An Initial Coin Offering (ICO), also called an Initial Token Offering (ITO), is a common crowdsale mechanism (collectively collaborating to pool financial resources to invest in a project) by selling crypto coins or tokens in exchange for virtual money (usually bitcoin or ether) or fiat currency.
Early investors usually buy coins or tokens in the hope that the project will be launched successfully. Therefore, the value of the coins or tokens will increase. However, this method of funding is controversial due to fraudulent schemes under the guise of ICOs.
Blockchain specialists are currently working on a fair ICO standard capable of preventing fraudulent schemes. Many worldwide organizations published notices.
Although the laws governing ICOs have not yet been issued in the UAE, in October 2017, the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Marketplace (ADGM). It is a financial free zone in Abu Dhabi, issued an instruction with guidance on ICO regulation.
It clarified that the tokens sold would be treated as securities or as specific investments or commodities, depending on the underlying legal structure and assets.
ICOs defined as securities or investments require strict adherence to the rules for the circulation of securities. At the same time, ICOs that are classified as services are not necessarily regulated in this way.
Other UAE regulators have been more cautious. In September 2017, the Dubai Financial Services Authority (DFSA) of the Dubai International Financial Center Free Zone issued a general warning about investing in cryptocurrencies and ICOs.
In addition, the Securities and Commodities Authority (SCA), the Securities and Commodities Regulator of the UAE, on 4/02/2018 issued a notice stating that token-based fundraising is risky.
Despite the warnings against ICOs / ITOs, these documents are notable for not declaring a ban on ICOs / ITOs. The DFSA and SCA not regulated them.
An ICO can also be initiated through a company established in an “ICO-friendly” jurisdiction such as Gibraltar, Switzerland, Singapore.
Several ICOs have been announced in the UAE over the past six months, including Afterschool, Royal Kingdom Coin and FARAD. Afterschool’s initiators sold 11 million tokens. But then stopped the sale, stating that they would return the funds raised to buyers in light of the aforementioned ADGM FSRA circular.
ICO Royal Kingdom Coin raised a more modest amount. UAE is fertile ground for ICOs in the near future.
Companies considering issuing an ICO should pay close attention to the controversial, rapidly changing legal policy of ICOs and, in any case, will seek competent legal advice.
To get advice on registering a company for ICO in the UAE, please contact our specialist.