SEC Advisory on Initial Coin Offerings

Date Posted: 8 January 2018

Initial Coin Offerings

Initial Coin Offerings

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The Commission has detected thatcertain companies, individuals or groups of persons are enticing the public,either through popular social media platformsor through their own independent website, to participatein so-called “initial coin offerings”and to purchase the corresponding “virtual currency”.Virtual currency refers toa digital representation of value issued and controlled by its developers and used and accepted among the members of a specific communityor users.AnInitial Coin Offering (ICO) is the first sale and issuance of a new virtual currencyto the publicusually for the purposeof raising capital for start-up companies or funding independent projects. In an ICO campaign,a percentage of the total available virtual currencyis sold to interested buyers in exchange for (1)fiat currency;(2) another virtual currency;or (3) another assetor security.Based on the information gathered by the Commission, some of these new virtual currencies, basedon the facts and circumstances surrounding theirissuance, follow the nature of asecurity as defined by Section 3.1 of the Securities Regulation Code (SRC).However, unlike ordinary securities, these virtual currencies are neither guaranteed by any Central Bank nor backed by any commodity.(Section 1 par. 2 of BSP Circular No. 944, Series of 2017)Under Section 3.1(b) of the SRC, a security includes an “investment contract”. An investment contract, as defined in Section 26.3.5(d) of the 2015 IRR of the SRC, means a contract, transaction or scheme (collectively”contract”) whereby a person invests his money in a common enterprise and is led to expectprofits primarily from the efforts of others. An investment contract is presumed to existwhenever a person seeks to use the money or property of others on the promise of profits.When a virtual currencyis likewise analogous toany of the types of securities under Section 3.1 of the SRC, there is a strong possibility that the saidvirtual currencyis a security under the jurisdiction of the SEC and has to be registered and necessary disclosures have to be made for the protection of the investing public.Where the scheme involves the sale of securities to the public, the SRC requires that the said securities offered are duly registered and that the appropriate license and/or permit to sell securities to the public are issued to the corporation and/or its agents, pursuant to the provisions of Section 8 and 28 of the SRC.Manila
Likewise, those who act as salesmen, brokers, dealers or agents of ICO entitiesin selling or convincing people to invest in the investment scheme being offered by ICO companiesincluding solicitations and recruitment through the internetmust be registered with the SEC pursuant to Sec. 28 of the SRC.Accordingly, those who invite or recruit other people to join or invest in this venture or offer investment contracts or securities to the public may be held criminally liable or accordingly sanctioned or penalized in accordance with the Supreme Court decision in the case of SEC vs. Oudine Santos (G.R. No. 195542, March 19, 2014).If a promoter, issuer, broker or salesman guarantees returns, if a potential investment sounds too good to be true, or if you are pressured to act hastily, please exercise utmost caution and diligence and be wary of the risk that your investment might be lost.In view thereof, the public is hereby advised to be vigilantwhen investing in this kind of investingactivity and to take the necessary precautions in dealing with ICO entities.For the guidance of the public.