MALTA — ICOs
THE NEW LEGISLATION
(Updated 4th edition)

A. INTRODUCTION

Initial Coin Offering, known as “ICO”, is a relatively new phenomenon that has quickly become the main player in the Financial Services and Crowdfunding industries, as well as being the key subject of discussion in the Blockchain communities. In essence, it is one of the most advanced methods of raising finance from the public and is becoming increasingly popular to fundraise start-ups.

B. TO WHOM DOES THE NEW LAW APPLY?

The new legislation applies to anyone who in or from within Malta:

C. DEFINITION OF VIRTUAL FINANCIAL ASSET (VFA)

By way of a definition, a VFA is any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not one of the following as defined below:

D. FINANCIAL INSTRUMENT TEST

An Issuer of a VFA shall, prior to offering such asset to the public in or from within Malta, or applying for its admission on a DLT exchange, undertake the Financial Instrument Test (hereinafter “the Test”).

  1. If it is not qualified as a Virtual Token, then one has to determine whether this qualifies as a Financial Instrument under MiFID (Section C, Annex 1) considering all the categories of Financial Instatements as identified above. If the answer is negative, then the asset is caught under the VFA Law and its licensing procedure must be followed.

E. SALIENT FEATURES OF THE ICO PROCESS

F. STRUCTURE OF THE ISSUER OF THE ICO

The regulations stipulate the following general requirements which must be met at all times by the Issuer of the VFA.

G. DOCUMENTATION TO BE SUBMITTED FOR ICO

An Issuer wishing to offer VFA to the public (i.e. ICO) in or from Malta shall prepare the following documents, which will be submitted to the MFSA through its VFA Agent:

H. ISSUING OF A VFA — REQUIREMENT OF A WHITEPAPER

The law prescribes that a whitepaper which will be registered and in effect approved by MFSA is compulsory in order for an issuer to:

I. BOARD OF ADMINISTRATION

The Issuer’s Board of Administration shall be responsible for ensuring that the Issuer complies with its obligations under the laws.

J. FUNCTIONARIES OF THE ISSUER

By law, the Issuer is required to appoint the following Functionaries:

1. VFA Agent

An issuer of a VFA is required to appoint, and have at all times in place, a VFA agent who is duly registered with the MFSA and duly approved by the same. The VFA Agent must at all times remain independent from the issuer.

2. Systems Auditor

Where an issuer has Innovative Technology Arrangements in place (e.g. Smart Contracts, DLT Platform), such Issuer has to appoint and have at all times a Systems Auditor, who needs to be approved by the MFSA. The authority may object to the appointment and may replace such Systems Auditor.

3. Custodian

The regulations require the appointment of a Custodian, in order to be responsible for the safekeeping of the assets and investors’ funds. The MFSA consent is required prior to such appointment.

4. Auditor

The law requires every Issuer to have at all times an Auditor that is approved by the MFSA who has to be experienced and qualified to act as such to the Issuer.

5. Money Laundering Reporting Officer (MLRO)

The Issuer must at all times have a duly qualified MLRO who must:

K. I.T. SYSTEMS & INFRASTRUCTURE

The regulations stipulate that the Issuer needs to have in place the following systems:

1. Cyber Security Framework

It is compulsory for the Issuer to have a Cyber Security Framework that complies with internationally recognized cyber security standards and be in line with the General Data Protection Regulations (GDPR).

2. Record Keeping Facilities

The Issuer has to maintain documents for a minimum of 5 years and must be made available to the MFSA whenever required. It is important that storage is made in a manner that:

3. I.T. Infrastructure

The Issuer shall ascertain that its I.T. infrastructure ensures:

L. ADVERTISEMENT

If the issuer maintains a website, its homepage shall contain such information and in such a format as may be required by the MFSA by means of duly published Rules.

M. ADMISSION TO TRADING ON A VFA EXCHANGE

A person can apply for admission of its VFA to trading on a VFA exchange. This application can only be made through a VFA Agent.

N. DUTIES OF THE ISSUER

By law, the issuer shall:

O. DUTIES UNDER ANTI-MONEY LAUNDERING LAWS

By law, the issuer shall be considered a Subject Person in terms of the Anti-Money Laundering laws.

P. CERTIFICATE OF COMPLIANCE & ANNUAL REPORTS

The issuer shall be required to submit on an annual basis a certificate of compliance to the MFSA which will be drawn up by the Issuer, reviewed by the VFA Agent and signed by all the members of the Issuer’s Board of Administration.

Q. INVESTOR PROTECTION

One of the MFSA’s main policies is to ensure investor protection. In order to further mitigate risks and enhance investor protection, the MFSA is requiring enhanced measures, apart from the requisite of the Custodian. In fact, the laws require the following:

R. POWERS OF THE MFSA

The MFSA has broad powers in relation to the issuance of the VFA, including the power to:

S. CORPORATE TAXATION

As a company resident in Malta, a License holder may also benefit from the advantageous fiscal treatment wherein a shareholder may apply for refunds equivalent to 6/7th of the income tax paid at corporate level, leaving the tax leakage to a maximum of 5% on company profits.

T. CONCLUSION

ICOs are an innovative and quick method for companies to raise capital. This new method requires ad hoc regulations, in order to maximize efficiency and investor protection. Via the introduction of the new regulations, Malta has become the first jurisdiction in the world to have specific laws on this, and this will render the island the natural choice of jurisdiction for ICO issuing companies.

ANNEX I — FORMAT AND CONTENTS OF WHITEPAPER

The whitepaper shall contain the information which, according to the particular nature of the issuer and of the Virtual Financial Assets (VFA) offered to the public, is necessary to enable investors to make an informed assessment of the prospects of the issuer, the proposed project and of the features of the VFA.

ANNEX II — LICENSING FEES PAYABLE TO THE MFSA

The fees payable to the MFSA are as follows:

Mr. Kinanis is a practicing Lawyer in Cyprus with 35 years experience in the Law profession. Author of various articles on Legal and Tax matters.

Mr. Kinanis is a practicing Lawyer in Cyprus with 35 years experience in the Law profession. Author of various articles on Legal and Tax matters.