Due to its features of investment and liquidity, the token identified as securities has become popular in the securities market. The Financial Supervisory Commission (“FSC”) announced a press release regarding the general information on Securities Token Offering (“STO Regulations”) (*Note 1) on June
I. Preface
Due to its features of investment and liquidity, the token identified as securities has become popular in the securities market. The Financial Supervisory Commission (“FSC”) announced a press release regarding the general information on Securities Token Offering (“STO Regulations”) (*Note 1) on June 27, 2019, making Taiwan the first country in East Asia to have specific regulations on STO. Even though it is still in the initial stage, relevant key points are worthy of note. In addition, the FSC also issued an order, Jin-Guan-Zheng-Fa-Zi No. 1080321164 dated July 3, 2019 (“Order”) (*Note 2), to expressly classify STOs as securities. The following is a brief introduction to STO’s features and relevant key points under the STO Regulations and the Order.
II. Virtual currencies that have the nature of securities are identified as “securities.”
Based on the Order issued by FSC, virtual currencies that have the nature of securities are approved as “securities” as referred to in Paragraph 1 of Article 6 of the Securities Exchange Act (*Note 3). "Virtual currencies that have the nature of securities" means those that use cryptography and distributed ledger technology or other similar technologies to represent value that can be digitally stored, exchanged, or transferred, and have liquidity and the following investment characteristics::
(i) Funding is contributed by contributors.
(ii) The funding is contributed to a common enterprise or project.
(iii) The contributors expect to receive profits.
(iv) The profits depend primarily on the efforts of the issuer or a third party/third parties.
III. Key Points of the STO Regulations
SFC has planned to adopt a tiered approach to regulate and supervise the STO in Taiwan. Any issuer with the amount of funds raised that is NT$ 30 million or less is exempted from obtaining an effective registration with issuing of securities according to Article 22, Section 1 of Securities and Exchange Act (“SEA”) (*Note 4). Any issuer with the amount of funds raised that is more than NT$30 million is required to apply for a sandbox experiment under the Financial Technology Development and Innovative Experimentation Act, and should comply with the SEA after successful completion of the sandbox experiment. The focus of the STO Regulations are on the issuers with the amount of funds raised that is NT$30 million or less, and the key points of the regulations are as follows.
(i) Issuance Regulations
1. Issuer qualification: A public or non-public company limited by shares organized and incorporated in accordance with Taiwan’s Company Act (not including those listed on TWSE, TPEx Mainboard, or TPEx Emerging Stock Board).
2. Restrictions on investors and fundraising amount: Only professional investors are allowed to invest in STO fundraising projects. Where the professional investor is a natural person, he/she is allowed to invest NT$ 300,000 or less in each STO fundraising project.
3. Issuance procedures：All issuers are restricted to raise funds through one platform. The platform operators should examine the qualifications of the issuers which shall prepare a STO prospectus. If the platform operator issues its own tokens, the STO must be examined and approved by Taipei Exchange.
(ii) Trading Regulations
1. STO trading methods：Platform operators are required to apply for and acquire a license for securities dealers to conduct price negotiation on STO, and platform operators are the counterparties in a transaction. In addition, for the purpose of market reference and price discovery, platform operators shall provide reasonable bid-offer reference prices (shall adopt bilateral quote) based on professional judgment and market conditions. Furthermore, each STO is limited to be traded on a single platform.
2. Limitation：A natural qualifying as a professional investor can only hold each STO up to NT$ 300,000. In addition, the daily trading volume of each STO cannot exceed 50% of the total number issued.
3. Other mechanisms: To stabilize the STO with abnormal price fluctuation, relevant stabilizing mechanisms will be implemented.
(iii) STO Platform Operators
1. Qualifications: A securities dealer license shall be obtained, with a minimum paid-in capital of NT$ 100 million and the deposit of operation fund of NT$ 10 million.
2. Restrictions of fundraising amount for platform operators: Any single platform can only approve STO fundraising projects up to NT$ 100 million. Any single platform is allowed to accept second STO project after the tokens issued by initial project have been traded over 1 year.
3. The transfer and storage services：To safeguard the rights and interests of investors and secure the trading records, the platform operators should enter into a contract with Taiwan Depository & Clearing Corporation (“TDCC”) and transfer the trading data such as the change and balance of STO to TDCC to make a backup. TDCC should allow investors to inquire about STO balance in order to assist them in confirming the correctness of their STO trading records.
IV. Conclusion
With the popularity of virtual currencies, more and more businesses will use STO as a way to fundraise. Although regulations on STO is still in an initial stage, FSC seems to be taking a stricter stance on STOs. In the future, when the relevant regulations are implemented, businesses should pay attention to how to comply with the new regulations.
＊Notes：
1. FSC’s regulations governing Securities Token Offering
2. FSC’s order Jin-Guan-Zheng-Fa-Zi No. 1080321164
http://eng.selaw.com.tw/LetterContent.aspx?Soid=183
3. Paragraph 1 of Article 6 or the SEA: “The term "securities" as used in this Act shall mean government bonds, corporate stocks, corporate bonds, and other securities approved by the Competent Authority.”
4. Paragraph 1 of Article 22 or the SEA: “With the exception of government bonds or other securities exempted by the Competent Authority, the public offering or issuing of securities without an effective registration with the Competent Authority shall be prohibited.”
