區塊鏈與虛擬貨幣法律專題(八)

區塊鏈與虛擬貨幣法律專題(八)

Initial Coin Offering (ICO) in Taiwan Risks – A look at Taiwan’s Financial Regulatory Sandbox

【Zhong Yin Law Firm, Partner Charlotte Wu / Associate Arthas Ke】

【Initial Coin Offering Launch Risks】

In a prior article, we have provided an overview of key regulations such as the Criminal Code, Banking Act, Securities Exchange Act, and Money Laundering Control Act, regarding cryptocurrencies and Initial Coin Offerings (“ICOs”) in Taiwan, pointing out that currently launching an ICO in Taiwan carries high risk under the current laws and regulations. That being said, ICOs in Taiwan continue to rise as many startups believe the rewards outweigh the risks. In order to help relieve some of the lack of clarity, and encourage growth in Taiwan’s economy, the Taiwanese legislature passed the “Financial Technology Innovation and Experiment Act” (the “Sandbox Act”) late last year, permitting innovative enterprises to apply for entrance into a sandbox. Once in the sandbox, the entity would be able to more freely operate in some grey areas around certain laws and regulations in the Financial Technology industry, including blockchain and cryptocurrency. In this article, we will take a look about the requirements and application procedures to apply for entrance into this sandbox.

【Applicant Entity : Domestic and foreign natural persons, juridical persons, a sole proprietorship, partnerships】

According to Article 4.1 of the Sandbox Act, “Domestic and foreign natural persons, juridical persons, a sole proprietorship, and partnerships may apply for the authority’s permission to launch into the Fintech Sandbox.” Compared to other countries’ sandbox regulations, this language has set the widest threshold on the definition of who the applicant may be. For example, Hong Kong has denied to accept ‘natural’ person (individual) applications to their sandbox. Only financial institutes are qualified to apply for the entrance into the sandbox. Hong Kong’s sandbox regulations have been harshly criticized for being too beneficial to large institutions. Taiwan’s sandbox on the other hand, has differentiated itself by accepting the applications of many different types of entities and persons for entrance into its sandbox.

【Required Documents for Applications】

Article 4.1 of the Sandbox Act highlights the variety of documents needed to apply for the entrance into the sandbox that must be submitted to the supervising authority, the Financial Supervisory Commission (the “FSC”) of Taiwan. The required documents can be broken down into four groupings: “basic information of applicant”, “ proof of innovation”, “experiment effects”, and “risk control framework”.

In regards to the basic information of the applicant, documentation such as the certificate of incorporation, corporate charters or similar founding documents, director and shareholder register, supervisors and other basic company information must be submitted. Additionally, funding resources must be disclosed to the authority. Next, proof of innovation must be demonstrated to the FSC in details such as the industry this innovation will touch, how the industry will be changed, and a detailed explanation of the applicant’s business model.

The effects of the experiment must be sufficiently addressed as well, including details on the proposed project timeline, scale, and the scope of the business model must be submitted. Finally, the risk control framework must be proposed and disclosed in order guarantee that the experiment in the sandbox with fraud or any other type of abuse in order to protect the public. The documents mentioned above can be expressed by the chart below.

（Chart 1：The classification of the documents needed to be submitted to FSC）

【Evaluation Criteria】

Evaluation criteria are laid out in Article 7 of the Sandbox Act. The FSC is required to review each application and consider things such as:

The FSC will use the above criteria and questions to evaluate each application on a case by case basis.

【Application and Entrance Timeline】

The FSC must make a decision to accept or to reject an application within 60 days after receiving the application. A hard copy of decision must be mailed to the applicant. A qualified admission may be permitted (admission with conditions). Upon receiving approval, the applicant must enter the sandbox within three months. The initial term for the sandbox will be no longer than 3 years. Once an applicant actually enters the sandbox, he must provide the FSC with notice letting them know that operation and experimentation has begun within five days. Although possible, it is very difficult to change the business model or experiment parameters once the applicant has entered into the sandbox. However, if a change needs to be made and will not impact any financial matters or participant’s interests, an application for changes may be made to the FSC.

Finally, when the term of the experiment is set to end, the applicant must send the FSC the result of their experimentation no later than one month before the date the experiment is set to end. Applicants may also seek to extend the term of the sandbox. A maximum of one extension, no greater than 6 months will be allowed. An exception to this is in cases related to regulation, extensions will not be limited to a one time.

