The Financial Markets Conduct Act 2013 (FMC Act) sets out four types of financial products - debt securities; equity securities; managed investment products and derivatives.
Debt securities
A token is a debt security if investors have a right to be repaid money or paid interest on money lent to, deposited with, or owed by a person, company, or unincorporated entity making a token offer. For example, a token linked to the value of a dollar or commodity could be a debt security if:
- investors can purchase a token with money;
- investors holding the token have the right to redeem that token for money; and
- an investor holding the token is not the beneficial owner of funds from which redemption proceeds are paid.
To make a regulated offer of debt securities, you must:
Are asset backed tokens debt securities?
What are asset backed tokens?
Asset backed tokens typically give investors an ownership right to an underlying tangible or intangible asset, like gold or real estate, where the distributed ledger is used as a record of ownership. Investors usually have the right to redeem the token in exchange for the underlying asset – exchanging one token for one gram of gold for example.
Are asset backed tokens financial products?
While each ICO must be looked at on an individual basis, asset backed tokens that give investors a right to redeem the token in exchange for the asset are not considered debt securities (unless the asset is cash). This is because the token does not give an investor the right to be repaid ‘money’.
Do asset backed token ICOs involve financial services?
When you offer asset backed tokens through an ICO, you are providing the financial service of ‘operating a value transfer service’. You may also be providing the financial service of ‘issuing and managing a means of payment’ – where tokens can be used to obtain products or services otherwise acquired using legal tender (such as NZ dollars). These services are regulated by us.
How do I comply?
If your asset backed token ICO is providing a financial service, you must comply with the fair dealing provisions in Part 2 of the FMC Act. These provisions prohibit you from making misleading, deceptive or unsubstantiated statements, for example about the extent to which the tokens are backed by the asset. So if you state in a white paper that an asset backed token is ‘100% gold backed’ there must be enough gold available (at an official mint, for example) to allow all investors to redeem their tokens.
Other obligations may also apply. For more information, see our guidance on ICOs and financial services, and fair dealing and ICOs.
Equity securities
A token is an equity security if investors buy, or have the option to buy, for example, a share in a New Zealand incorporated company or any body corporate incorporated outside New Zealand. A token that provides an option to buy a share is an offer of both the token and the equity share.
If you make a regulated offer of equity securities, you must:
Investor interests and rights will be set out in the company’s constitution. This means a trust deed is not required.
Managed investment products
A token is a managed investment product (an interest in a ‘managed investment scheme’) if investors:
- contribute money or cryptocurrency to receive interests (tokens) in a scheme (a structure or project that allows investors to pool their money)
- have a ‘right to receive a financial benefit’ (as defined in the FMC Act) from the scheme – such as money, rights to a share in profits, cryptocurrency, additional tokens, or changes in the tokens’ value and these benefits are principally produced by someone else, and
- do not have day-to-day control over the project or business (even if they have the right to be consulted or to give directions).
The manager of a managed investment scheme must be licensed by us in order to make a regulated offer to retail investors in New Zealand. The manager is the person, company, or unincorporated entity issuing the tokens. When you make a regulated offer of managed investment products, you must also:
Are utility tokens managed investment products?
What are utility tokens?
Utility tokens (sometimes called “application tokens”) typically give investors the right to access and/or use a company’s platform, product or service.
Are utility tokens financial products?
While each ICO must be looked at on an individual basis, utility tokens are not considered managed investment products simply because they can be traded on a cryptocurrency exchange or other secondary market. This is because any profits an investor receives by trading those utility tokens on a cryptocurrency exchange are not ‘rights to receive a financial benefit’ under a managed investment scheme.
Do utility token ICOs involve financial services?
When you offer utility tokens through an ICO, you will typically be providing the financial service of ‘operating a value transfer service’. You may also be providing the financial service of ‘issuing and managing a means of payment’ – where the tokens can be used to obtain products or services that are otherwise acquired using fiat currency. These services are regulated by us.
How do I comply?
If your utility token ICO is providing a financial service, you must comply with the fair dealing provisions in Part 2 of the FMC Act.
Other obligations may also apply. For more information, see our guidance on ICOs and financial services, and fair dealing and ICOs.
Derivatives
A token may be a derivative if, under the terms of the token, the issuer or holder may be required to pay an amount or provide something else in the future, and the amount to be paid or the value of the token is derived from the value or amount of something else, such as a commodity or asset.
The issuer (person, company, or unincorporated entity) of the tokens must also be licensed by us in order to make offers to retail investors in New Zealand.
If you make a regulated offer of derivatives, you must:
