Proposed Regulatory Framework for Operators of Private Financing Platforms

DISCUSSION PAPER
NO. 1 OF 2018
11 MARCH 2018
PROPOSED REGULATORY
FRAMEWORK FOR OPERATORS OF
PRIVATE FINANCING PLATFORMS

TABLE OF CONTENTS
Introduction .................................................................................................3
Proposed Regulatory framework .................................................................6
Background…….…………………………………………………………………………………….….6 A. Permitted activity.………………………… ..……………………………….……………...….8 B. Risks Associated with PFP Transactions.………………………………..……………..9
C. Restrictions On Client Base.………………………………..………..…………….……...10
D. Client Assets..………………………………………………………………..………..………….12 E. Capital Requirements.………………………….…………………………………….…….…13
F. Risk Warning & Disclosure Statements.………………….……………………….....14
G. Due Diligence By PFP Operators.………………….……..………………………….….15 H. Restrictions On Marketing Communications..…………..…….………………….18
I. Management Of Potential Conflicts Of Interest..………………………………….19
J. Exit Facility..…………………………………………………………………………………………20 K. Reporting Requirements..…………………………………………………………….…….23
L. Complex Business Models.............………………………………………………………24
Implementation of the Proposed Regulatory Framework…….…………………..25

INTRODUCTION
WHY ARE WE ISSUING THIS PAPER?

The Financial Services Regulatory Authority ("FSRA") of the Abu Dhabi Global
Market ("ADGM") has issued this Discussion Paper to invite public feedback and comments on its proposed introduction of a regulatory framework that is tailored for operators of financing / funding platforms for non-public companies (“Private Financing Platforms”).
Start-ups and small and medium enterprises (“SMEs”) contribute significantly
towards the UAE’s economic growth. According to the UAE Ministry of Economy, the SME sector represents more than 94% of the total number of companies operating in the country and provides jobs for more than 86% of the private sector's workforce 1 . Yet, SME financing makes up for only 4% of lending by UAE banks. According to the Arab Monetary Fund 2 , while SMEs make up 80% of businesses in the region, only one in five has a loan or line of credit. The International Finance Corporation estimates the SME funding gap in MENA at US$260 billion 3 .
Given the importance of start-ups and SMEs as key engines of economic
growth and diversification in the region, it is important to develop alternative financing solutions to bridge the commercial funding gap and ease cash flow issues. Online Private Financing Platforms such as peer-to-peer lending, equity crowdfunding, invoice financing platforms and private investment / placement platforms that leverage data and technology can unlock new ways of raising money for small businesses from a qualified network of investors comprising professionals 4 and potentially, individuals actively looking to diversify their portfolios.
Private Financing Platforms (“PFPs”) can play an important role in the UAE
and the region in developing the financing ecosystems for start-ups and SMEs

https://www.government.ae/en/information-and-services/business/crowdfunding/the-impact-of-smes-on-theuae-economy https://www.thenational.ae/business/sme-lending-gap-in-region-must-be-filled-urges-amf-1.52640 International Finance Corporation Report: “Closing the Credit Gap for Formal and Informal Micro, Small, and Medium Enterprises” (August 2013, https://openknowledge.worldbank.org/handle/10986/21728) These may include corporate ventures, private equity, venture capital, family offices, angel investors, accelerators / incubators, insurance firms, alternative asset managers, private banks and other wealth management service providers.