After the sandbox term has concluded, for ‘innovative’ cases or cases involving the operating costs of financial services, the FSC must revise its financial regulations or issue regulatory guidance based on the results of the sandbox.

【Powers of the FSC】

The Sandbox Act grants the FSC to inspect the sandbox entity at any time, without interference. Article 14 states that “applicants shall abide by the provisions of this Act and matters required by the competent authority when approving the innovative experimentation, and provide description of the experimentation status as instructed by the competent authority. If deemed necessary, the competent authority may visit the sites of experimentation, which the applicants may not evade, interfere with or refuse.” In addition to the above, the FSC may revoke the approval for the innovative experimentation in order to avoid the adverseness to the financial market or the interests of participants depends on each innovative experimentation. [8] At last, the competent authority also needs to improve itself, review and amend the relevant regulations, and provide necessary assistance to innovative financial business.

【ICOs applicants to the sandbox】

After the above introduction, let’s focus on the possible issues of ICO issuing entities entering the sandbox.

Foremost, there are many potential ICO applicants in the market. However, according to Article 6 of the Sandbox Act, “the innovative mentioned in Paragraph 2 of Article 7 of the Financial Technology Development and Innovative Experimentation Act, means the application of the experimentation is not the same as or similar to other case approved by the competent authority.” Therefore, if there is an applicant who successfully issued an ICO in the sandbox, it is currently unclear if another applicant, with a token similar to the one already issued inside the sandbox, would be able to be admitted.

Secondly, the nature of the blockchain and tokens is complex. Some people suggest to manage tokens as securities in other countries. However, according to the Sandbox Act, the liability regarding securities exchange “issuing securities without prior filing” (Paragraph 1 of Article 22 and Subparagraph 3 of Paragraph 2 of Article 174 of the Securities Exchange Act) is not an excluded act for any entities inside of the sandbox. Therefore, is it recommended to have a legal opinion issued as to whether the token would be considered as a security on the Securities Exchange Act of Taiwan in order to present to the FSC that the token is not a security.

The development of governmental policies and regulations toward blockchain, tokens, and ICOs are constantly evolving. Our firm has a dedicated team to monitoring the status of such regulations, in Taiwan and around the world, in order to better keep you informed. If you have any further questions, please feel free to contact our firm for assistance.

[1] Li, Ruei-Tsang, “The plan and future of the Financial Technology Development and Innovative Experimentation Act”, Industrial Technology Research Institute, May 9th, 2017.

[2] Chiu, Chin-Lan, “Master of future finance sharing- Financial Regulatory sandbox and cross-border cooperation”, Economic Daily News, January 25th, 2018.

[3] Paragraph 3 of Article 8 of the Sandbox draft article, “When approving an innovative experimentation under Paragraph 1 hereof, the competent authority may take the following actions:

[4] Paragraph 1 of Article 12 of the Sandbox draft article, “An applicant shall commence an approved innovative experimentation within three (3) months from the date of receiving the notice of approval decision made by the competent authority pursuant to Paragraph 1 of Article 8 herein.”

[5] Paragraph 1 of Article 10 of the Sandbox draft article, “No changes can be made to an innovative experimentation plan approved by the competent authority. However, if the change does not involve important elements of the experimental financial business and does not have material impact on the interests of participants, the applicant may make changes after applying for the change and obtaining approval of the competent authority.”

[6] Paragraph 1 of Article 9 of the Sandbox draft article, “The period of innovative experimentation approved by the competent authority shall be limited to one year. However, an applicant may, one month before the approved experimentation period ends, apply to the competent authority with reasons attached for approval of an extension; the extension shall be limited to once and no longer than six months. Notwithstanding the foregoing, when an innovative experimentation involves any law amendment, the extension of the experimentation period is not limited to once. However the entire experimentation period shall not be longer than three (3) years.”

[7] Paragraph 1 of Article 17 of the Sandbox draft article, “Where an innovative experimentation is inventive, effectively increase the efficiency of financial services, reduce operational and use costs or enhance the interests of financial consumers and enterprises, the competent authority should take the following actions in consideration of the implementation status of the innovative experimentation:

[8] Paragraph 1 of Article 15 of the Sandbox draft article, “In case of any of the following situations arises during the innovative experimentation period, the competent authority may revoke the approval for the innovative experimentation:

[9] Article 26 of the Sandbox draft article.