NZ’s Financial Market’s Authority recently released guidance on the regulation of ICOs under NZ securities laws – in particular under the Financial Markets Conduct Act 2013 (FMCA). This follows a spate of similar guidance releases by securities regulators around the world.

The FMA’s guidance is pretty conservative. They advise that:

• all tokens and cryptocurrencies are securities under the FMCA (a blanket categorisation that is unlikely to help NZ’s fledgling blockchain services industry to promote NZ as a destination for blockchain entrepreneurs)
• tokens and cryptocurrencies that fall within one of the four categories of financial product defined in FMCA (equity securities, debt securities, managed investment products and derivatives) may only be offered to retail investors if a product disclosure statement (a prospectus) is registered and other regulatory requirements are met. In the case of debt securities and managed investment products, which are the categories most likely to catch ICO’s, the regulatory requirements include registration of a trust deed and appointment of a statutory supervisor
• tokens and cryptocurrencies that don’t fall into one of the four financial product categories are still liable to be regulated by the FMA, based on the economic substance of the token or coin. The FMA would do this by designating the instrument as a financial product under its broad regulatory powers.

Compliance with the product disclosure statement regime and other regulatory requirements is unlikely to be attractive to NZ entrepreneurs interested in raising funds via an ICO. The costs of compliance are significant, whereas the NZ retail market for this type of investment is diminishingly small in comparison to international markets.

NZ entrepreneurs will be able to offer tokens in an ICO to wholesale investors, using the same criteria that apply to any tech company private capital raising. However, this may not be worthwhile, again due to the small size of NZ’s wholesale capital pool for high risk investments.

How will this affect the participation of NZ investors in offshore ICOs? Our guess is that the blanket designation of tokens and cryptocurrencies as securities will see NZ investors excluded from ICO’s run by reputable players in ICO markets, who will generally wish to avoid regulatory complexity in minor markets.