May 2020
Focused Summary of the Taiwan Regulations on the Issuance and Trading of the Security Token and Regulatory Amendment Recommendations (Taiwan)
Teresa Huang and Elva Chuang[1]
I. Focused summary of the regulations on the issuance and trading of security token offerings
1. The Financial Supervisory Commission (hereinafter, the "FSC") of Taiwan officially incorporated security token offering (hereinafter, "STO") into the regulatory framework of the Securities and Exchange Act (hereinafter, "SEA") by defining "security tokens" as the so-called securities under the SEA on July 3, 2019. According to the Jin-Guan-Zheng-Fa-1080321164 Circular of the FSC, "A cryptocurrency of a securities nature is one that uses cryptography and distributed ledger technology or other similar technologies to represent the value which can be digitally stored, exchanged or transferred, which is transferable and has the following investment characteristics: (1) the contributors make capital contributions; (2) the contributors invest in a common enterprise or project; (3) the contributors have an expectation of receiving profit; and (4) the profit depends mainly on the efforts of the issuer or a third party." On January 15, 2020, the FSC initially deregulated a STO with the amount of fund to be raised up to NT$30 million, and the permitted types of such security tokens are limited to profit sharing and debt-based security token cases with no shareholders’ equity. Such STOs are exempted from the obligation to report to the FSC for enforcement indicated in Article 22, Paragraph 1 of the SEA (the "Exempt STO").[2]
2. The Taipei Exchange therefore promulgated several administrative rules for security token business[3] on January 20, 2020 pursuant to the FSC's authorization, including but not limited to Taipei Exchange Rules Governing Information to be Published in Prospectuses for Applications for Security Token Offerings for Over-the-Counter Trading and Taipei Exchange Rules Governing the Operation by Security Firms of the Business of Proprietary Trading of Security Tokens, hereinafter collectively, the "STO Regulations) for compliance by issuers of Exempt STOs and by operators of trading platform business.
3. Important regulatory highlights of the above laws and regulations are summarized in the following table:
II. Criticisms from the industry and academic and the current status of practical operations
1. Criticisms from the industry and the academia:
After reviewing the above-mentioned provisions of STO Regulations and summarizing the records of the numerous public hearings and related news reports of the FSC, we note that the industry and the academia mostly still believe that the regulatory approach of the newly implemented STO Regulations has the issues of excessive oversight and impediment of industry development, with specific questions including but not limited to:
(1) The threshold amount for exemption from the declaration obligation is too low at NT$30 million.
(2) Eligible investors are limited to professional investors and the NT$300,000 limit on the subscription amount for natural persons are contrary to the spirit of financial inclusion.
(3) Although the STO Regulations do not explicitly provide for "whether foreigners are allowed to invest in STOs legally issued in Taiwan," it seems that foreign investors (including foreign natural persons and institutional investors) are still unable to invest in STOs issued in Taiwan according to the positive list restrictions on investment types under the Statute For Investment By Foreign Nationals and the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals.
(4) That STO as a funding source are limited to NTD only and cannot be subscribed to in cryptocurrencies, which may not meet practical needs.
(5) The issuance of each STO is strictly limited to the same trading platform, and the volume and amount of STOs accepted by each trading platform are also limited, significantly reducing the market participation incentives of potential issuers and trading platform operators.
(6) Security token trading platform operators are subject to overly stringent qualifications and business restrictions.
2. Since the release of the draft STO Regulations, some digital asset exchanges or cryptocurrency-related technology companies have indicated that they will start to deploy and create security token trading platforms. However, as of the date of this article, there has been no formal establishment of a security token trading platform in Taiwan yet. As the trading platforms responsible for accepting the STO issuance have not been successfully set up, even if there are any potential STO projects, it is still not possible to implement them at this stage due to procedural obstacles.
