We recently posted an article on LinkedIn about Initial Exchange Offerings (IEOs). We received some questions which relate to three main topics.
Who is responsible for running AML and CTF checks on their subscribers of the IEO? Is it the issuer or the exchange?
The answer to this question can’t be found in law books, yet, but it’s true that the exchange is the only entity in direct contact with the investors and is also the owner of the information about them. So I’d feel quite comfortable in saying that it is the exchange the entity in charge of all compliance-related controls.
Can I run an IEO wherever I’m based and can I partner with an exchange wherever it’s based?
The answer to this question is just a ‘no.’ On the point of law, an IEO could be easily considered as an ICO with only one subscriber, which is the exchange. So if you’re allowed to run an ICO in your country, then you should be allowed to run an IEO as well. On the contrary, if your jurisdiction doesn’t permit ICOs, you should forget about an IEO from there.
When it comes to the identification of the exchange, the first best is to identify a platform which is based on your same country. In this case, the regulator could supervise both you and the exchange at the same time. I understand that this isn’t always possible or can be found inconvenient, so in these circumstances, I strongly recommend you to identify an exchange whose AML and CTF policies substantially comply with your own legal and regulatory framework.
Should I apply for a no-action letter before I run an IEO?
This is a tough question, the hardest one I would say, and it requires the lawyer’s answer, which is, unfortunately, ‘yes and no.’
On the one hand, a no-action letter on your records is, of course, your safest harbour. This is the yes-part of the answer. But, on the other hand, at least 3 reasons could hold you back from applying for a no-action letter.
Reason number 1, don’t apply for a no-action letter if you aren’t sure that your application can demonstrate your full and clear understanding of the legal and regulatory framework applicable to your project. A no-action letter request isn’t just a long shot so be sure that your application is able to anticipate the doubts or the concerns of the regulator and reassure the official in charge of your request about them.
Reason number 2, not all regulators are created equal when it comes to their availability or capacity to provide you with feedback in a timely fashion. Some of them could take just a few weeks, some others several months, so apply for a no-action letter only if you have a
realistic estimation of the timeframe needed by the regulator and if this timeframe fits with your business needs.
Reason number 3, don’t apply for a no-action letter if you don’t have a plan B immediately available. There is always a chance that the regulator refuses to grant you a no-action letter or there is also a chance that the regulator doesn’t respond to you in the timeframe you expected. So in the first case -a refusal- your alternative plan could be a partial remodelling of your business so that the regulator can review its decision. In the second case -a delay in the answer- your plan B could consist of an application filed with a different regulator, meaning the regulator of a different country which you have identified at first.
This article was originally published in “Blockchain Compliance Bulletin”, number 8. Cover image: © profit_image/AdobeStock.