The Philippine Securities and Exchange Commission (SEC) finally said it: initial coin offerings (ICOs) are illegal if the issuers don’t register the coins with the regulators.

That was the thing I had asked them way back in November last year when Joseph Calata declared on national TV that he will offer Calata Corp minority shareholders coins in exchange for their shares as an exit in the wake of the company’s delisting and ban from the Philippine Stock Exchange (PSE). At that time, the SEC Commissioners were very careful with their response to my query. They said they are closely watching what their counterparts in Singapore and Malaysia are going to do in light of the increase in ICOs being conducted in the region.

So last week, the SEC finally issued the cease and desist order (CDO) on the Krops ICO by companies headed by Calata.

The idiot Calata reminds me of Pharma Bro. Seems like he doesn’t have any conscience at all. As I told a friend over on Facebook, para syang ipis na binato mo na ng tsinelas pero buhay pa rin. Lumipad pa papunta sa yo! Anyway, that’s a different topic for another blog entry.

So in November, I asked the SEC what they thought of cryptocurrencies and ICOs. Commissioner Emiliano Aquino said ICOs are risky and their Malaysian counterparts have issued that warning to the public. He said the Malaysian authorities will be coming out with their own set of rules governing ICOs and cryptocurrencies soon and the Philippines will be watching out for that. As it is, there are no black and white rules on ICOs yet anywhere in the world, except for the bans imposed by China and South Korea.

Aquino had said then they he personally thought that coins, in the context of ICOs, are securities,  just as what the Hong Kong and Thai regulators have declared.

“They can be considered as investment contracts so the SEC can invoke its authority over such fundraising activities. But this is a new territory and we cannot just quickly swoop in with new rules. This has to be thought carefully because we don’t want to stifle the potential of these new instruments,” he said.

I asked Bangko Sentral ng Pilipinas (BSP, the central bank) Governor Nestor Espenilla what does he think coins are, since the BSP has recognized two local coin exchangers who use these instruments in remittance services. He said:

“If it looks like a security, smells like a security, quacks like a security, then it is a security.”

There you go.

Fast forward to 29 January  2018. The SEC called for a press conference to discuss the Krop coins and ICOs in general.

So Comm. Aquino has formally declared ICOs illegal if these coins are not registered with the SEC. Because essentially these coins are securities because they are instruments used to raise funds from other people. All securities are under the purview of the SEC.

So what are securities? Securities = they secure an investment. As mentioned above, these are contracts that ensure an investor will get something back for the amount he/she injected into a company. It can be in the form of debt (bonds, notes, commercial papers) or shares (as in equities = common shares or preferred shares) or a hybrid of that.

So no argument there, coins are securities and under the Securities Regulation Code, the SEC is the authority on that.

But why would start-ups register their coins with regulators and go through the hoops like in a regular initial public offering when the main reason why they would like to launch an ICO is they want to evade regulation and raise money fast? There is little incentive for them to do that when they could do an ICO somewhere else since we live now in a borderless world.

If we go back to the origins of digital currencies, specifically bitcoins, this quote from the creator of bitcoin is very telling: “a system for electronic transactions without relying on trust” (based on the paper Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto). Essentially, the creators, users, and investors want a currency system that is beyond the reach of central banks. No regulators, just algorithms.

I have interviewed some foreign start-ups about their fundraising plans and one of them said they want to launch an ICO this year in Hong Kong alongside their Series B fundraise because 1) it’s faster than venture capital fundraise since VC requirements are stringent (but of course they should be, they’re plunking money on unproven businesses!); and 2) there will be no or minimal dilution of existing/angel investors.

And mind you, there is an active market in Southeast Asia now for ICOs. Crowd Genie, the licensed Singapore-based peer-to-peer (P2P) lending platform, is currently conducting its ICO to raise USD 5m. I think I read somewhere that the Monetary Authority of Singapore (MAS) is closely watching this ICO to make this it’s test case.

So, if ICOs can be conducted anywhere in the world and can offer the coins to whoever, how can the Philippine SEC keep Filipinos and OFWs (they seem to be the prime target of ICOs by shady companies being tracked now by the SEC) from being victimized by dodgy coin issuers? Can they physically run after the operations of these companies like what they did with “boiler rooms” ten years ago?

Comm Aquino said they can. They are now also enlisting the help of HK authorities to verify the registration of Calata’s Krop company (because he claimed the ICO will be done in HK). Aquino said, the HK authorities have also declared unregistered ICOs illegal while those in mainland China have altogether banned the exercise.

This is just the beginning of the ICO saga.

I’ve read somewhere that VCs are now beginning to feel the competition as start-ups now turn to ICOs for fundraising. Will VC’s role in growth capital raising be dimished? We’ll see.