seeking to launch and grow their businesses, as well as spur innovation and enhance competitiveness in the SME sector. In addition to SMEs and startups, PFPs can serve a wide, private market landscape from very early stage to pre-IPO stage companies. As such, there are real socio-economic benefits in having a tailored regulatory regime that supports the development of PFPs.
5. The FSRA is proposing a risk-appropriate, calibrated regulatory framework for
PFPs (the “PFP Framework”) that facilitates access by start-ups and SMEs to new alternate sources of funding, albeit primarily from Professional Clients, as an alternative to more traditional channels for financing, while applying the necessary regulatory safeguards to ensure they operate in a safe and sound manner for those clients. The term “clients” is used in this paper to denote the potential pool of lenders and investors which qualify to provide such funding, i.e. those on the buy-side of a PFP. Unless otherwise defined, capitalised terms referred to in this paper have the meanings attributed to such terms as contained in the Financial Services Markets Regulations 2015 (“FSMR”) and the Glossary (“GLO”).
6. FSRA would like to invite comments on the proposed introduction of the
regulatory framework for PFPs. Our proposed regulatory framework will subsequently be effected through new regulations and rules, which FSRA will consult on after considering feedback and comments on this Discussion Paper. WHO SHOULD READ THIS PAPER?
7. This Discussion Paper should be of particular interest to funding platform
operators as well as investors, lenders, individuals and organisations active in the credit and investment sector, SME Issuers and borrowers, and their respective professional advisors. HOW TO PROVIDE COMMENTS
8. All comments should be made in writing and sent to the mail address or email
address specified below. If sending your comments by email, please use the Discussion Paper number in the subject line. If relevant, please identify the organisation you represent in providing your comments. The FSRA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making any comments.

Comments supported by reasoning and evidence will be given more weight by the FSRA. WHAT HAPPENS NEXT?
9. The deadline for providing comments on this proposal is 10 April 2018. When
we receive your comments, we will consider whether any modifications are required to the proposed regulatory framework. FSRA will then proceed to draft the relevant regulations, rules and guidelines (if applicable) for public consultation. You should not act on this proposal until the relevant regulations and rules are issued. COMMENTS TO BE ADDRESSED TO:
Discussion Paper No. 1 of 2018
Financial Services Regulatory Authority
Abu Dhabi Global Market Square
Al Maryah Island
PO Box 111999
Abu Dhabi, UAE
Email: consultation@adgm.com

PROPOSED REGULATORY FRAMEWORK
BACKGROUND
10. Given the business models of PFPs, the FSRA has received feedback that the
current regulatory framework in ADGM might be better tailored to encourage PFP operators to play an active role in securing financing from qualified investors for start-up and SME businesses that might be offered on a PFP (“PFP Prospects”). In achieving the objective of facilitating such funding, the core undertakings that a PFP operator would undertake on behalf of the PFP Prospects and its network of clients might include the following. (i) Helping PFP Prospects better structure their business offerings to the investor community (“PFP Transactions”), thereby aiding them to secure subsequent funding rounds without the administrative burden 5 of coordinating corporate actions involving many different clients. (ii) Screening opportunities in PFP Transactions on behalf of its network of clients (see Section C, “Restrictions on client base”) who do not have the time and resources to do so, providing a degree of assurance to clients that PFP Prospects are of an acceptable quality.

In some instances a PFP operator may have a proprietary data-driven
and technology-enabled due diligence process to screen investment opportunities, ensuring PFP Prospects meet certain criteria before they are made available to the client network. For instance, a PFP operator may decide that only deals with a lead, anchor investor may be offered on its platform, whereupon other suitable investors from its platform network are invited to join the investment round. A second example is the case of invoice financing which converts outstanding invoice receivables into immediate cash for an SME, the PFP operator may select PFP Prospects that conduct business with multinational corporations (“MNCs”) as the main credit risk lies with the payer, being the MNC.

Some platforms may operate a nominee structure, allowing PFP Prospects to interact with a single investor rather than many.