III. Recommendations on regulatory amendments
As previously stated, it seems that the contents of the current STO Regulations do not fully meet the expectations of the relevant operators, which may be one of the reasons why there has not been an emergence of a number of security token exchanges and STO projects in Taiwan after relevant regulations are released. The below section of this article contains recommendations on the adjustment priority of the current STO Regulations. It is hoped that in the future, the government and the industry will continue to communicate with each other and gradually discuss the possibility of further relaxing the existing STO Regulations in the light of the actual business situation.
1. Recommendations on the regulations of security token issuance
The current STO Regulations completely prohibit general citizens who are not professional investors from participating in Exempt STO projects, which is obviously contrary to the "financial inclusion" policy that the FSC has been trying to promote in recent years.[4] Considering the convenience of STOs in raising funds through the Internet, STOs, if properly utilized, will undoubtedly be one of the important tools to assist Taiwan to thoroughly achieve the financial services accessibility of financial inclusion and enhance the usability and quality of financial services. Therefore, it is suggested that the FSC should consider legal amendments in the future to allow non-professional investors to participate in the small-amount subscription to Exempt STOs and consider foreign legislative examples to set investment limits for risk control, so as to protect investors' rights and interests while implementing financial inclusion and stimulating our capital market.
For foreign investment, since STOs may also serve as one of the innovative channels for local enterprises to accelerate the attraction of foreign investment, it is proposed that the FSC should expeditiously define the relevant systems to allow foreign investors to invest in STOs issued in Taiwan. Specific practices include, but are not limited to, explicitly approving Exempt STOs as the types of domestic securities that may be invested by foreigners under Article 4, Paragraph 1 of the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals, and amending the inappropriate procedural requirements of the aforesaid Regulations accordingly pursuant to the STO Regulations, in order to enhance the internationalization and liberalization of our financial market.
2. Recommendations on the regulation of security token trading platform operators
The current STO Regulations strictly require all security token trading platform operators to meet the requirement of $100 million paid-in capital and to assume the obligation of confirming that an issuer meets relevant eligibility requirements and prepares a prospectus, while subjecting the scope of business of platform operators to the restriction that the cumulative amount raised by a single platform operator by issuing Exempt STOs shall not exceed NT$100 million, and that a platform operator that has accepted a Exempt STO may not accept another Exempt STO until the trading of the previous STO has been conducted for one year. The above-mentioned obligations are much higher than the expected profitability. Such regulatory model may completely discourage operators who previously intended to participate from applying for a securities dealer license to operate a security token exchange and such a high threshold is also unfavorable to the development of new fin-tech innovators.
In order to avoid the recurrence of the past situation where few securities firms applied to operate equity-based crowdfunding, it is proposed that the FSC should continue to communicate with the relevant operators and gradually discuss the possibility of further easing the restriction on the acceptance of fundraising through Exempt STOs by platform operators. In addition, for the control of systemic risks of platform operators, consideration should be given to the introduction of other technology-based supervision methods instead of rigid formal requirements, in order to enhance supervision efficiency and reduce supervision costs.
3. Recommendations on the scope of application of the existing STO Regulations
It seems that the current STO Regulations do not expressly stipulate the jurisdictional scope of application, except for the requirement that they apply to STO issuance or platform trading of companies incorporated in Taiwan. However, if the STO activities are conducted in accordance with foreign laws but involve Taiwanese citizens when it comes to investors making subscriptions, whether the STO Regulations in Taiwan are still applicable is a matter for interpretation and resolution.
