Malaysian Securities Commission releases guidelines on offering digital tokens

• Minimum paid up capital of RM500,000 for companies that are offering digital tokens
• Maximum investment of RM2,000 per offering for retail investors

MALAYSIAN entrepreneurs with innovative solutions will later this year have an alternative source for early financing, according to the Securities Commission of Malaysia (SC), who on Jan 15, issued guidelines related to the offer of digital tokens. However, questions arise as to who will be best positioned to take advantage of this new fundraising mechanism, and what kinds of solutions it envisages.

For the SC, this is clear. "What we're trying to do through this framework, is to help our early stage entrepreneurs, to enable them to have an avenue to fundraise through a different channel,” explained Chin Wei Min (pic), Securities Commission executive director, Digital Strategy and Innovation. “At the same time we're also trying to safeguard our industry from scammers.”

Specifically, the guidelines say that any company in Malaysia who intends to raise funds through an Initial Coin Offering (ICO) must now conduct their offering on an approved IEO operator, and that IEO operator must assess and approve the issuer and its corresponding Whitepaper. Contents of the Whitepaper must include information such details of the issuer, the digital token, and how the funds obtained through the fundraising exercise will be used.

The guidelines will only be brought into force in the second half of 2020. In the meantime, the SC will work closely with IEO operators to assess the IEO issuers, while continuing to engage with stakeholders to gain feedback – of which there is plenty.

Issuers can only offer on approved platforms

Approved IEO platforms are those registered as a Recognised Market Operator (RMO) by the SC, and would be responsible for carrying out due diligence on issuers, as well as ensuring the issuers comply with regulations.

Nevertheless, the SC made it clear that there will be a degree of handholding in the beginning. "In the initial phase, SC will be working closely with your operator in assessing these issues, to make sure that we are aligned and understand the criteria," said Chin.

Meanwhile, issuers who want to offer digital tokens need to use an approved IEO platform. They need to be locally incorporated exempt private companies with a minimum paid up capital of US$122,690 (RM500,000). The fundraising limit will be 20 times the shareholder funds, up to a maximum of US$245,380 (RM100 million).

There are limitations to the digital tokens offered as well. If they are to be used as a payment instrument, they may only be used in exchange for goods and services. However, Chin also clarified that if an issuer wants to use new tokens for trading activities, they should come to the SC for approval.

Meanwhile, similar to ECF constraints on investors, retail investors are limited to RM2,000 per offering and RM20,000 per year, while angel investors are limited to RM500,000 per year and those registered as "sophisticated investors" have no limit.

[RM1 = US$0.245]

Concerns about barriers to entry

”I worry that the paid-up capital is high for startups,” said Harpreet Singh (right), Blocklime founder and chief executive officer as well as national committee member on ISO standards for Blockchain and Electronic Distributed Ledger Technologies.

“Many will have to raise Angel to just do an IEO, and still have to balance the evaluation to not overvalue themselves,” he said, adding that perhaps the limit should be reduced to RM200,000-250,000.

Meanwhile, Reuben Yap, Zcoin Project Steward also commented on the the caps. “The high caps allowed by these digital token offerings especially when compared to the much more conservative Equity Crowdfunding limits also allow larger companies to do spinoffs in a separate entity,” he pointed out. “(But) they would already have well-established funding routes, so the question is should they be then allowed to raise from the public?”

“I question whether we need another mechanism that targets the public for companies to fund raise where besides the traditional routes, there is already the ECF and LEAP markets which serve smaller companies and startups," he continued.

Harpreet also felt that there were barriers to entry for investors. ”The retail investor cap is too low, it should be at least RM5,000 to make it attractive for retail investors to participate,” said Harpreet, adding that even Thailand allows an investment up to THB30,000 (approx RM4,000). “Even if it hits 100x returns, it won’t be very attractive to a retail investor with a RM2,000 cap.”

What does an innovative use of digital token look like?

There is also the question of how offerings will be evaluated and what does it mean to be an “innovative solution”? “(The SC is) quite a principle-based regulator,” explained Chin. “If I can prescribe exactly (what innovation is), then that's no longer innovative, right?”

He did eventually try to narrow it down somewhat. "If you solve a specific problem within your industry, or you create value in a specific value chain within that, (then) we consider that it will be beneficial to the industry, and we consider that a good innovative solution."

Chin however was quite adamant on certain types of offerings. "We do have a guidelines on celebrity endorsement - which is a no-no!"

Unsurprisingly, Reuben expressed concern about how offerings were to be evaluated. “I am skeptical as to how well-equipped IEO Platform operators are in evaluating and assessing Whitepapers which traditionally hasn't been one of their functions," he said.

He also looked forward to better understanding what the SC had in mind in how digital tokens should be used, given the limitations that it can only be used to exchange for goods and services.

“How is this different from asking people to buy reload credits or loyalty points or airline miles if you are locked towards the issuer's own products?” questioned Reuben. “But in this case the product/service may not even exist yet!”

Nevertheless, the big picture of what the SC is aiming for is well summarised by blockchain evangalist Jasmine Ng.  

”It is the intent of the SC to regulate and ensure that all ICOs being issued are not scams,” she said. “The SC is interested in investor protection, and to that end, they have carried out their responsibility.”

Chin accepts there will be many questions and queries from all concerned. “We're allowing the industry time to familiarise themselves,” he said, rationalising again the need to delay implementation until late 2020 so stakeholders can get to know the regulations better.

“They can engage us, we can engage them,” Chin said. “We're giving time to the industry to (better) understand this.”