(iii) As part of the business model, a PFP operator may also wish to help clients seeking to divest their investments in the PFP Prospect 6 which is otherwise difficult due to the illiquid nature of the PFP Transactions.
11. We propose permitting two types of PFP Transaction to be offered in or from
the ADGM, those being loan-based or investment-based crowdfunding 7 , where those activities might be undertaken on a single or distinct PFPs. (i) In terms of loan-based PFPs, the PFP operator would seek to connect several clients to a single borrower with the clients entering into separate credit agreements with that one borrower; the clients would lend money to the borrower in the expectation of a financial return in the form of interest payments and repayment of their capital over time. (ii) For investment-based PFPs, the PFP operator would seek to connect several clients to a single issuer with the clients investing directly or indirectly 8 in securities issued by a single business; the clients would invest money in the expectation of dividend payments and a positive return on their investment over time.
12. Depending on its business model, a PFP operator would typically be required
to hold a Financial Services Permission (“FSP”) under the FSMR to undertake any one or more of these Regulated Activities 9 :
(i) Advising on Investments or Credit;
(ii) Arranging Credit (for loan-based PFPs) 10; (iii) Arranging Deals in Investments (for investment-based PFPs).
13. In addition, any Offer of Securities to the Public within the ADGM through an
investment-based PFP is required to be accompanied by a Prospectus under
Section 61 of the FSMR, unless it qualifies as an Exempt Offer as set out in

For instance, there may be a change in the PFP Prospect’s corporate strategic direction which the client does not agree with, or there may be an expected change in the client’s financial situation. There are other common types of crowdfunding such as donation-based and reward-based crowdfunding, which are not regulated as they do not involve offers of Specified Investments as defined under FSMR. Typically through a Special Purpose Vehicle (SPV). Although the PFP operator may also be conducting additional Regulated Activities under FSMR, e.g. Dealing in Investments, Providing Credit, etc. 10 The proposed PFP framework is not intended to cover institutional syndicated lending.

Chapter 4 of the Markets Rules (“MKT”) 11. It is our intention that any offers
under the proposed framework must meet the conditions to qualify as an Exempt Offer.
14. In conclusion, given the objective of establishing and developing alternative
sources of funding for start-ups, SMEs and private businesses, and in the light of the considerations above, the FSRA considers that there is merit to put in place a risk-appropriate, calibrated PFP Framework.
15. The following Sections A to K set out the characteristics of the proposed PFP
Framework.
A. PERMITTED ACTIVITY
16. As mentioned previously, the services provided by a PFP operator could fall
within the scope of some of the FSRA’s existing Regulated Activities. However, the FSRA is considering the introduction of a new Regulated Activity of “Operating a Private Financing Platform” that would solely capture loanbased and investment-based PFPs and fall within Category 4 for the purposes of prudential supervision.

11 MKT Rule 4.3 sets out that a Person may make an Offer of Securities to the Public without a Prospectus where any one of the following conditions, amongst other conditions in that Rule, is met:
a. an Offer is made to or directed at only Professional Clients other than natural Persons; b. an Offer is directed at fewer than 50 Persons in any 12 month period, excluding Professional Clients who are not natural Persons;
c. where the consideration to be paid by a Person to acquire Securities is at least US$100,000; or
d. the Securities offered are denominated in amounts of at least US$100,000. ISSUES FOR CONSIDERATION QUESTION 1:
THE FSRA SEEKS COMMENTS ON THE PROPOSAL TO CREATE A NEW REGULATED ACTIVITY SPECIFICALLY FOR PFPs OPERATORS.

B. RISKS ASSOCIATED WITH PFP TRANSACTIONS
17. Notwithstanding the benefits of a PFP Framework to the financing landscape
for start-ups and SMEs, there are risks associated with PFP Transactions, including but not limited to the following. (i) Loss of capital: PFPs would attract mainly start-ups and SMEs that do not have an established track record, for which the observed failure rate is generally high. This poses high risks of capital loss to clients, particularly for those who may not be familiar with start-up or SME investing. (ii) Lack of liquidity: In the absence of a ready secondary market for PFP Transactions, clients face the risk of not being able to exit their PFP Transactions 12 or having to transfer them at a significant discount. (iii) Lack of information on PFP Prospects: There may not be sufficient information on the business proposals to be funded to enable clients to conduct proper due diligence and make fully informed investment decisions. Given that fundraising would be carried out through online platforms, clients may not have direct contact or recourse with the PFP Prospects. There is no assurance that the information provided by the PFP Prospects would be accurate or accessible and therefore that the projected valuations or returns to investors would materialise. (iv) Platform failure: Clients of a PFP may not be able to readily recover their assets in the event that a PFP operator that handles Client Assets fails and becomes insolvent. This may be further complicated in cross-border PFP Transactions, where they may be subject to the potentially conflicting laws and regulations of two jurisdictions. Clients who rely on the PFP operator to help seek recourse in relation to their PFP Transactions may be adversely affected. (v) Conflicts of interest of the PFP operator: The remuneration of a PFP operator is typically linked to the amount of funds raised so the interests

