The Securities and Exchange Commission (SEC) has released draft guidelines for initial coin offerings (ICO).
With more companies embracing cryptocurrency as a way to raise capital, these guidelines are meant to legalize the sale of cryptocurrency. The draft was published on the SEC’s website so the public and stakeholders can comment on it.
The need for bespoke rules
During the second half of 2017, famous crypto and other virtual currencies like Ethereum reached mainstream consciousness after the surge in their prices stirred people’s interest and spurred many to invest.
The hype has died down, but there is still a segment of serious aficionados and believers in the technology taking charge of the growing crypto industry in the Philippines.
In a report by ABS-CBN News, SEC Chairman Emilio Aquino said that despite the tokens acting like traditional share that are publicly traded, there need to be “bespoke” rules that will guide this new kind of trading.
“Under the draft rules, the tokens issued by the startups or companies conducting the ICO may follow the nature of a security under Section 3.1 of the Securities Regulation Code, and therefore, these should be registered with the Commission and necessary disclosures need to be made for the protection of the investing public,” the SEC said in a statement.
“Nevertheless, despite being analogous to securities, the present registration process for initial public offering (IPO) may not be tailor fit for initial coin offering. Hence, the proposed rules have been formulated for the registration of security tokens offered through initial coin offerings.”
What does this mean for cryptocurrency in the Philippines?
Under the proposed charter, startup companies who are planning to conduct an ICO must go to the SEC to have their tokens assessed as to whether or not they’re security tokens.
If the company planning an ICO is found to be selling security tokens, they have to incorporate their company as per SEC rules. Meanwhile, foreign companies who want to offer security tokens in the country have to establish a branch in the country.
Aside from the initial assessment of the nature of the ICO, the SEC also created ground rules on the auditing of the companies’ source codes. They will also be inspected by the commission if their business complies with the framework of the Anti-Money Laundering Act. Advertising of such services will also be regulated as to prevent companies from making dubious advertisement claims.
With the potential guidelines on using cryptocurrency to raise capital, one of the biggest advantages drafted there is the provision on the use of escrows.
Under the said article, proceeds from the ICO must be kept on a third-party escrow agent and the funds will only be released if the company submits an update of their project. Should they not reach the soft cap of their ICO or the company abandons the venture altogether, the escrow will return the funds back to the investors.
Study of the whitepapers of various ICOs that have been conducted within the Philippines shows that the proponents of such ICOs claim that the tokens being issued are not securities and therefore not under the jurisdiction of the SEC.
Allowing this practice is proven dangerous to the investing public who are left with no clear recourse once the said ICOs are proven to be scams, the SEC said.
“Therefore, the SEC will put the burden of proving that the tokens issued through an ICO in the hands of the proponents by presuming that the tokens are securities unless proven otherwise,” they concluded
21st century Ponzi
Upon its creation, cryptocurrency and blockchain technologies were seen as ways to liberate people from government meddling and regulations. However, with the technology still in its nascence and everyone still trying to figure out its place in our society, governments are finding ways to tighten their control in the new space.
Aside from government bodies, fraudulent entities also want a slice of the pie in this brave new world. This is where regulation steps in.
A few days ago, the SEC announced that several companies selling coins as a form of investment are “not registered as a corporation or partnership” and “not authorized to solicit investments from the public.” The agency identified the following companies:
- Crypto Expert Inc. (CyptoExpert Trading or CryptoExpert: Mutual Funds and Trading Expert)
- Paysbook E-Commerce System Co. Ltd (Indigen Coins)
- Freedom Traders Club (Ploutus Coin)
- Purewealth EBC Corp. (Purepound)
- Yeheey Itraffic System Inc.
According to the SEC, the following companies are new additions to the commission’s growing list of online trading firms that promise high-yielding interests in exchange of purchasing tokens from the company. These dubious firms promise a return on investment with unrealistic yields from 25 to 100 percent weekly.
What makes them fall under the jurisdiction of the SEC? For starters, the said companies are offering securities to unsuspecting investors to fund their trading. In return, they will get receive a payout with an incredible yield. All securities—whether they’re stocks, bonds, investment contracts, and the like—offered to the public must be recognized by the SEC before they can be traded publicly.
Don’t be a victim
The SEC created a list of red flags you can check to know if the company offering “bitcoins” is an online Ponzi scheme or not.
If these items match the description of a person or a company reaching out to you, you may want to keep a tight grip on your money:
- They are not registered to the SEC
- They sell securities that are not regulated by the SEC
- They sell “bitcoins” as a form of security
- They promise unrealistically huge yields in a short timeframe
- They offer affiliate commissions in the form of upline and downline
- They have little to no paper trail
- They promise low to zero risk
- They impose a lock-in period on your investment
- They assure you that a payout happens sooner than you expect it
- They pressure you into investing in them
- They have minimal presence in both real life and online
- They conduct seminars informally
Until the SEC finalizes the new guidelines that regulate the trade of cryptocurrency as a form of security, don’t fall for these get-rich-quickly schemes that use buzzwords like “bitcoin” and “cryptocurrency.”
Keep in mind that legitimate companies are more than willing to wait for the commission’s green light before they start to make their tokens available to the general public.