By Ahn Chan-sik
Officially, it is Korean government policy that all initial coin offerings (ICOs) are prohibited. However, as a lawyer, I believe Korea lacks legal grounds to make illegal all kinds of ICOs, especially in the case of utility token ICOs, because there is as yet no particular law to regulate and prohibit them unless the tokens are security tokens.
Regardless, scared off by this government policy, almost all ICOs undertaken by Korean companies go outside Korea and are launched in crypto-friendly venues, such as Switzerland, Estonia, and Singapore.
Are these ICOs undertaken overseas by Korean companies safe from any Korean law that prohibits ICOs? The answer is no. Legally speaking, any Korean mandatory laws may be applicable to activities or transactions taking place outside the country, if such activities or transactions are deemed to have an impact on Korean markets or customers. (“Mandatory laws” are laws relating to public interests and policies.)
This is called a theory of “extraterritorial application” of the law. Under this theory, nobody can opt out of, or agree to exclude, the application of the mandatory laws by contract or in other ways. It means that despite the intention of the relevant parties, Korea’s mandatory laws may come into play and take effect on any contracts or transactions if there is an effect on Korea.
Almost all ICOs undertaken by Korean companies in foreign countries sell their tokens to Korean purchasers or investors. It is said that these ICOs affect the markets and/or people of Korea and therefore, its laws that regulate ICOs, which are mandatory laws in nature, are most likely to apply to such token sales.
Given this, when Korean companies intend to launch their ICOs overseas, they must be aware that not only will the laws of the country where their tokens are issued for sale be applicable, but Korean laws may also apply. This requires some preparation.
Korea’s mandatory laws, such as the Financial Investment Services and Capital Markets Act, the Act on Fundraising without Permission, the Foreign Exchange Transactions Act, the Antitrust and Fair Trade Act, the Door to Door Sales Act, the Personal Information Protection Act, and Tax laws, to name a few, may apply to overseas ICOs.
In cases where a token-issuing company, namely an ICO entity, is established as a special purpose vehicle, or a paper company, and it does not have any staff, budget, office facilities or business operations, while a Korean company behind the project in fact controls the entity and basically manages all relevant matters, the Korean authorities may find that those two companies can be regarded as one entity in substance, or that the ICO entity is just a conduit for the Korean company. This will make it possible to target the Korean company in any investigation into the project, or in any application of Korean law.
Of course, there will be practical barriers to Korean regulators directly challenging overseas ICOs. That is, the Korean regulators may find it very difficult to chase and investigate all overseas token sales due to limited budget or personnel, and, more than anything else, because doing so would require cooperation from the foreign government. Such cooperation is often very complicated to obtain and not always readily available.
That said, however, the possibility of Korean regulators investigating ICOs, especially high-profile ones, undertaken in foreign jurisdictions by Korean companies for any noncompliance with Korean laws cannot be entirely ruled out.
Ahn Chan-sik is a partner at HMP Law and head of the Tech & Comms practice group.