12 For loan-based investments, the client cannot usually seek repayment of the loan on demand, as they might for a bank deposit account. The client must wait to be repaid under the terms of the loan, which may be a long term loan, or must assign his rights under a loan to another lender to exit the loan. For investment-based PFP Transactions, a Client must seek a willing buyer with the appropriate risk appetite to exit a position, which may be challenging given the high risks and subjective valuation of such investments.

of a PFP operator may be more aligned with those of the PFP Prospect than those of the client.
18. A key consideration for the FSRA in considering the regulatory approach for
PFPs is to strike a balance between facilitating the establishment of PFPs in the AGDM to serve the UAE and the region, and ensuring that there are sufficient safeguards for clients. The proposed safeguards to mitigate the risks outlined above are considered and discussed in further detail in the following sections.
C. RESTRICTIONS ON CLIENT BASE
19. As a business model, PFP operators generally do not provide financial
advisory services to clients. Under these circumstances, the onus is on clients to seek independent financial advice or to make their own evaluation of the risks associated with any potential loan or investment. Nonetheless, under Rule 3.4 of the Conduct of Business (“COBS”) Rulebook, before providing financial services to a client, an Authorised Person is required to have a reasonable basis to consider that the transaction is suitable for that particular client.
20. Notwithstanding the suitability requirements that would be applicable to PFP
operators as Authorised Persons, the FSRA believes that Retail Clients 13, in general, may not appreciate the high risks associated with PFP transactions even where comprehensive risk warnings are provided. Professional Clients, on the other hand, are more sophisticated and have more resources and capacity to make informed decisions on prospective loans or investments after factoring in consideration of the inherent risks. It is also likely that Professional Clients are better placed to assist start-ups and SMEs by contributing their expertise, experience and contact networks. Therefore, the FSRA proposes to restrict accessibility to PFPs under the PFP Framework to Professional Clients 14 .
21. The FSRA recognises, however, that there may be some Retail Clients who
have sufficient expert knowledge about the businesses of the PFP Prospects

13 COBS Rule 2.3.
14 This may be imposed by means of a licence condition of the FSP granted to the PFP operator.

sourced by the PFP operator (e.g. through having worked in a similar industry sector). In this regard, and on an exceptional basis, the FSRA proposes to allow PFP operators to serve Retail Clients subject to the PFP operator putting in place proper policies and procedures to perform pre-qualification of Retail Clients, and having a reasonable basis to believe, through performing a client suitability test, that:
(i) those qualified Retail Clients have the requisite knowledge and/or experience to invest in PFP Transactions; and (ii) particular PFP Transactions, as a group, are suitable for the Retail Clients in light of their investment objectives and risk tolerance.
22. Under these exceptional circumstances, i.e. where Retail Client participation
is permitted, the FSRA may impose other risk-appropriate retail protections such as investment / lending limits and cooling-off periods prior to closing of the PFP Transaction, given the higher potential for conduct risks to exist with those clients and depending on the nature and scale of the PFP operator’s business. The PFP operator would be required to conduct periodic reviews on the circumstances relating to its clients, for both Professional Clients and any Retail Clients, to ensure they remain qualified.
23. In addition, it is noted that an investment-based PFP Transaction offering
securities to the public from ADGM would need to be accompanied by a Prospectus unless it qualifies as an Exempt Offer. In order to mitigate the specific risks associated with investment-based PFP Transactions, the FSRA proposes to only allow offers of PFP Transactions that comply with the Exempt Offer restrictions. It is expected that most PFP Prospects undertaking investment-based fundraising would seek to do so via an Exempt Offer as, for start-ups and SMEs, complying with the full Prospectus requirements for a generally small fundraising exercise from Professional Clients is usually not viable given the costs and resources involved in preparing a Prospectus. In light of the limited reach under an Exempt Offer, the FSRA is of the view that the restricted opening up of PFP activities to Retail Clients as mentioned above is risk-appropriate.

