When raising capital, many companies immediately think of issuing stocks or bonds. However, the financial landscape offers a broader range of instruments—some traditional, others emerging through technology. One such innovation is cryptocurrency, which has sparked interest among startups and established firms alike. But can a company legally issue digital tokens to raise funds? And if so, are there regulatory obligations, such as providing a prospectus?
This article explores the full spectrum of securities under financial regulations, clarifies whether virtual currencies can qualify as securities, and outlines key legal considerations for companies exploring alternative fundraising methods.
Understanding Securities Under Financial Law
At the heart of capital markets regulation lies the concept of "securities"—financial instruments that represent an investment in a business or project. In most jurisdictions, including Taiwan, securities are governed by laws like the Securities and Exchange Act, which defines what qualifies as a security and sets compliance requirements for issuance.
What Qualifies as a Security?
Securities are generally defined as instruments that:
- Represent a monetary value,
- Are transferable or tradable,
- Involve an investment component where returns depend on the efforts of others.
Under the Securities and Exchange Act, recognized types of securities include:
- Government bonds
- Corporate stocks
- Corporate bonds
- Other instruments designated by the regulatory authority
While stocks and bonds are well-known, the fourth category—"other designated securities"—is particularly important because it allows regulators to adapt to new financial innovations, including digital assets.
👉 Discover how modern financial instruments are reshaping investment opportunities today.
The Expanding Definition: Regulator-Approved Securities
To prevent regulatory gaps, the law adopts a "closed list with open-ended authorization" model. This means while only specific instruments are explicitly listed, regulators have the power to include new types.
Currently approved securities beyond traditional ones include:
- Foreign stocks, bonds, and government debt traded domestically
- Taiwan Depositary Receipts (TDRs)
- Investment contracts for overseas funds managed by overseas managers
- Beneficiary certificates issued by securities investment trusts
- Warrants issued by third parties (not the underlying company)
- Coupon payments from bond interest, when separated
- Futures investment trust beneficiary certificates
- Index-linked securities issued by broker-dealers
- Virtual currencies with securities characteristics
Notably, virtual currencies deemed to have securities-like features are officially recognized as securities by the Financial Supervisory Commission (FSC). This classification is critical—it means that issuing certain types of crypto tokens isn't just a tech move; it's a regulated financial act.
What Makes a Cryptocurrency a Security?
Not all cryptocurrencies are securities. Bitcoin and Ethereum (in its current form) are often treated as commodities or mediums of exchange. But when a digital token is used to raise funds with profit expectations tied to a company’s performance, it may cross into securities territory.
Four Key Criteria for Security Classification
The FSC uses a four-part test to determine whether a virtual currency qualifies as a security:
- Investment of Money – Investors contribute funds in exchange for the token.
- Common Enterprise – The funds support a centralized business or project.
- Expectation of Profit – Holders anticipate returns, such as dividends or resale gains.
- Reliance on Third-Party Efforts – Profits depend primarily on the issuer’s or promoter’s work.
Let’s apply this to our case: Company A plans to issue a virtual currency that investors will purchase. The proceeds will fund company operations, and holders will receive profit-sharing based on future performance.
- ✅ Investment of money? Yes — investors pay to acquire tokens.
- ✅ Common enterprise? Yes — funds go toward Company A’s operations.
- ✅ Expectation of profit? Yes — holders get dividends linked to company success.
- ✅ Reliance on issuer effort? Yes — returns depend on Company A’s management.
All four criteria are met. Therefore, this virtual currency is legally considered a security.
Implications for Companies
If a token qualifies as a security, issuing it triggers legal obligations:
- A public offering requires a prospectus (公开说明书), disclosing financials, risks, use of proceeds, and management details.
- Even private placements may require disclosures depending on investor type and scale.
- Failure to comply can result in penalties, investor lawsuits, or fundraising invalidation.
But here's a twist: Company A wanted to avoid issuing a prospectus. Unfortunately, if their token is a security, that’s not an option—unless they restructure the offering entirely.
Can You Issue Crypto Without Creating a Security?
Yes—but only if the token doesn’t meet the four criteria above.
For example:
- A utility token that grants access to a service (e.g., platform credits) and isn’t tied to profits may not be a security.
- A commemorative digital collectible with no financial return expectation likely falls outside securities law.
- A decentralized network token, where value isn’t driven by a central team’s efforts, might also avoid classification.
However, once profit-sharing, dividend rights, or resale expectations are introduced—especially based on company performance—the line is crossed.
Who Can Invest in Security Tokens?
Even more restrictive: only professional investors—such as banks, insurers, and licensed securities firms—can participate in private placements of security tokens in Taiwan.
This means Company A cannot offer its investment-linked crypto token to the general public. Retail investors are excluded unless the offering goes through a full public registration process, which includes:
- Prospectus filing
- Regulatory review
- Ongoing disclosure requirements
👉 See how compliant blockchain-based fundraising is evolving in regulated markets.
Frequently Asked Questions (FAQ)
Q1: Are all cryptocurrencies considered securities?
No. Only those that meet the four criteria—investment of money, common enterprise, profit expectation, and reliance on third-party effort—are classified as securities. Utility or payment-focused tokens without profit promises typically aren’t.
Q2: Does issuing a security token always require a public prospectus?
Not always. Private placements to qualified professional investors may be exempt from full disclosure—but strict conditions apply, including investor accreditation and transaction limits.
Q3: Can a company issue crypto to reward early users without triggering securities laws?
Yes—if there’s no upfront payment, no profit promise, and the token is purely functional (e.g., access to features), it may avoid regulation. However, monetizing such tokens later could retroactively create liability.
Q4: What happens if a company issues a security without proper disclosure?
Regulators may impose fines, halt the offering, or require refunds to investors. In severe cases, criminal charges or director liability may arise.
Q5: Is blockchain-based fundraising legal in Taiwan?
Yes—but only within regulatory boundaries. Security token offerings (STOs) are allowed for professional investors under current rules. Full retail access would require broader legal reforms.
Q6: How can startups legally use crypto for fundraising?
Options include:
- Launching non-security utility tokens,
- Conducting private STOs for institutional investors,
- Partnering with licensed platforms that handle compliance.
Conclusion
Securities extend far beyond stocks and bonds—they include innovative instruments like security-linked virtual currencies. For Company A, issuing a profit-sharing crypto token means entering the regulated world of securities law. Despite their desire to avoid public disclosure, they must provide a prospectus if raising funds from professional investors—and they cannot target retail investors at all under current rules.
The key takeaway? Technology doesn’t override regulation. If your crypto project functions like an investment contract, it will be treated as one.
As digital finance evolves, understanding the boundary between innovation and compliance becomes essential for any business exploring new fundraising models.
👉 Stay ahead of regulatory trends in digital asset issuance—explore global insights now.