On May 4, 2018, the Anguilla House of Assembly enacted the Anguilla Utility Token Offering Act, which provides for the registration of issuers of utility token offerings in or from within Anguilla.
Larry Franklin, permanent secretary in the Ministry of Finance, which shepherded the legislation through Parliament, noted that the legislation provides for the first cryptocurrency regulatory regime for the registration of initial offerings of specified categories of cryptocurrency.
As such, the Act will facilitate registration of clearly defined “utility tokens” that do not have the features of a security, and that have one or more “utility” features within the issuer’s current or proposed blockchain platform. There is currently no country-approved regulatory regime specifically for non-securities cryptocurrency offerings.
It appears that the legislation is geared towards filling or exploiting the lacuna that currently exists for products that are not securities as defined either in Anguilla or internationally, which means that Anguilla has, potentially, tapped into a niche market for this product. In fact, it is this void which was behind the thinking of the drafters of the legislation, specifically, Ravi A. Bahadursingh, an Anguilla finance and tax lawyer with Chancery Lane Chambers.
He explained that: “In drafting this Act, we saw that tokens that were in effect ‘securities’ in Anguilla are required to comply with the same Anguillian and international regulatory regime as all other securities offerings. However, there remained a large swathe of non-security tokens with no clear guidance as to how they should be offered to the public. Therefore, we focused our efforts on creating a safe and effective regulatory framework for non-security token offerings.”
Anguilla’s Chief Minister and Minister of Finance Victor Banks said he believes the new AUTO Act will help “Anguilla become the leader in establishing best practices for cryptocurrency offerings, to protect the people of Anguilla and the participating public.” He noted Anguilla’s long history with cryptocurrency, beginning with the island nation serving as host for the first International Conference on Financial Cryptography in the 1990s and leading to the first wave of cryptocurrency developers living in, and working from, Anguilla during the early 2000s.
“We believe the AUTO Act is a significant step in the right direction … to provide clearly defined rules and increased safety for the blockchain community,” Mr. Banks added. “With the enactment of the AUTO Act, we look forward to the registration of premier blockchain projects in Anguilla in undertaking their utility token offerings.”
The Act permits specified Anguillian entities to apply to be registered to conduct a Utility Token Offering when following the disclosure review, approval and registration process for a proposed offering, which includes publication of the entity’s official disclosure documents related to the offering.
The disclosure document requirements include certain elements that are standard for capital offerings but specifically tailored to these types of projects, including company structure and location, business status, detailed project description, management background, technical and legal description of offered tokens, current ownership, use of proceeds, plans for protecting offering proceeds, anti-money laundering program, and risk factors for purchasing tokens.
“The objective is a simple but effective standardized registration and disclosure protocol for blockchain projects wishing to issue utility tokens,” said Permanent Secretary Franklin. “The government’s goal is to strike a sound balance between meeting the information requirements of the purchasing public and creating an accelerated but prudent process to meet the needs of the fast-moving blockchain industry. Anguilla will conduct a regular review of the effectiveness of the new Act and will propose updates to keep up with the ever-evolving blockchain industry. In order to assist in these amendments, a Utility Token Offering Advisory Committee will be formed consisting of private sector participants from the blockchain field.”
Recent developments in new blockchain digital technologies and platforms and the international proliferation of initial coin offerings (ICOs) has given rise to a plethora of significant and novel legal issues for governments worldwide.
“The Government of Anguilla has observed initial coin offerings proliferate worldwide without clear regulation and believes there is opportunity to provide clear guidance for both issuers of these new cryptocurrencies and the purchasing public,” Franklin said.
The Act is elegantly and simply drafted, if only because the subject matter is complex to understand and very esoteric, to say the least. It begins with a statutory legal definition of blockchain as “a continuously growing list of decentralised digital records that are linked and secured using crytography.”
Since the legislation is a legal framework for the issuers of utility token offerings, the Act provides extensive definitions of what utility token offerings are and the functionaries linked to these offerings.
