There are cultural differences between cryptocurrency and ASX that lead to breaches of securities exchange etiquette.
ASX has seen an increase in cryptocurrency-related activity from listed entities in the last year, it says. These activities run across the full gamut of related services, from ICOs and other token issuing to broader blockchain tech development, investing and marketing to mining, market-making and the operation of exchanges.
The growing interest has prompted ASX to issue a new compliance update, which outlines exactly how various cryptocurrency-related activities may impact a business’s obligations to ASX. It also highlights some of the behaviour it has seen from some crypto companies so far, which goes a long way towards explaining why this additional guidance was necessary.
Boasts of being ASX or AUSTRAC approved
Some companies have been claiming to be “regulated by” or “approved by” ASX, it says. “Generally, the context in which these claims have been made shows that they are intended to convey an impression to the reader that the activity in question is less risky than other cryptocurrency-related activities because of ASX’s oversight.”
That’s not how it works.
ASX only regulates crypto companies under the limits of ASX listing rules. If it becomes aware of any listed entities claiming to be “regulated by” or to have been “approved by” ASX, that company will be immediately suspended.
It’s a similar story with crypto companies that say they’re AUSTRAC regulated.
“Again, the context in which these claims have been made shows that they are intended to convey an impression to the reader that the activity in question is less risky than other cryptocurrency-related activities because of AUSTRAC’s oversight,” ASX says.
Once again, AUSTRAC’s regulatory scope only covers cryptocurrency activities in line with ensuring anti-money laundering compliance. It’s also mandatory for certain cryptocurrency businesses.
Context matters here. It’s okay for listed companies to say they’re registered with AUSTRAC. It’s less okay for companies to imply that AML compliance is a good reason to invest in that company when it’s actually just their minimum legal obligation.
Shonky legal advice
ASX “strongly encourages” any companies thinking of doing an ICO or IEO to understand how Australian law applies to these activities and to seek legal advice beforehand.
If that legal advice then says it’s all unregulated and that you don’t need to worry about anything, companies may want to seek different legal advice.
“ASX is aware of some Australian law firms providing advice that tokens issued in an ICO or IEO are not a financial product for the purposes of the Corporations Act and therefore are not regulated by that Act. The examples ASX has seen of such advice do not appear to have considered all of the issues involved in this complex question, including in particular whether or not the ICO or IEO involves an offer of an interest in a managed investment scheme,” it says.
ASX’s own interpretation of the law says there’s a “reasonable” likelihood that many ICOs and IEOs would constitute managed investment schemes under Australian law.
“For the avoidance of doubt” ASX may request “a copy of any legal advice obtained by the entity confirming that its cryptocurrency-related activities do not breach applicable laws.”
Diluting value with token sales
“It is not uncommon for a listed entity proposing an ICO (initial coin offering) or IEO (initial exchange offering) to be seeking to raise funds that are substantially higher than the amount raised in its IPO and/or its current market capitalisation,” ASX says.
And this isn’t necessarily a problem in itself. The issue is how this shift of value impacts existing business operations as per ASX rules.
Under ASX rules, any listed companies that want to make a significant change to the nature or scale of its business activities will have to inform ASX, which may then tell the company that it needs to get investor approval for the move and that it will need to re-comply with ASX admission requirements afterwards.
Even when in the full bounds of the law, a token sale might change the nature of a business so fundamentally that it can no longer comply with ASX listing standards.
This is because “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 says.
For example, consider a listed company that’s already had an IPO, and which then issues an ICO to raise even more funds, under the conditions that the ICO token is redeemable for freebies from the company at a later date. The company is essentially taking some future revenue as payment upfront. It gets the money, but it may come at the expense of shareholders.
Freebies aren’t free. And when this happens on a large scale, it’s tough to say token issuance isn’t fundamentally changing a company’s scale or business activities in a way investors should have to sign off on first. This doesn’t apply to all token sales, of course. Some ASX-listed companies have business models that derive revenue from token sales.
SAFEs (simple agreements for future equity) and SAFTs (simple agreements for future tokens) can trigger similar issues as ICOs or IEOs.
Announcement hype and false markets
On the one hand, ASX has seen entities making announcements too soon, which sometimes has the effect of hyping things up and driving prices unduly.
“ASX has observed that listed entities are making announcements about proposed cryptocurrency-related activities prematurely and without an appropriate level of detail to meet the entity’s disclosure obligations under the listing rules,” it says.
Generally, entities should be able to provide enough information for investors to determine the impact of an announcement on future security prices before making the announcement.
On the other hand, some companies are disclosing information too late or not at all.
Per ASX rules, “once an entity is or becomes aware of any information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.”
ASX false market rules also apply. If ASX considers that there is likely to be a false market (where the true value of something is clouded by inaccurate information), ASX may require entities to give them the information needed to prevent that false market.