It is envisaged that any PFP Prospect would be a Body Corporate and would
therefore qualify as a “Service-Based”15 Professional Client. All potential buyside clients would have to be pre-screened and on-boarded before being allowed to access the platform to ensure that they meet the eligibility criteria to be classed as either “Deemed”16 or “Assessed”17 Professional Clients. In both cases, it would be a pre-requisite that all of these parties do not elect to be treated as a Retail Client unless the PFP operator’s FSP permits them to service such clients.
The FSRA notes that PFPs would be a relatively new form of financing for
private businesses in the region, and this form of financing is at a nascent stage of development. The FSRA would continue to monitor market developments in considering the appropriateness of extending PFP participation to those Retail Clients with sufficient expertise should an innovative proposal for that category of clients come along. With this in mind, and more generally, it is proposed that the FSRA may waive requirements in the proposed PFP Framework on a case-by-case basis subject to the PFP operator having appropriate safeguards. D. CLIENT ASSETS
As best practice, a PFP operator should not hold or control Client Assets and
would be required to appoint a third party escrow agent or custodian.
However, the FSRA recognises that with advances in financial technology
(“FinTech”) and distributed ledger technology (“DLT”), PFP operators may

15 COBS Rule 2.4.3.
16 COBS Rule 2.4.2
17 COBS Rule 2.4.4
ISSUES FOR CONSIDERATION
QUESTION 2:
THE FSRA SEEKS COMMENTS ON ITS PROPOSED CLIENT RESTRICTIONS.
QUESTION 3:
THE FSRA SEEKS COMMENTS ON THE APPROPRIATE SAFEGUARDS THAT SHOULD BE INTRODUCED IF THE FSRA WERE TO EXTEND PFP PARTICIPATION TO RETAIL CLIENTS MORE BROADLY.

better achieve escrow capabilities through smart contracts, and secured custody of Client Investments on the blockchain ledger. A PFP operator may therefore wish to hold or control Client Money, especially in the case where client funds are pledged before being transferred to the PFP Prospect, but an Authorised Person in prudential Category 4 is currently prohibited from doing so under COBS Rule 14.2.3(a). In order to facilitate this business model and apply appropriate safeguards, the FSRA may remove the prohibition on Category 4 firms that are PFP operators to enable them to hold or control Client Money. Re-calibrated capital requirements (see paragraph 28) and the Client Money provisions in COBS would also apply to such firms. E. CAPITAL REQUIREMENTS
28. A PFP operator not holding or controlling Client Assets would be subject to
Category 4 capital requirements under the Prudential Rulebook (“PRU”). As such, the PFP operator is subject to a Capital Requirement, being the higher of a Base Capital Requirement (“BCR”) of US$10,000 or an Expenditure Based Capital Minimum (“EBCM”) computed as 6/52 of its Annual Audited Expenditure. If the PFP operator’s business involves holding or controlling Client Assets, the FSRA will have to calibrate the capital requirements accordingly.
29. As with other Category 4 firms, the PFP operator would be required to
maintain professional indemnity insurance cover appropriate to the nature, size, and risk profile of its business as set out in PRU Rule 6.12. ISSUES FOR CONSIDERATION QUESTION 4:
THE FSRA SEEKS COMMENTS ON THE PROPOSED CLIENT ASSET REQUIREMENTS FOR PFP OPERATORS. QUESTION 5:
IN SOME INSTANCES WHERE A PFP OPERATOR INTENDS TO HOLD OR CONTROL CLIENT ASSETS, THE FSRA SEEKS COMMENTS ON WHAT ALTERNATIVE ARRANGEMENTS ENABLED BY FINTECH OR DLT MAY BE AVAILABLE TO ENSURE ADEQUATE SAFEGUARDING OF CLIENT ASSETS.

