriptions of the ICO scheme but may also carry disclaimers which absolve the operators from certain responsibilities and obligations,” it says.

A list of activities regulated by SC and license holders can be found below:

https://www.sc.com.my/wp-content/uploads/eng/html/cmsa/cmsa2007/CMSA2007Schedule-2a.pdf

https://www.sc.com.my/licensing/public-register-of-licence-holders/

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