Key issues:
- On 1 August 2019, the Australian Stock Exchange released a new compliance update relating specifically to crypto-currency related activities.
- The Update explains ASX’s position in relation to SAFEs and SAFTs, the concerns that new entities engaged in crypto-currency related activities seeking to list can expect to answer, and ASX’s position in relation to ICOs held post IPO.
- ASX remains wary of developments in the digital assets sector, and the Update reinforces the need for appropriate and informed guidance.
On 1 August 2019, the Australian Stock Exchange (ASX) released a new compliance update relating specifically to crypto-currency related activities (Update). The Update places particular emphasis on the application of the ASX Listing Rules to initial coin offerings (ICOs) and initial exchange offerings (IEOs).
Those keeping abreast with Australia’s regulatory developments in the digital assets sector will not be surprised by the Update. ASX remains wary of crypto-currency related activities, but the Update is useful in providing further transparency on ASX’s treatment of listed entities who are currently engaged in, or looking to engage in, crypto-currency related activities.
ASX Listing Rules
The Update notes particular listing rules which ASX will apply to a listed entity’s engagement with cryptocurrency related activities. In all instances, ASX expects that listed entities consult with ASX first prior to pursuing those cryptocurrency related activities, and prior to making any announcement to the market concerning such activities.
Firstly, ASX often considers that proposals by listed entities to engage in cryptocurrency-related activities will involve a significant change in the nature or scale of the entity’s activities, and ASX will need to be notified (Listing Rule 11.1). Where such activities constitute a “significant change”, ASX will likely require the entity to seek security holder approval for the change and re-comply with the ASX admission requirements. These requirements include the obligation that a prospectus or product disclosure statement is issued and lodged with ASIC, or an information memorandum that complies with Listing Rule 1.4 is lodged with ASX, and that the entity must apply for and be granted permission for quotation of all the securities in its main class.
Secondly, ASX has warned that if a listed entity engaging in cryptocurrency related activities is involved in a fraud or scam or is breaching applicable laws by engaging in those activities, ASX will consider that to be in contravention of listed entities’ obligations to have a structure and operations appropriate for a listed entity (Listing Rule 12.5) and will seriously consider whether termination of the listed entity’s admission to the official list is warranted.
Thirdly, ASX has stated that listed entities proposing to engage in cryptocurrency related activities should not make an announcement about the proposed activity until it is well developed (Listing Rule 3.1). In the Update, ASX lists the information it expects entities to provide in relation to such activities, which includes:
- the proposed timetable for the ICO or IEO;
- the number of tokens to be offered, and the price at which tokens will be issued;
- the specific rights that tokens will confer on their holders - ASX expects that investors should be informed enough to be able to assess the impact of the ICO or IEO on the value of the entity’s securities;
- the protections in place to ensure that the proceeds of the ICO or IEO will be used only for its specific purposes;
- confirmation that the entity has received tax advice of the ICO or IEO, and disclosed any material tax issues; and
- confirmation that the entity has received accounting advice on the accounting treatment of the ICO or IEO and disclosed any material accounting issues the ICO or IEO will involve.
Listed entities which announce their intention to conduct an ICO or IEO without requisite detail will be suspended until that detail is provided. The above list is not exhaustive, and entities should refer to the Update for a full list of items that should be considered.
SAFTs and SAFEs
Entities which are looking to enter into Simple Agreements for Future Equity (SAFEs) and Simple Agreements for Future Tokens (SAFTs) should note that ASX considers that a SAFE will generally be an equity security for the purposes of the Listing Rules, and a SAFT may also be an equity security for the purposes of the Listing Rules if the underlying tokens are interests in a Managed Investment Product.
Accordingly, those equity securities which are SAFEs or SAFTs must possess terms which are, in ASX’s opinion, appropriate and equitable (Listing Rule 6.1).
New listings
Entities seeking to list on the ASX engaging in cryptocurrency related activities must also satisfy ASX that:
- its business is bona fide;
- it will comply with all applicable legal requirements in Australia and in jurisdictions where it proposes to carry on its business; and
- that proper disclosure has been made to investors of the risks involved.
Additional obligations are imposed for applicants wishing to list a new LIC, LIT or ETF investing in cryptocurrencies or cryptocurrency derivatives.
ASX’s attitudes towards ICOs
Perhaps most interestingly, the ASX has expressed in the Update, its particular concerns for ICOs to be undertaken by listed entities that have already conducted an initial public offering (IPO). ASX states that:
“An entity that has already conducted an IPO will have a reasonable number of existing security holders who have subscribed capital on the basis of its prospectus and who expect to make a return on that capital. The rights conferred on token holders will typically result in a shift of value from the entity’s security holders to its token holders.”
ASX suggests that ICOs issuing utility tokens that confer rights on token holders to use the issuer’s services provided will result in instances where the issuer will receive little or no revenue from the provision of its services. Where an ICO or IEO is proposed and seeks to raise a greater amount of funds than raised in an entity’s IPO or its current market capitalisation, ASX considers that the value of the entity may shift from its security holders to its token holders.
While ASX has identified that implementing these fundraising mechanisms could create a shift in value from security holders to token holders, it remains unclear what action ASX proposes to take in relation to that perceived value shift.
Final thoughts
While the Update provided by ASX is helpful in some respects, it also reinforces the need for appropriate and informed guidance. Entities involving themselves with cryptocurrency related activities need to be particularly aware of the requirements of the ASX Listing Rules and how ASX will interpret the Listing Rules for entities dealing in digital assets.
If you need assistance in navigating the ASX Listing Rules or other aspects of the Australian regulatory environment as it relates to crypto-assets or ICOs, please contact a member of HopgoodGanim Lawyers’ Digital Assets team.