New frontiers in fintech & cryptos

The Asia-Pacific region has seen a surge of fintech start-ups, service providers, suppliers, investors, consumers and other stakeholders in recent years. Many business sectors have experienced innovative and disruptive technological developments at varying degrees. Trends in the fintech sector have progressed from an early focus on blockchain and distributed ledger to artificial intelligence (AI), cryptocurrencies and initial coin offerings (ICOs), as well as security token offerings and the setting up of crypto platforms and internet banks, etc.

It has become clear throughout the advancement of financial innovation in Asia that a sound legal and regulatory regime in which businesses can operate is key to success. When fintech first emerged, a number of jurisdictions rushed to position themselves as the technology and innovation hub in the region. However, only those jurisdictions with well-developed legislation are able to maintain their leading position. Bermuda is a prime example of this.

Bermuda is a leading international financial centre with a long history of providing pragmatic financial and professional services to the (re)insurance, investment fund, asset management and trust sectors, which are supported by a world-class advisory and financial services infrastructure. In more recent years, Bermuda has expanded its offering to international businesses through the innovative and forward thinking introduction of a legal and regulatory framework designed to govern and regulate ICOs and the digital asset business and insurtech sectors (regime).

The regime sets out expected standards of disclosure for ICOs, a dual licensing system (including sandbox) for anyone seeking to provide digital asset business services in or from Bermuda, and both a sandbox regime and innovation hub for the insurtech sector.

ICOs

It is of particular note that the ICO regime governs all types of coin and token offerings, whether or not they are deemed utility tokens, securities or otherwise anywhere else in the world, which allows for certainty of treatment for issuers no matter what form their coin or token takes. It also provides a level of credibility that the issuer has received the permission of the applicable minister to conduct the offering following completion of a thorough application process.

ICOs are regulated under the Companies Act 1981 and the Limited Liabilities Act 2016. The ICO legislation strikes a balance between market integrity and consumer protection.

Only companies registered under the Companies Act and Limited Liabilities Act, and that have ministerial consent, are permitted to issue ICOs in or from within Bermuda.

ICOs are treated as a restricted business activity requiring prior consent from the minister. To assist with the vetting of applications, a fintech advisory committee assists in the review of each application and makes recommendations to the minister.

Once consent is received, a company must publish an ICO offer document in electronic form. Subject to specific statutory exemptions, a company is required to file the document with the Bermuda Registrar of Companies.

ICO issuers must also have appropriate procedures in place to ensure that they verify the identity of the participants in the ICO and also ensure that all confidentiality, privacy and disclosure of information obligations are complied with by the issuer under Bermuda law.

Companies conducting an ICO must establish procedures to comply with local AML/ATF requirements including but not limited to participant due diligence.

Digital asset business

The Digital Asset Business Act (DABA) introduced a two-class licensing system that includes a class M licence, which allows for a proof-of-concept stage in order to test new products, services and technologies. The legal and regulatory requirements that the applicants request can be modified for the duration of the class M licence.

DABA regulates all digital asset business carried on, in or from within Bermuda and provides that a person cannot carry on digital business unless they are licensed or fall within an exempt category. “Digital Asset Business” is defined as the business of providing any or all of the following activities to the general public:

1. Issuing, selling or redeeming virtual coins, tokens or any other form of digital asset;
2. Operating as a payment service provider business utilizing digital assets, which includes the provision of services for the transfer of funds;
3. Operating an electronic exchange;
4. Providing custodial wallet services; and
5. Operating as a digital asset services vendor.

The BMA regulates digital asset business conducted in or from Bermuda. There are two classes of digital asset business licence that may be applied for under the DABA. These are:

1. Class F licence, under which the applicant shall be licensed to provide a digital asset business; or
2. Class M licence (the regulatory sandbox), under which the applicant shall be licensed to provide restricted digital asset business for a defined period determined by the BMA, which may be extended upon application to the BMA.

Anti-money laundering and anti-terrorist financing (AML/ATF) legislation and regulation in Bermuda are based on recommendations promulgated by the financial action task force (FATF).