In view of the cross-border nature of online STO fundraising, and in order to protect the rights and interests of investors in Taiwan, it is proposed to refer to the international jurisdiction provision in Article 4, Paragraph 1 of the draft Security Token Exchange Act,[5] which just cleared through the first legislative reading at the end of 2019. This provision specifically stipulates that in principle, the FSC may exercise its jurisdiction over STOs conducted in Taiwan to Taiwan investors and providers of STO services for Taiwan customers in Taiwan. However, in view of the difficulty in the actual exercise of international jurisdiction and in order to avoid excessive expansion of authority by the competent authority in Taiwan, as well as to respect the relevant STO regulations in other countries, it is recommended that the FSC consider the following factors in deciding whether or not to take jurisdiction, including: the actual impact of the STO activity at issue on investors in Taiwan (e.g., the scale of Taiwan investors' subscription to the STO), the country in which the main STO fundraising activities are conducted, the location and principal place of business of the STO issuer and trading platform, the possibility of conflicts between Taiwan's regulations and the laws or policies of the country in which the STO issuer and trading platform are located, the possibility of compulsory enforcement of administrative dispositions, and the impact of compulsory enforcement on foreign businesses, etc. The FSC shall also announce the above-mentioned criteria for determining if to take jurisdiction and update actual cases concerning the exercise of jurisdiction at all times so that international STO issuers or related exchanges have specific guidelines to follow.
[1] The authors are lawyers at Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions of the authors and do not represent the position of this law firm.
[2] The Jin-Guan-Zheng-Fa-10803620609 Circular of January 15, 2020 from the FSC.
[3] The detailed requirements concurrently released by the Taipei Exchange also include the Taipei Exchange Standards Governing the Places of Business and Facilities of Securities Firms and Securities Introducing Brokers, the Guidelines for the Pre-Service and In-Service Training of the Business Personnel of Securities Firms Operating Proprietary Security Token Trading, and the Principles for the Issuance of IT System and Security Control Operation Assessment Reports by Certified Public Accountants. Their full text provisions can be accessed at http://www.selaw.com.tw/LetterContent.aspx?Soid=10995#G0103999
[4] FSC's announcement on January 14, 2020, source: https://www.fsc.gov.tw/ch/home.jsp?id=96&parentpath=0,2&mcustomize=news_view.jsp&dataserno=202001140002&dtable=News
[5] Draft Security Token Exchange Act, LawBank, date of proposal: December 6, 2019, source: https://www.lawbank.com.tw/news/NewsContent_print.aspx?NID=164734.00
I. Focused summary of the regulations on the issuance and trading of security token offerings
1. The Financial Supervisory Commission (hereinafter, the "FSC") of Taiwan officially incorporated security token offering (hereinafter, "STO") into the regulatory framework of the Securities and Exchange Act (hereinafter, "SEA") by defining "security tokens" as the so-called securities under the SEA on July 3, 2019. According to the Jin-Guan-Zheng-Fa-1080321164 Circular of the FSC, "A cryptocurrency of a securities nature is one that uses cryptography and distributed ledger technology or other similar technologies to represent the value which can be digitally stored, exchanged or transferred, which is transferable and has the following investment characteristics: (1) the contributors make capital contributions; (2) the contributors invest in a common enterprise or project; (3) the contributors have an expectation of receiving profit; and (4) the profit depends mainly on the efforts of the issuer or a third party." On January 15, 2020, the FSC initially deregulated a STO with the amount of fund to be raised up to NT$30 million, and the permitted types of such security tokens are limited to profit sharing and debt-based security token cases with no shareholders’ equity. Such STOs are exempted from the obligation to report to the FSC for enforcement indicated in Article 22, Paragraph 1 of the SEA (the "Exempt STO").[2]
2. The Taipei Exchange therefore promulgated several administrative rules for security token business[3] on January 20, 2020 pursuant to the FSC's authorization, including but not limited to Taipei Exchange Rules Governing Information to be Published in Prospectuses for Applications for Security Token Offerings for Over-the-Counter Trading and Taipei Exchange Rules Governing the Operation by Security Firms of the Business of Proprietary Trading of Security Tokens, hereinafter collectively, the "STO Regulations) for compliance by issuers of Exempt STOs and by operators of trading platform business.
