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FSC Announced the Security Token Offering (STO) Regulations



Considering security tokens (i.e., virtual currencies with the nature of securities, the "Security Tokens") shouldbe deemed as securities (due to the nature of investments and transferability) and therefore be covered by the regulatory regime of the Securities and Exchange Act (the "SEA"), the Financial Supervisory Commission (the "FSC") issued a ruling (Ref. no.: Jin-Guan-Zheng-Fa-Zi-1080321164) on July 3, 2019 to officially define Security Tokens as a type of securities under the SEA. Also, the FSC issued a press release on June 27, 2019 to illustrate the key points of FSC's proposed regulations on Security Token Offering (the "STO"), as summarized below:
 
1.  Definition of Security Token
 
Security Tokens (i.e., virtual currencies with the nature of securities) refer to tokens that utilize cryptography, distributed ledger technology or other similar technologies to represent their value that can be stored, exchanged or transferred through digital mechanism and are transferable and have all of the following attributes of an investment:
 
(1) Funding (provided by investors);
 
(2) Providing funding for a common enterprise or project;
 
(3) Investors expect to receive profits;
 
(4) The profits depend primarily on the efforts of the issuer or any third parties.
 
2.  Key Points of STO Regulations
 
The FSC contemplates to differentiate the regulation of STOswith the threshold of 30 million New Taiwan Dollar (NTD). For an STO of NTD30 million or less, the filing obligation under Paragraph 1 of Article 22 of the SEA may be exempted; an STO above NTD30 million must first apply to be testedin the "financial regulatory sandbox" pursuant to the Financial Technology Development and Innovative Experimentation Act and, in case the experiment has a positive outcome, should be conducted pursuant to the SEA.
 
For STOs of NTD30 million or less (the "Exempted STOs"), key points of the FSC's proposed regulations are as follows:
 
(1) Regulations on Issuance (primary market):
 
(i)  Qualifications of the issuer: The issuer must be a company limited by shares incorporated under the laws of Taiwan and not a company listed on the Taiwan Stock Exchange or the Taipei Exchange or traded on the Emerging Stock Market.
(ii)  Eligibleinvestors and amount limits: Only "professional investors"are eligible for STOs and where the professional investor is a natural person, the maximum subscription amount is NTD300,000 for each STO.
(iii) Issuance process: Issuers must conduct STOs on a single platform, and the platform operator should ensure that the issuer meets the relevant qualifications and that the prospectus has been well prepared. Where the platform operator itself is an STO issuer, such issuer should not launch an STO without a prior review by the Taipei Exchange.
 
(2) Regulations on Trading (secondary market):
 
(i)  Trading mechanism of Security Tokens: The platform operator should obtain a securities dealer license and handle the trading by way of price negotiation. The platform operator should be the counterparty to every transaction and should offer a reasonable reference quotation based on the market conditions. In addition, each Security Token under an STO program may only be traded on a single platform.
 
(ii)  Maximum transaction amount: Where the professional investor is a natural person, the maximum amount of holdingunder an STO program is NTD300,000. In addition, the maximum daily transactionlimit for each STO is 50% of total issuance amount under such STO program.
 
(3) STO Platform Operator:
 
(i)  Qualifications of the platform operator: The platform operator should (1) obtain a securities dealer license, (2) have minimum paid-in capital of NTD100 million and (3) provide an operation bond in the amount of NTD10 million.
 
(ii)  Total offering amount capacity: The total offering amount of all Exempted STOson a single platform should not exceed NTD100 millionA platform can only accept to process a second STO one year after theSecurity Tokens of the first STO have been traded on the platform.
 
(iii) Transfer and record keeping: The platform operator should enter into an agreement with the Taiwan Depository and Clearing Corporation (the "TDCC") and transmit the trading information such as balance changes and balance statement to the TDCC for its record on a daily basis. The TDCC should provide STO balance inquiry service to investors.
 
(4) Subscription and trading of Security Tokens should be conducted on a real name basis and the transactions must be conducted in NTD under the same name of the bank account.

3.  Corresponding Amendments to Relevant Laws and Regulations
 
In addition to the above, the FSC will authorize the Taipei Exchange to further promulgate the relevant regulations governing STOs. In July of 2019, the FSC also announced proposed amendments to the relevant regulations governing the security dealers conducting proprietary trading in Security Tokens (the "Security Token Dealer"). The key amendments are summarized below:
 
(1) The Standards Governing the Establishment of Securities Firms: A Security Token Dealer solely conducting STO business must have a minimum capital amount of NTD100 million, with internal control system in compliance with the requirements to be set by the Taipei Exchange.
 
(2) The Regulations Governing Securities Firms: While Security Token Dealers must comply with relevant regulations to be set by the Taipei Exchange, certain provisions regarding general securities firms under the Regulations Governing Securities Firms (such as internal control system, production and dissemination of advertisement, internal audit, total liabilities, special reserve, use of funds, reinvestment, financial reports, monthly statements, investment in foreign and Mainland enterprises and management of self-owned capital) do not apply to a Security Token Dealer solely conducting STO business.
 
(3) The Regulations Governing Responsible Persons and Associated Persons of Securities Firms (the "Personnel Regulations"): It is proposed that the personnel of a Security Token Dealer comply with the requirements of the Taipei Exchange. As to the responsible persons and associated persons of a Security Token Dealer solely conducting STO business, while they should meet the relevant qualifications for the associated persons and should complete the personnel registration as required by the Personnel Regulations, other rules such as the qualification requirements for managers and personnel training requirements under the Personnel Regulations will not apply.
 
(4) The Regulations Governing Centralized Securities Depository Enterprises: It is proposed that the FSC-approved securities firms conducting the business of transfer and custody of Security Tokens should not be deemed as a "centralized securities depository enterprise".


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