Any company conducting digital asset business must comply with applicable AML/ATF requirements. Adoption of a comprehensive AML/ATF framework is integral to the conduct and licensing of digital asset business in Bermuda.

Insurtech

Bermuda has long been at the forefront of providing innovative solutions in the insurance industry and boasts the largest insurance-linked securities (ILS) and captive sectors in the world. Leveraging Bermuda’s reputation as a centre of excellence for innovation in a sound regulatory environment, the BMA has launched two parallel innovation tracks: the insurance regulatory sandbox (IR sandbox) and an innovation hub, both initially targeted at insurance technology (insurtech) companies.

The IR sandbox is a regulated environment established by the BMA in which companies can test new technologies and offer innovative products and services to a limited number of customers in a controlled environment, and for a limited period of time.

Some of the benefits of the sandbox include providing a safe and transparent environment for companies to test their innovations, giving the BMA the opportunity to work together with the company before new products are released to market, increasing efficiency by reducing the amount of time and cost for products to reach market, and reducing the cost of regulatory uncertainty for start-ups.

The sandbox is available for entities registered, or proposing to become registered, under section 4 (insurer) or section 10 (insurance intermediaries) of the Insurance Act 1978, as amended.

Upon approval of concept, the company will be assigned a temporary licence and will be allowed to operate within the sandbox. Upon completion of the proof-of-concept phase, the company must submit a final report to the BMA on the outcomes of the testing. After review of the report and approval for the company to commence operations outside of the sandbox by the BMA, the company will be issued a licence in accordance with the company’s business model and existing insurance licence regime (as outlined above).

The innovation hub is a platform for exchanging ideas and information; it facilitates dialogue between the BMA and market participants. This space is intended for activities that are not directly regulated by the BMA, or where a company is still developing its thoughts and ideas and not yet prepared for proof of concept, and is therefore not ready to apply for entry into the sandbox.

Conclusion

The Bermuda government has made remarkable progress in a very short period of time in establishing a world-renowned digital asset-specific regulatory and legislative ecosystem in which technology companies, whether launching ICOs, offering digital asset business services or insurance technology solutions, have certainty and credibility in their business dealings.

The government has also introduced cross-departmental policies to streamline the process for establishing technology companies in Bermuda, as well as attractive immigration policies and payroll tax relief to give immediate economic benefit to people establishing their technology business in Bermuda, which further shows its commitment to supporting international businesses serious about developing this fast growing sector. Many fintech businesses in Asia have recognized the distinctive features of the Bermuda regime.

APPLEBY Hong Kong office
2206-19 Jardine House,
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www.applebyglobal.com

‘Light touch’ provisional liquidation regime

If a company becomes insolvent or experiences a liquidity crunch, which necessitates a restructuring or resort to higher-risk financing arrangements, the directors should consider whether to commence formal proceedings to facilitate the restructuring or financing.

Where the directors believe the company is still viable, the company may seek to implement a management-led restructuring by taking advantage of Bermuda’s court-supervised provisional liquidation, commonly known as a “light touch” provisional liquidation, which gives the company the benefit of a statutory moratorium prohibiting the commencement or continuance of any proceedings against the company without the leave of the Supreme Court of Bermuda.

The principal purpose of Bermuda’s provisional liquidation regime is to allow a company and its board of directors the time and space to implement and promote among existing stakeholders a restructuring which may return the company to solvency, while giving creditors comfort that management is operating under the supervision of a provisional liquidator and the court.

The process of restructuring may take different forms, including the purchase by a third party of distressed debt, an equity injection by a “white knight” investor, or promoting and implementing a scheme of arrangement (described further below) pursuant to which the company enters into a scheme with its members and/or creditors pursuant to sections 99 and 100 of the Companies Act 1981.

Procedure

Companies wishing to take advantage of the provisional liquidation regime must first present a winding-up petition to the court under section 161 of the act. A petition may be presented by the company’s creditors or the company itself, though in the context of a restructuring it is often the company itself that presents the petition.

