As part of our ongoing investor activism, we take issue with the instrument risk of IEOs.

by Celebrus Advisory

The following was published as a LinkedIn post on May 8, 2023 at this link.

We sincerely hope the Securities Commission Malaysia can provide much-needed clarity to the following.

First of all, thumbs up for launching the IEO regime to the public! Platforms can now issue “equity tokens” for cash-hungry businesses. According to an operator’s press announcement, these tokens are “asset-backed”.

At closer look however, details are fuzzy. Despite calling them “equity tokens”, the tokens are not really equity, is it? From our limited and unsophisticated understanding: If the name sounds like a duck and is marketed like a duck, we assume it’s a duck. But we know it’s not so, as the law explicitly says tokens are not equity!

Instead of a shareholders’ agreement that investors are familiar with, it seems that we must rely on a pseudo untested version of it. This is being used to canvass an exotic high-risk instrument, which normally won’t be placed out to the retail public. But here we are.

Should disputes arise, there is no statutory investor protection for IEO investors – as we aren’t shareholders. Apparently, no one claims to have fiduciary duty, even for a RM100 million raise – which is higher than many IPOs on Bursa! No one claims to be the principal adviser – despite the requirements for crypto-specific accounting, corporate finance, and valuation in the whitepaper. We also note that the platform is not CMSL licensed and there is no redress path via SIDREC.

Hence if investors need to seek recourse and ascertain our rights, we have no choice but to litigate through the courts, which would cost us a lot of money, effort, and time – on top of our emotional pain and suffering.

If the issuer becomes insolvent, which is all too common for early-stage businesses, what happens to the “equity tokens”? We aren’t certain that domestic law allows tokens to be charged on assets. We can’t even sell these tokens because there is no exit!

Please don’t get us wrong. We are big believers in innovation. But unlike tokenization models elsewhere, it appears that the blockchain is reduced to mere record-keeping for IEOs. There is no smart contract automation for capital contribution and distribution, no security token standard, no atomic settlement, no post-trade servicing machinery – the entire process is still performed off-chain. It is as innovative as being scripless.

Lastly, we humbly apologize for the questions above due to our confused state of mind, and hope to be educated about the proprietary nature of digital tokens in Malaysia (in the absence of any case law and legislation). In the meantime, can we please go back to good old-fashioned shares while this IEO model gets straightened out?

We welcome access to private markets, but we shouldn’t have to be guinea pigs for it. Please understand.

Concerned Retail Investors #digitalassets #IEO