Being the 22nd richest country in the world and with the 7th largest economy in Asia, international investors including blockchain companies have lots of interest in Taiwan. With security tokens proving to be a go-to option for most blockchain companies, Taiwan’s Financial Supervisory Commission in July 2019 recognized the need to officially incorporate security token offering (STO) into the Securities and Exchange Act, which entails the regulatory framework for trading securities, by defining security tokens as securities.
According to the FSC, a security token is a cryptocurrency that is transferable and hold the following features:
- The owners make capital contributions to the issuer
- The owners invest in a common enterprise/project
- The owners expect to receive profit depending on the efforts of the issuer or a third party.
The new Security Token Offering regulations
In January 2020, the FSC proposed deregulating STOs with an equivalent of up to NT$30 million. These STOs are characterized as “Exempt STO” in Paragraph 1 of Article 22 of the SEA. According to the article, these STOs are exempted from the obligation of reporting to the FSC.
Although the deregulation of STOs seemed to be a step in the right direction, the exemption comes with a tight set of restrictions. Additionally, the NT$30 million limit is relatively low, meaning that most of the STOs will not be exempted since most of them have targets above NT$30million.
However, the main objective behind the new regulations is to ensure that STOs in Taiwan are issued by regulated issuers and issued to professional Taiwan investors.
For a company or startup to issue security tokens in Taiwan, it has to be a company listed by shares, meaning it is incorporated per Taiwan’s Company Law.
For an STO to qualify for the exemption, the STOs must be conducted to on the same trading platform with the cumulative placements not exceeding the NT$30 million. The issuer must also ensure that the raised funds are denominated in the New Taiwan Dollar (NT$).
Additionally, the issuer should show the relevant issuance documents in an application to a security firm like the prospectus and security token application.
The prospectus, in particular, should include:
- The Company Profile and Risks.
- The Operation Overview.
- The Operating Plan and Execution.
- The Financial Overview.
- An Expert’s Opinion on the Information Technology used in the issuance of the security token
- Financial (non-certifying CPAs or securities underwriter) Expert’s Opinion about how reasonable the issuance price is.
- Attorney’s opinion on whether the issuance of the security token complies with the set regulations and if the fundraising project adheres to the set legal rules.
- Any other documents that should be disclosed and supplemented as per the securities firm notification.
The security firm that the issuers choose to use should have a securities dealer license.
STO investors should be professional investors that qualify as per the criteria under paragraph 3 of Article 3 of the Offshore Structured Products regulations.
For the Exempt STO, the amount that a professional investor can subscribe should not exceed the limit of NT$300000.
For an STO to qualify for the “Exempt STO” it should target raising NT$30 million, which is equivalent to $1003764 USD. This is relatively low and means that most of the security token offerings will most likely not fall under the Exempt STO category. The Exempt STO category is however good for the small startups looking to raise a small capital.
Secondly, only professional investors as per the Offshore Structured Products regulations can participate in an STO. Also, the maximum amount that an investor can cash in cannot exceed NT$300,000 on a single STO.
Thirdly, STO funding is limited to the New Taiwan Dollar (NT$). This makes it increasingly difficult for foreign investors. Also, issuers cannot raise funds in other cryptocurrencies or USD as is the norm with most STOs.
Fourthly, an STO can only raise funds through one platform. Therefore, one STO cannot use different platforms to issue security tokens. Also, there is a limit to the number of STOs that can be accepted by each trading platform. This reduces market participation of STO issuers and operators of the trading platform.
Fifthly and lastly, there are many business restrictions and strict qualifications for security token trading platform operators.