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BY Risen Jayaseelan - November 9, 2018

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Country Heights token sale far from being approved

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The shareholder approval that Country Heights Holdings Bhd (CHHB) has received for its initial coin offering is no indication of any regulatory approval for the exercise.

In fact, indications are that CHHB will only be allowed to submit an application to list its Horse Coin only after the Securities Commission (SC) comes out with its guidelines on token offerings.

It was reported that CHHB may have been given a blank cheque to conduct its ICO after getting its shareholder nod. However, the shareholder approval has nothing to do with the legitimacy of the planned ICO by CHHB.

It was revealed in Budget 2019 that the SC would come up with a framework for ICOs.

Furthermore, CHHB’s largest shareholder and chairman, Tan Sri Lee Kim Yew even told the media that their meeting with the SC ended with the regulator stating that CHHB only ought to submit their application for their ICO after the latter comes up with the regulatory framework.

Based on regulatory developments taking place in markets like the US, it is hoped that the SC will take the view that most tokens are securities.

While there is always a big debate over whether tokens can escape the security label by claiming to be purely utility based, those arguments are flimsy.

The test ought to be as simple as this: as long as the investor in the token is hoping to benefit from an upside in value (either capital appreciation or dividends) from that token, it is clearly a security.

The next question then is, what would the guidelines entail?

Do note that there is a huge move towards security token offerings (STOs), which are token offerings squeezing themselves through by getting some level of exemptions from existing securities laws. This means, for example, they file the offering in the US under existing private placement of shares rules, where the shares are only sold to accredited or overseas investors.

At least that’s the case in the US, although even there, the SEC is not necessarily condoning such issuances.

In Malaysia though, it is likely that the regulator will be drafting new rules that sit somewhere between existing initial public offering requirements and the guidelines that exist for crowd-funding.

Recall that Malaysia over the last few years had licensed platforms to facilitate equity and debt crowdfunding. Issuers are obliged to provide some level of disclosures and the platforms are required to conduct some level of due diligence.

In token offerings, the requirements are going to be more onerous, considering the fact that larger issuances are going to take place, plus the fact that blockchain technology is more complicated than startups.

Also, the preponderance of investment scams disguised as ICOs, the world over, is clearly another consideration for any regulator in drafting ICO guidelines.

Credit should be given to the Malaysian regulator for attempting to move with the times, protect investors and at the same time facilitate the innovation in fundraising that ICOs supposedly bring to the market.

It has also been vigilant in shutting down unlicensed fund raising activities in the guise of ICOs, such as Lavida Coin and CopyCashCoin.

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