3. Important regulatory highlights of the above laws and regulations are summarized in the following table:
Issuance Regulations | |
| Companies limited by shares which are incorporated in accordance with the Company Law of Taiwan, not including listed, OTC-traded and emerging stock companies and foreign juristic persons. |
|
|
|
|
|
|
Trading Platform Regulations | |
|
|
|
|
|
|
|
|
|
|
|
|
II. Criticisms from the industry and academic and the current status of practical operations
1. Criticisms from the industry and the academia:
After reviewing the above-mentioned provisions of STO Regulations and summarizing the records of the numerous public hearings and related news reports of the FSC, we note that the industry and the academia mostly still believe that the regulatory approach of the newly implemented STO Regulations has the issues of excessive oversight and impediment of industry development, with specific questions including but not limited to:
(1) The threshold amount for exemption from the declaration obligation is too low at NT$30 million.
(2) Eligible investors are limited to professional investors and the NT$300,000 limit on the subscription amount for natural persons are contrary to the spirit of financial inclusion.
(3) Although the STO Regulations do not explicitly provide for "whether foreigners are allowed to invest in STOs legally issued in Taiwan," it seems that foreign investors (including foreign natural persons and institutional investors) are still unable to invest in STOs issued in Taiwan according to the positive list restrictions on investment types under the Statute For Investment By Foreign Nationals and the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals.
(4) That STO as a funding source are limited to NTD only and cannot be subscribed to in cryptocurrencies, which may not meet practical needs.
(5) The issuance of each STO is strictly limited to the same trading platform, and the volume and amount of STOs accepted by each trading platform are also limited, significantly reducing the market participation incentives of potential issuers and trading platform operators.
(6) Security token trading platform operators are subject to overly stringent qualifications and business restrictions.
2. Since the release of the draft STO Regulations, some digital asset exchanges or cryptocurrency-related technology companies have indicated that they will start to deploy and create security token trading platforms. However, as of the date of this article, there has been no formal establishment of a security token trading platform in Taiwan yet. As the trading platforms responsible for accepting the STO issuance have not been successfully set up, even if there are any potential STO projects, it is still not possible to implement them at this stage due to procedural obstacles.
III. Recommendations on regulatory amendments
As previously stated, it seems that the contents of the current STO Regulations do not fully meet the expectations of the relevant operators, which may be one of the reasons why there has not been an emergence of a number of security token exchanges and STO projects in Taiwan after relevant regulations are released. The below section of this article contains recommendations on the adjustment priority of the current STO Regulations. It is hoped that in the future, the government and the industry will continue to communicate with each other and gradually discuss the possibility of further relaxing the existing STO Regulations in the light of the actual business situation.
1. Recommendations on the regulations of security token issuance
The current STO Regulations completely prohibit general citizens who are not professional investors from participating in Exempt STO projects, which is obviously contrary to the "financial inclusion" policy that the FSC has been trying to promote in recent years.[4] Considering the convenience of STOs in raising funds through the Internet, STOs, if properly utilized, will undoubtedly be one of the important tools to assist Taiwan to thoroughly achieve the financial services accessibility of financial inclusion and enhance the usability and quality of financial services. Therefore, it is suggested that the FSC should consider legal amendments in the future to allow non-professional investors to participate in the small-amount subscription to Exempt STOs and consider foreign legislative examples to set investment limits for risk control, so as to protect investors' rights and interests while implementing financial inclusion and stimulating our capital market.
For foreign investment, since STOs may also serve as one of the innovative channels for local enterprises to accelerate the attraction of foreign investment, it is proposed that the FSC should expeditiously define the relevant systems to allow foreign investors to invest in STOs issued in Taiwan. Specific practices include, but are not limited to, explicitly approving Exempt STOs as the types of domestic securities that may be invested by foreigners under Article 4, Paragraph 1 of the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals, and amending the inappropriate procedural requirements of the aforesaid Regulations accordingly pursuant to the STO Regulations, in order to enhance the internationalization and liberalization of our financial market.