F. RISK WARNING & DISCLOSURE STATEMENTS
30. In order to ensure that all clients are aware of the risks associated with PFP
Transactions, the FSRA would require a PFP operator to provide a written risk warning to each client and to obtain a signed acknowledgement (in written or electronic form) that they fully understand the risks involved, including potential losses that they might suffer through the poor performance or the failure of the PFP Prospect, before the client makes its first PFP Transaction on the platform. The risk warning is to be readily and prominently available on the platform and, as an absolute minimum, would be required to address the risks as set out in paragraph 17 of this paper.
31. Separately, a PFP operator would be required to provide appropriate
information and disclosure to clients (e.g. in the client agreement) on how its platform model works, its remuneration model, its roles and obligations 18 , and the available recourse in the event of the failure of the PFP operator, in addition to the existing disclosure obligations in COBS 19 and FSMR.
32. In the event that there is a material adverse change in the circumstances of
the PFP Transaction or the related PFP Prospect defaults, the PFP operator would also be required to disclose to the relevant clients its arrangements for the return of the Client Assets.
33. The FSRA has considered requiring other specific disclosures such as
information on expected and actual default rates of the PFP Transactions, but would not mandate such a requirement at this stage in light of the nascent

18 If the relationship between the Client and the PFP operator is non-advisory in nature, the PFP operator shall clearly disclose the fact and that the offer information presented for each PFP Transaction does not constitute personal advice or recommendation. 19 For instance, an Authorised Person is subject, as applicable, to disclosure requirements under COBS Rules 3.3.2 (client agreements) and 3.5.4 (conflicts of interest). ISSUES FOR CONSIDERATION QUESTION 6:
THE FSRA SEEKS COMMENTS ON CAPITAL REQUIREMENTS FOR PFP OPERATORS UNDER THE PROPOSED PFP FRAMEWORK.

stage of the PFP industry in this region and that such information is unlikely to be currently available. However, as a PFP operator establishes an operating track record, such disclosure may foster better trust and confidence in PFPs as a viable alternative source of financing. The FSRA will continue to monitor industry development and review the need for such disclosure, and its form, as the market evolves and encourage appropriate disclosure in this area as best practice. G. DUE DILIGENCE BY PFP OPERATORS
34. In view of the risks of PFP Transactions, given they involve start-ups and SMEs,
the FSRA would require that a PFP operator undertakes appropriate and proportionate due diligence covering, as a minimum, the following areas before accepting any PFP Prospect onto its platform. (i) Fitness and propriety checks on the PFP Prospect, its management and key officers, including but not limited to, their integrity and honesty, competence and capability, and financial soundness. (ii) Reasonable measures to reduce the opportunity for fraud to occur including, but not limited to, obtaining background and regulatory history checks on the PFP Prospect, its management and key officers, and having a reasonable basis for believing that the PFP Prospect is complying with applicable laws (e.g. governing laws on financial crime, financial services, etc.). (iii) Reviewing the proposal from the PFP Prospect (the “PFP Proposal”) in relation to the PFP Transaction, to form a reasonable basis for believing that the PFP Proposal adequately sets out relevant information in a ISSUES FOR CONSIDERATION QUESTION 7:
THE FSRA SEEKS COMMENTS ON THE RISK DISCLOSURE REQUIREMENT FOR PFP OPERATORS, AND WHETHER THERE ARE ANY OTHER SPECIFIC RISKS THAT SHOULD BE PRESCRIBED FOR DISCLOSURE UNDER THE PROPOSED PFP FRAMEWORK.