Firstly, a Utility Token is defined as any token that
(a) does not, directly or indirectly, provide the holder(s), individually or collectively with other holder(s), any of the following contractual or legal rights –
(i) ownership or equity interest in the issuer or in any person or pool of assets,
(ii) entitlement to a share of profits, losses, assets or liabilities of the issuer or any other person or pool of assets (other than, in the event of liquidation or dissolution of the issuer, to receive a portion of (but not in excess of) the original subscription price paid for the utility token in the initial utility token offering (known as “Limited Return Rights”)),
(iii) legal status as a creditor (other than with respect to Utility Token Features, or with respect to Limited Return Rights), or
(iv) entitlement to receive distributions of profits, revenues, assets or other distributions from the issuer or any other person or pool of assets other than with respect to Limited Return Rights; and
(b) has or will have in the future, upon launch of the issuer’s Utility Token Platform, one or more Utility Token Features.
Secondly, Utility Token Features means the contractual right for a holder to utilize a token to –
(a) have access to, become a member of, or become a user of a Utility Token Platform developed and managed, or proposed in the issuer’s white paper to be developed and managed, by the issuer,
(b) use as the sole or preferred (by economic discount, preferred access, preferred use or otherwise) purchase, lease or rental price for the products and/or services provided or proposed to be provided by or in the Utility Token Platform developed and managed, or proposed in the issuer’s white paper to be developed and managed, by the issuer, or
(c) use as a means of voting on matters relating to the governance, management or operation of the Utility Token Platform developed and managed, or proposed in the issuer’s white paper to be developed and managed, by the issuer;
Thirdly, a Utility Token Platform is the digital platform in which a utility token offered in the initial or secondary utility token offering may be utilized.
Fourthly, a Token means any cryptographically secured digital representation of a set of rights, including smart contracts, provided on a digital platform and issued or to be issued by an issuer.
Further, a Smart Contract means a blockchain-based computer protocol intended to facilitate, verify, or enforce the negotiation or performance of a digital set of agreed upon terms, or contract.
The White Paper means any document of an issuer the purpose of which is to make an initial or secondary utility token offering and that contains the information required by the AUTO Act and as may be prescribed by regulations from time to time.
The Act goes on to define an Issuer as a person undertaking an initial or secondary utility token offering where a person includes an individual, company, partnership, trust, fund, association and any other legal entity or organised or incorporated group of persons, and the personal or other legal representative of any person to whom the context can apply.
An Initial Utility Token Offering means an initial offer to subscribe for, purchase or otherwise obtain utility tokens to be issued by an issuer made by the issuer to any person who is not connected to the issuer while a Secondary Utility Token Offering is an offer to subscribe for, purchase or otherwise obtain utility tokens to be issued by an issuer made by the issuer to any person who is not connected to the issuer subsequent to an initial utility token offering by such issuer, whether or not the initial utility token offering was made under the Act.
A Platform is defined for the purposes of the Act, any blockchain-based distributed digital ledger platform, with or without smart contract (scripting) functionality, or such other platforms prescribed from time to time by regulations where a Distributed Ledger means a consensus of replicated, shared and synchronized digital data geographically spread across multiple sites, countries and institutions.
Finally, for purposes of this discussion, a Utility Token Offering Administrator refers to a person who, for valuable consideration, provides an issuer with any of the following services in relationship or connection to an initial or secondary utility token offering :
(a) escrow services in accordance with an escrow agreement filed with the Commission, including the receipt, maintenance and release of subscription finds;
(b) administration of the register of subscribers; and
(c) collection, review and record-keeping of customer due diligence conducted on subscribers.
The Act states that no person shall undertake an initial utility token offering or a secondary utility token offering in or from within Anguilla unless registered as an issuer specifically for the purpose of conducting that offering under it and goes on to make it clear that any person that contravenes this provision commits an offence. The application to be registered has to be made to the Financial Services Commission (the Commission), which is the statutory body established in Anguilla to license and regulate the international financial services industry.
