According to the Singapore regulations the digital tokens can be classified as “securities” or as “utilities”. The real nature of the digital token identifies the rights attached to it and the terms of its regulation.
In most cases the digital tokens, issued in Singapore can be classified as follows:
- Security tokens: digital tokens with security features as shares, debentures, bonds with opportunities for income generation, as well as potential legal liabilities for the issuer.
- Digital currency: a class of token which can be used for transactions, exchange, assets or value storage, as well as accounting limits.
- Asset-backed tokens: digital tokens, which are backed with assets, such as gold, securities, real estate, cash or diamonds.
- Utility tokens: are digital tokens for supporting services or functionalities on blockchain-based platforms.
The general regulatory position in Singapore is that digital tokens are not generally regulated, although if they can be identified as securities or other regulated financial instruments under the SFA, they are regulated according to it. In such instance, if a digital token is regulated, the Issuer needs to stay compliant with the applicable laws relating to the securities regulations and financial markets.
ICO Legal Documentation in Singapore
1. White Paper
A white paper for an ICO is a document that describes the exact technology behind a certain blockchain project. This usually includes detailed information about the token, its system architecture, technical requirements, and issuer. White Papers in most cases provide information about market capitalisation and its further prospects of growth or decrease; financial models of the business, as well as the terms and conditions of the tokens. In order to be irrefutable, White papers should include information about the founders of the project (its core team), as well the full story of the project. There are no exact technical requirements for the white paper and due to this fact, may vary considerably. The white paper can be prepared both by the Issuer and by the project promoter and it should highlight the advantages of the project and attract potential investors. The white paper is usually being published on the project website in order to promote the project. White Papers make a strong influence on the legal opinion and legal documents similar to the ICO terms and conditions, as well as other documents and agreements. All refer to the White Paper.
2. Token Legal Opinion
To establish an ICO, an Issuer needs to determine the digital token legal structure. The legal opinion of a token should be issued by a licensed and regulated Singapore law firm, which will identify whether a token is regulated token (security) or unregulated utility token.
A Singapore licensed law firm will:
- Study the proposal according to the White Paper functionality of the digital token, as well as the overall company background information including marketing materials and facts identifying what type of rights are attached to the digital tokens. The law firm identifies if the digital token is a utility token, security, debenture, financial product under investment scheme in the legal framework of Singapore.
- Identify where the digital token issuer operates (according to open source data) and where the likely investors and participants are based. Singapore legislation may be applicable to an ICO made by an Issuer outside of Singapore if the ICO digital tokens fall under Singapore financial services regulation and targets investors based in Singapore.
- Identify what are the ways of transferring or exchanging digital tokens into fiat currency?
- Identify how investors sell the digital tokens, if this option is possible.
- Qualify the digital tokens and identify whether they offer a stored value facility, if they are backed by certain assets or may be considered a legal or beneficial interest in any assets.
- Inform potential investors how the digital tokens are going to be marketed and represented, as well as how any bonus or bounty program may be handled.
- Answer questions regarding functionalities or options for the token use, opportunities of additional token sales in the future. Only a licensed law firm can give a legal opinion on the future scheme of project implementation.
We need to mention that although in most cases the legal opinion produced by the licensed law firm is an internal document; very often the token exchanges consider them as compulsory documents and request the Issuer to provide them accordingly.
3. ICO Terms and Conditions
Cryptocurrencies and other digital tokens are virtual realm elements and are essentially only a set of rights. The ICO Terms and Conditions are closely connected with the ICO White Paper and can be treated as an integrated part of any ICO process, as long as they contain the major legal agreement between an investor and the Issuer of the digital token. The Terms and Conditions may also define the token and describe its features in a detailed way, by providing information about the Issuer. This can include:
- Details about pricing and the arranged schedule of the token sale
- Set out restrictions on the distribution of tokens
- Contain disclaimers and indemnification provisions protecting the Issuer.
- Set out the procedures for token acquiring and receiving.
- Contain representations and warranties by investors,
- Establish commercial terms depending on the technological details of the token offering.
We need to mention that the only legal regulation which can protect an investor from an unregulated digital token/coin is in most cases a legal provision found in the commercial agreements entered into between the Issuer and the Investor. From the position of the Issuer, official ICO documentation can protect the Issuer and its Directors from the legal claims of investors.
4. Pre-sale Agreement or Pre-ICO agreement
Often, Issuers decide to run a limited token sale event, which is being called a Pre-Sale or Pre-ICO. This is usually being carried out before an official crowd sale or ICO campaign launch. The Pre-ICO sales targets are in most cases are much lower than the main ICO fundraising targets. The Issuers at Pre-Sale usually sell tokens to their friends, family members, colleagues and selected groups of people with a large discount. Pre-sales often use separate smart contracts from the main ICO contracts in order to avoid a mixture of Pre-ICO and the main ICO.