Once the petition is presented, the company may make an application to appoint a provisional liquidator with limited powers based on the court’s powers under sections 164 and 170 of the act. Once the provisional liquidator has been appointed, the hearing of the winding-up petition will most likely be adjourned in order to allow the restructuring to proceed. The appointment is typically headed “In Provisional Liquidation For restructuring purposes only”.

The appointment invokes a statutory moratorium on any proceedings being brought against the company without the leave of the court, thereby preventing dissenting minority creditors from forcing the winding-up of the company while the directors evaluate and implement a restructuring to ensure that the company may continue as a going concern. It should be noted that despite the statutory moratorium, secured creditors remain entitled to enforce their security against the company provided they do not require recourse to proceedings to do so.

Maintaining control of the company

A provisional liquidator may only exercise those functions and powers conferred on him by the order of the court appointing him. As a result, the company may request the court to empower the provisional liquidator with soft powers only, thereby limiting his/her powers to overseeing the company’s board and management as the restructuring is implemented. This allows the existing board to retain control of the company’s affairs and drive the restructuring under the supervision of the provisional liquidator and the court.

Schemes of arrangement

Once a provisional liquidator has been appointed, the company may enter into a scheme of arrangement with its creditors and/or its members (or any class of creditors and/or members) under sections 99 and 100 of the act.

A Bermuda scheme of arrangement is similar to an English scheme of arrangement under part 26 of the Companies Act 2006, or a Hong Kong scheme of arrangement under part 13, division 2 of the new Companies Ordinance, and is most commonly used to implement a distressed financial restructuring by varying the rights of the relevant stakeholders of the company, although it can be used for other purposes in a non-insolvency context.

Scheme benefits

Schemes are particularly helpful for companies dealing with dissenting creditors, whose claims may be compromised without their unanimous consent, provided that the requisite voting thresholds are satisfied. Schemes are also an important tool for implementing a restructuring in the context of longstanding listed companies with complex creditor structures that are the legacy of multiple rounds of financing over time.

More generally, a scheme of arrangement is a flexible tool that companies can use to implement a broad range of restructuring solutions, and since a scheme is not an insolvency process, it can (and where possible should) be initiated before the company has entered the “zone of insolvency”, resulting in less stigma compared to formal insolvency proceedings.

Scheme procedure

In the context of a provisional liquidation, once the commercial terms of the scheme are agreed, the provisional liquidator will apply to the court for an order summoning a meeting of the creditors and/or members (or any class of creditors and/or members) as applicable, to place the scheme before them for approval.

Once the meeting has been summoned, a formal scheme document and explanatory statement outlining the effect of the arrangement, and in particular any material interests of the directors of the company (in their capacity as directors, members or creditors of the company or otherwise), will be circulated to the creditors or members with the notice of the scheme meeting.

The scheme must receive the approval of a majority in number representing 75% in value of each class of creditor or member present and voting at the scheme meeting (in person or by proxy). Court sanction of a scheme will be required before the scheme may become effective.

An agreed scheme of arrangement that has been sanctioned by the court and filed with the Registrar of Companies is a legally binding document that may be enforced as a matter of contract. If the required support cannot be obtained and a satisfactory proposal cannot be agreed upon, the provisional liquidator would report this to the court and, in most cases, a winding-up of the company would ensue.

Benefits of provisional liquidation

The “light touch” provisional liquidation procedure is recognized as a flexible tool that can be used to provide a company breathing space in which to implement a restructuring under the supervision of the court without displacing management, and to ultimately continue as a going concern. The statutory moratorium on proceedings against the company allows the directors to focus on implementing the restructuring free from the distraction or risk of creditors bringing winding-up proceedings against the company.

In addition to the benefits of the statutory moratorium and the ability of management to retain control over the restructuring procedure (albeit under the supervision of the provisional liquidator and the court), provisional liquidation gives confidence to both creditors and the court that the restructuring process has been completed thoroughly and with a focus on protecting creditor interests.

CAREY OLSEN (HONG KONG)
Suite 4120 Jardine House
1 Connaught Place, Hong Kong
+852 3628 9000
hongkong@careyolsen.com
www.careyolsen.co

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