A person that is a qualified company, so defined to include international business companies, limited liability companies and domestic companies incorporated in Anguilla, may apply to the Commission for registration as an issuer for the purpose of conducting an initial utility token offering or a secondary utility token offering. The Act mandates that an application so made must be made in the form and contain the information as set out in the regulations; and accompanied by:
(i) a statement setting out the nature and scope of the business to be carried on by the applicant, including the name of any other country or jurisdiction where the applicant is carrying on or intends to carry on business,
(ii) a statement of the financial, technical and human resources and administrative facilities available to the applicant for the competent and efficient conduct of its business or intended business,
(iii) a statement pertaining to the scope of the initial or secondary utility token offering,
(iv) a White Paper containing such information as required by the Act and such other information as may be prescribed by regulations from time to time,
(v) the application fee of such amount as may be prescribed by regulation,
(vi) certified copies of the instruments by which the applicant is constituted, or such other proof as may be satisfactory to the Commission that the applicant company is lawfully constituted under the laws of Anguilla as a qualified company,
(vii) the address of the applicant’s place of business and its address for service in Anguilla, the name and address of a person resident in Anguilla who is authorised to represent the applicant and to the accept service on its behalf and address of any place of business that the applicant has outside of Anguilla, and
(viii) such other documents or information as the Commission may reasonably require for the purpose of determining the application.
To date, the aforementioned Regulations have not been issued and fees set but those should be issued in due course. In the interim, recourse has to be made to the Commission for the necessary guidance.
An application for registration is subject to the discretion of the Commission which can deny it even if it satisfies the requirements of the Act. However, the Commission shall refuse to grant registration to any applicant if –
(a) the applicant has a name which is undesirable or misleading; and/or
(b) it determines that it is not in the public interest that such registration should be granted, including where any director, officer, or significant shareholder of the issuer or any of its affiliates involved in the development, operation or management of the blockchain project is not a fit and proper person.
Where the Commission, in the exercise of its powers stated above, makes a decision refusing to grant registration, it shall provide brief written reasons for its decision, which shall not be subject to appeal or judicial review, thus making a refusal final.
The Act requires that registered issuer shall make an initial or secondary utility token offering unless, prior to initiating the offering, it has published a white paper signed by the board of directors (by whatever name called) approving the contents of the white paper or authorizing its publication and has filed a copy thereof with the Commission.
The white paper shall be published by posting and maintaining a copy of it on a prescribed website that is accessible to potential subscribers for such time preceding, during and after the initial or secondary utility token offering as may be prescribed by regulations issued under the Act. Every white paper published shall –
(a) provide full and accurate disclosure of all such information as potential subscribers to the initial or secondary utility token offering reasonably would require and expect to find for the purpose of making an informed decision to subscribe, including any information as may be prescribed by regulations;
(b) contain a summary statement of subscribers’ rights; and
(c) be accompanied by financial statements for the issuer at the time of preparation of the white paper, and the auditor’s report thereon if the issuer has completed a financial year in operation.
The subscriber to a utililty token offering has statutory protections.
If a registered issuer publishes a white paper or any amendment thereto that contains a material misrepresentation relating to any of the disclosure required under the Act, a subscriber has a right of action against the issuer for the rescission of the subscription or for damages.
Misrepresentation includes both untrue or misleading statements or omissions of the disclosure required under the Act. However, an issuer shall not be liable under the Act if it can be proven that the subscriber subscribed for the utility tokens offered with knowledge of the misrepresentation.
A subscriber has to file a suit within 180 days from having knowledge of the misrepresentation or within one year from the date of the subscription transaction, whichever is earlier.
However, legal action may be commenced after the limitation periods set out in the Act have expired, if a plaintiff can demonstrate to the satisfaction of the court that it is in the interests of justice for the limitation period to be extended.
The amount recoverable shall not exceed the subscription price for which the utility tokens were subscribed, along with any fees or other charges paid by the plaintiff with respect to such subscription.
It should be noted that an issuer may elect to stipulate that any disputes arising out of or related to a subscription to the initial or secondary utility token offering shall be restricted to resolution by arbitration. Where this option is chosen, the subscriber shall be limited to resolving the claims for rescission or damages to arbitration.
In addition to the issuer having to register under the Act, the issuer must also appoint a utility token offering administrator and shall maintain permanently at a designated principal office in Anguilla, or some other location approved by the Commission, with full and proper records of the initial or secondary utility token offering.
The administrator must be licensed by the Commission. Both the issuer and the administrator must meet its fit and proper test which reflects criteria of character, competence and financial and human resources.
Finally, the Act imposes a levy on any registered issuer of an initial or secondary utility token offering related to the aggregate value of the subscriptions in the offering.
The rate and timing of the payment will be prescribed by regulations.
The Act still requires fleshing out certain aspects through regulations that need to be issued. However, it provides a sufficiently clear roadmap for offerings which the blockchain industry should welcome.