Love at second sight: The Thailand Initial Coin Offering and its regulatory framework
Initial Coin Offerings as the third type of start-up financing
A start-up business can be generally financed through equity contributions, by obtaining a loan, or by selling its future products on the public markets. The third method has been developed and made available by the design of utility tokens and the development of blockchain technologies. In all three financing alternatives, the success rate of start-ups is measured on a global scale as below 10%. This is unchanged for decades and no particularity of ICO projects.
Contrary to equity and debt financing, ICO financing has been open to retail investors. Therefore, the traditional and unspectacular start-up failing rate made its way into public awareness. Also, supposed easiness of international scam structure ruined the reputation of free and unregulated ICO offers. After US$ 30 billion had been invested and mainly lost, there is no more stupid money available for crazy projects.
Thailand’s crypto regulations 2018: Fit for ICOs in 2019/2020?
Thailand’s regulatory framework has the purpose
- to create a controlled and protected legal and business environment for the development of an ICO market
- to do initial due diligence on the feasibility of the start-up as a service for prospective ICO investors and token buyers,
- to protect the market and stakehodlers against exit scams and fraudulent ICO projects.
Apart from big names, specific industries, and super solid business models, the ordinary ICO experiences now an uphill battle to find enough proceeds in their coin offerings, while all the available stupid money has been already wasted in the past for houses of cards, which have been already blown by the wind. In the same vein as wild and unregulated ICO lose their marketability, the regulated Thai ICO will gain in importance and significance.
No more stupid money for crazy projects
Thailand’s fintech legislation creates the perfect marketing tool to attract international investors in crypto-businesses. The fact that each ICO project has to
- be audited by an independent, government-licensed ICO portal company and, in addition,
- obtain the license by Thailand’s Security Exchange Commission, and, even more,
- after the licensing process has to fulfill strict compliance requirements,
is an invitation for ICO stakehodlers from all over the world to bring their ICO project to Thailand and to benefit from the trust and confidence in the regulatory framework in the land of smile.
— Bangkok Lawyer (@bangkoklawyer) June 26, 2019
Seven steps to getting the ICO done in Thailand
This post describes the seven essential elements to get the ICO successfully licensed and in which areas PUGNATORIUS Ltd. can assist and support.
#1. Business, business idea, and problem-solving: A ICO is typically accomplished by a start-up company or for new (start-up) products. Products are goods or services including granting of access to a network.
- For an ICO, these products are in a certain status of development and not ready for the market yet.
- Finished and available products are instead subject of tokenization project.
- Direct or indirect participation in the start-up’s dividends, interest payments, royalties, or similar benefits result in a security token event STO.
The project has to be sustainable. It has to fulfill the legal and economic requirements to establish a long-term business in its market. Seven relevant key data are
- the corporate entity and its legal and tax arrangement,
- the shareholders and its experiences and background,
- the internal corporate constitution and structure, and
- the directors and executives,
- the feasibility of the business venture,
- reasonable roadmaps and long-term procedures,
- a certain form of proof of concept for the venture.
The business model has to give evidence for successful products. High profitability is not required, because the token investors would/should not participate in this.
#2. Blockchain technology: Compared with a centralized database, the blockchain technology is more expensive, much slower and has limited privacy. The blockchain-based business has to utilize particular blockchain advantages which over-compensate these economic disadvantages. Practical examples are that the business utilizes the blockchain
- as a record-keeping tool for the long-term storage of information, data, and files,
- as proof and verification tool, immune from data falsification with complete traceability.
- as proof of work for certain tasks.
Blockchain advantages mainly require that the public has the option to verify each transaction directly on the blockchain, apart from the web or phone application. Peer-to-peer platforms like Uber and AirBnB maintain web-based centralized databases and see no advantage in the blockchain technology.
#3. Feasible token economy model: Neither a casino jeton nor a fun coupon – the intrinsic characteristics and associated rights of the token are essential. It has to be clear,
- which and how many products are subject to the token, and
- how this value is assured, by a smart contract, an empty promise or something in between.
The token which is sold in the ICO needs such utility as its intrinsic value. The smart contract has to be verifiably designed to reach this aim. This strong intrinsic characteristics and associated rights have to be truly and clearly described.
— Brickblock (@brickblock_io) April 25, 2018
#4. Whitepaper: The offering prospectus should contain all required or necessary information. The potential token buyer will look into these four core aspects:
- Description of the implementation status of the start-up business.
- Description of the prospected sustainability of such business.
- Description of the intended use of the ICO proceeds and how this is assured.
- Description of the particular use purpose and the counter value of the token.
#5. Legislation and regulations: The ICO has to meet the applicable regulations
- for any pre-sales, road shows, and similar arrangements,
- for the country in which the ICO company is located, and
- in any jurisdiction where the token is offered.
To accomplish an ICO under foreign law, although the key personnel, key buyer base, or the start-up is located in Thailand, should be carefully reviewed under feasibility and legality.
#6. ICO procedure: The procedures of the Thai ICO have to follow Thailand’s complex regulatory framework. Key aspects are
- The Thai company as ICO promoter and the requirements regarding its internal constitution, shareholders, and officers,
- The approval by a private ICO portal company
- The licensing by the SEC
- The limitations under laws, regulations, and license.
When conducting ICO transactions, only four plus one coins are excepted as a medium of exchange. These are
- Bitcoin (BTC),
- Ethereum (ETH),
- Ripple (XRP),
- Stellar (XLM), and
- Baht (THB).
The SEC rectifies this list with the criteria of sufficient market liquidity, a well-designed decentralized system, and the ability to use a trading pair with other cryptocurrencies.
#7. After-ICO requirements: The legal requirements do not end with the ICO it self. Additional requirements cover
- the start-up.
- the use of the proceeds,
- the ICO itself.
The long-term success of the ICO must not be identical with the long-term success of the start-up and its products.
ICO advisory and professional services in Thailand’s Fin-Tech sector
PUGNATORIUS Ltd. advises and supports on challenging ICO projects in a multi-regulatory and multi-legislation environment. The firm’s lawyers are involved for some years in virtually each and every aspect of this exciting industry in Thailand and abroad. This includes legal and regulatory aspects, the support of new ventures, exchange, trading, brokerage, custody, mining, token listing requests and, as an essential element, the tax planning of crypto operations as well as tax planning of private crypto wealth. Based on this, PUGNATORIUS Ltd. possesses comprehensive experience and expertise.
The law firm advises in these complex cases on
- the design and set-up of the overall corporate structure,
- the selection and handling of the ICO portal company,
- the licensing for ICO and, as the case may be, other required licenses,
- the possible civil law, tax, and criminal consequences,
- a risk-reducing legal and tax structuring,
- the advisable marketing and whitepaper strategy, as well as social media presence,
- the operating of the ICO project on a long-term basis.
The PUGNATORIUS group also advises on ICOs which are no longer in good standing and have been identified as a ticking time-bomb for the promoters, directors as well as gatekeepers. This depends on the ICO completion phase, the risk assessment, the need for action including restructuring and the protection of assets and participants for negative impacts.
With respect to cryptocurrencies, digital asset businesses and ICOs, the Bangkok law firm offers mainly these seven legal and tax services:
- Thai crypto-compliant company formations
- Regulatory-avoiding and tax-efficient cross-border structuring
- Digital asset and financial services licensing
- Blockchain and ICO advisory services
- Thai and cross-border tax structuring
- Cryptotransaction support services
- Legal opinions and professional statements