2. Recommendations on the regulation of security token trading platform operators
The current STO Regulations strictly require all security token trading platform operators to meet the requirement of $100 million paid-in capital and to assume the obligation of confirming that an issuer meets relevant eligibility requirements and prepares a prospectus, while subjecting the scope of business of platform operators to the restriction that the cumulative amount raised by a single platform operator by issuing Exempt STOs shall not exceed NT$100 million, and that a platform operator that has accepted a Exempt STO may not accept another Exempt STO until the trading of the previous STO has been conducted for one year. The above-mentioned obligations are much higher than the expected profitability. Such regulatory model may completely discourage operators who previously intended to participate from applying for a securities dealer license to operate a security token exchange and such a high threshold is also unfavorable to the development of new fin-tech innovators.
In order to avoid the recurrence of the past situation where few securities firms applied to operate equity-based crowdfunding, it is proposed that the FSC should continue to communicate with the relevant operators and gradually discuss the possibility of further easing the restriction on the acceptance of fundraising through Exempt STOs by platform operators. In addition, for the control of systemic risks of platform operators, consideration should be given to the introduction of other technology-based supervision methods instead of rigid formal requirements, in order to enhance supervision efficiency and reduce supervision costs.
3. Recommendations on the scope of application of the existing STO Regulations
It seems that the current STO Regulations do not expressly stipulate the jurisdictional scope of application, except for the requirement that they apply to STO issuance or platform trading of companies incorporated in Taiwan. However, if the STO activities are conducted in accordance with foreign laws but involve Taiwanese citizens when it comes to investors making subscriptions, whether the STO Regulations in Taiwan are still applicable is a matter for interpretation and resolution.
In view of the cross-border nature of online STO fundraising, and in order to protect the rights and interests of investors in Taiwan, it is proposed to refer to the international jurisdiction provision in Article 4, Paragraph 1 of the draft Security Token Exchange Act,[5] which just cleared through the first legislative reading at the end of 2019. This provision specifically stipulates that in principle, the FSC may exercise its jurisdiction over STOs conducted in Taiwan to Taiwan investors and providers of STO services for Taiwan customers in Taiwan. However, in view of the difficulty in the actual exercise of international jurisdiction and in order to avoid excessive expansion of authority by the competent authority in Taiwan, as well as to respect the relevant STO regulations in other countries, it is recommended that the FSC consider the following factors in deciding whether or not to take jurisdiction, including: the actual impact of the STO activity at issue on investors in Taiwan (e.g., the scale of Taiwan investors' subscription to the STO), the country in which the main STO fundraising activities are conducted, the location and principal place of business of the STO issuer and trading platform, the possibility of conflicts between Taiwan's regulations and the laws or policies of the country in which the STO issuer and trading platform are located, the possibility of compulsory enforcement of administrative dispositions, and the impact of compulsory enforcement on foreign businesses, etc. The FSC shall also announce the above-mentioned criteria for determining if to take jurisdiction and update actual cases concerning the exercise of jurisdiction at all times so that international STO issuers or related exchanges have specific guidelines to follow.
[1] The authors are lawyers at Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions of the authors and do not represent the position of this law firm.
[2] The Jin-Guan-Zheng-Fa-10803620609 Circular of January 15, 2020 from the FSC.
[3] The detailed requirements concurrently released by the Taipei Exchange also include the Taipei Exchange Standards Governing the Places of Business and Facilities of Securities Firms and Securities Introducing Brokers, the Guidelines for the Pre-Service and In-Service Training of the Business Personnel of Securities Firms Operating Proprietary Security Token Trading, and the Principles for the Issuance of IT System and Security Control Operation Assessment Reports by Certified Public Accountants. Their full text provisions can be accessed at http://www.selaw.com.tw/LetterContent.aspx?Soid=10995#G0103999
[4] FSC's announcement on January 14, 2020, source: https://www.fsc.gov.tw/ch/home.jsp?id=96&parentpath=0,2&mcustomize=news_view.jsp&dataserno=202001140002&dtable=News
[5] Draft Security Token Exchange Act, LawBank, date of proposal: December 6, 2019, source: https://www.lawbank.com.tw/news/NewsContent_print.aspx?NID=164734.00
