The Financial Markets Conduct Act 2013 could apply to the issue of digital tokens in an Initial Coin Offering (ICO) if the offer is received by a person in New Zealand, law firm Russell McVeagh says.

The firm has released a publication, Initial Coin Offerings, which looks at the legal issues around ICOs.

An ICO (or "token sale") is a fundraising tool which is increasingly popular for raising capital. No shares are issued. Organisations conducting an ICO (which may not be legal entities capable of issuing shares) issue tokens on a blockchain digital ledger.

The tokens issued in an ICO can confer a variety of different rights on the purchaser, which may not include rights traditionally associated with shares (such as rights to participate in governance and to receive a share of the organisation's residual profits).

Russell McVeagh partner Deemple Budhia says the wide territorial scope of the Financial Markets Conduct Act may subject a significant number of ICOs to New Zealand regulatory requirements and "raises important questions about how these legal obligations can or will be enforced, and particularly, in respect of ICOs based outside New Zealand".

She says whether the Act will be engaged by any particular ICO must be determined by reference to the facts and circumstances of that ICO.

"For each ICO, it is necessary to qualitatively evaluate the rights conferred by the tokens issued in the ICO and evaluate these against the definitions of each of the financial products regulated by the Act.

"It is entirely possible that a token issued in an ICO could be classified as any one of the financial products regulated by the FMCA, or alternatively fall outside the scope of the FMCA. Where a token falls outside scope, the FMA may nevertheless use its designation power to declare a product is a financial product if the circumstances warrant such a designation."