Proctor : December 2018
30 PROCTOR | December 2018 Token offers: a career opportunity? The explosive growth of blockchain during the past two years has coincided with a parallel growth in the use of cryptographic tokens in fundraising beyond the traditional methods contemplated by Chapters 5C and 6D of the Corporations Act 2001 (Cth) (the Act). Consequently, new opportunities are now emerging for early-career lawyers to focus on this growing and complex practice area, while assisting in shaping blockchain regulation. Token offers Blockchain is a coded platform that verifies transactions through records held by a community of participants (that is, through a ‘distributed ledger’) rather than through a centralised authority. According to Michael Bacina, a Partner in the Blockchain Group at national law firm Piper Alderman, “The blockchain industry offers early career lawyers the opportunity to specialise in a growth area of the law that is both challenging and rewarding and to add a unique offering to their professional expertise.” Token offers are related to cryptocurrencies (such as Bitcoin and Ethereum) however, unlike cryptocurrencies, they are not limited to fiat currency replacements. Token offers involve the issuer making an offer to investors which incorporates cryptographic tokens in order to raise funding for the issuer’s blockchain-based business. Token offers can broadly be separated into the increasingly prevalent ‘security token offer’, which combines an offer of cryptographic tokens with equity in the issuer (or some other valuable asset) and the more controversial ‘initial coin offering’ of utility tokens (where the tokens are the only assets offered). Token regulation During 2017, initial coin offerings rose significantly in popularity, likely due to a perception among issuers that utility tokens were not regulated as financial products by the Act. In response, the Australian Securities and Investments Commission (ASIC) published ASIC Information Sheet 225 (INFO 225), which provides that a utility token may in fact constitute a share, a managed investment scheme, a derivative or a non-cash payment facility. Each of these constitute a financial product and are therefore captured by the various disclosure and regulatory requirements of the Act. Even where a utility token does not constitute a financial product, ASIC has received delegated authority from the Australian Competition and Consumer Commission (ACCC) to prosecute token issuers for misleading or deceptive conduct pursuant to section 18 of the Australian Consumer Law (ACL). 1 This allows ASIC to ‘leapfrog’ the historically limiting requirement that ASIC prove a financial product exists before it has jurisdiction to prosecute for misleading or deceptive conduct. 2 The role of lawyers Blockchain lends itself to lawyers who are digital natives with a fundamental understanding of the fluid legal status of cryptographic tokens. For example, tokens may not legally be a financial product upon issue, but may later evolve to include characteristics which cause them to constitute a financial product. Given the complexity of token regulation, ASIC publically states in Part E of INFO 225 that, “ASIC strongly encourages entities to carefully consider their proposal and seek professional advice (including legal advice)”. ASIC’s increased activity in the blockchain space follows the Australian Federal Parliament passing the Treasury Laws Amendment (2018 Measures No.3) Act 2018, which received royal assent on 1 September 2018. These amendments substantially increase the maximum penalties for companies ($10 million plus) and individuals for misleading or deceptive conduct pursuant to the ACL. The increased ACL penalties are a welcome adjustment that bring Australia’s consumer penalties regime into line with international standards,3 however simultaneously indicate the increasing risk of participating in the blockchain industry. Future of blockchain With respect to potential future reforms, uncertainty remains regarding the treatment of non-financial product tokens. Specifically, it is unclear whether holders of such tokens have available to them a remedy against the issuer akin to a breach of directors’ duties, despite the relationship of issuer to holder being broadly comparable. It is also worth noting that the dollar thresholds prescribed by the Act which regulate the availability of fundraising pursuant to the small-scale offerings exemption4 and the crowd-sourced equity funding regime are calculated based on past security issues. These provisions may require amendment to ensure that they cannot be undermined by issuers attributing (or potentially, apportioning) past funding to a utility token offer. Conclusion According to Mr Bacina, “lawyers have now become a critical adviser to any token issuer to manage the regulatory and reputational risk inherent to conducting a token offering”. Experience in blockchain may prove relevant to any number of potential career paths, both in the public and private sectors. For early career lawyers, establishing a career in blockchain, particularly with ASIC publically recognising the value of legal advice, is a unique opportunity to contribute both to an evolving practice area and the public discourse regarding how it is regulated. by Daniel Owen, The Legal Forecast Legal technology Notes 1 Schedule 2 of the Competition and Consumer Act 2010 (Cth). 2 See ASIC RG234: Advertising financial products and services (including credit): Good practice guidance at RG 234.156 for a list of ASIC’s relevant regulatory powers. 3 Following recommendations from Consumer Affairs Australia and New Zealand in its April 2017 final report, Australian Consumer Law Review, cdn. tspace.gov.au/uploads/sites/86/2017/04/ACL_ Review_Final_Report.pdf. 4 The current threshold is a total of $2 million raised in a rolling 12-month period by issuing securities in the company. See section 708 of the Act. Daniel Owen is a Queensland Executive Member of The Legal Forecast. Special thanks to Michael Bidwell and Benjamin Teng of The Legal Forecast for technical advice and editing. We also thank Michael Bacina, Louisa Xu and Alejandro Vasquez Betancourt from Piper Alderman for their assistance. The Legal Forecast (thelegalforecast.com) aims to advance legal practice through technology and innovation. TLF is a not-for- profit run by early-career professionals passionate about disruptive thinking and access to justice.