clear, fair and not misleading manner for clients to make an informed decision including, but not limited to:
 general information about the PFP Prospect including details of its incorporation, commercial licence, directorships, major shareholders, beneficial holders;  the business proposal and business model;  financial information about the PFP Prospect;  criteria by which the PFP Transaction would be regarded as being in default;  a wind-down plan, including information on the return of Client Assets, in the event of business default/failure of the PFP Prospect;  features, structures, and subscription classes of the PFP Transaction;  basis of subscription class and allotment to each client;  treatment, voting / contractual rights and claims of Clients of the PFP Transaction in any particular subscription class;  pricing and valuation basis of the PFP Transaction;  risks specific to the PFP Prospect and PFP Transaction;  parties involved in the PFP Transaction and any conflicts of interest, including any financial or other interests that the PFP operator, its key officers, Employees and Associates have in the PFP Prospect or PFP Transaction;  any roles and responsibilities that the PFP operator would or would not carry out on behalf of clients in any administrative / corporate actions;  whether the PFP Prospect is seeking funding from other sources at the same time;  intended use of funds;  treatment of oversubscriptions and maximum amount accepted, if applicable;  any cancellation rights;  format / frequency of performance reporting to clients; and

 format / frequency of ongoing disclosure of applicable information in relation to the PFP Transaction and PFP Prospect. (iv) Ensure any material changes to the information disclosed to clients prior to closing of the PFP Transaction is updated and notified to clients.
35. A PFP operator would be required to maintain proper documentation of its
due diligence process and the basis for accepting a PFP Transaction onto its platform, in order to facilitate supervisory oversight by the FSRA. The PFP operator is not required to publicly disclose actual due diligence reports, but is required to disclose and explain in a clear way the selection and acceptance criteria for PFP Transactions to be offered on its platform, and the due diligence approach under each criterion it chooses to use.
36. For example, in performing due diligence of a loan-based PFP Transaction, a
PFP operator may assess the creditworthiness of a PFP Prospect including their ability to make repayments as they fall due; in this example, the PFP operator would be required to disclose and explain to potential lenders its approach to assessing creditworthiness of that PFP Prospect. Similarly, if the PFP operator relies on independent third party experts or specialist advisers to conduct the selection due diligence on a PFP Prospect 20, the PFP operator would have to disclose and explain the methodology adopted by the adviser on its platform.
37. An exception to the requirements in paragraph 34 would be permitted where
a PFP operator wishes to gauge the interest from registered clients in a potential PFP proposal prior to publishing it. This private forum or message board must only publish general information about a potential PFP proposal which does not allow the related start-up or SME to be identified and must disclose that no or limited due diligence has been undertaken on that business. A PFP operator must monitor the forum or message board to remove any potentially misleading or fraudulent posts.
38. In addition to the above due diligence process, the PFP operator (as per any
other Authorised Person) would be required to comply with all applicable regulatory requirements as set out in the Anti-Money Laundering and

20 This may be the case to mitigate potential conflict of interest between the PFP operator and the PFP Prospect.

Sanctions Rules and Guidance (“AML”), and have systems and controls in place to mitigate the risk of financial crime that may arise from both the PFP Prospect and client side of a PFP Transaction. H. RESTRICTIONS ON MARKETING COMMUNICATIONS
39. As set out in Section C above, the FSRA would restrict the client base under
the PFP Framework to Professional Clients, but retain the opportunity to extend the client base to Retail Clients should an innovative proposal appear and where, critically, those potential clients meet the client suitability test and appropriate retail controls are imposed.
40. As access to PFPs is to be available only to a restricted client base, mass
solicitation, advertising or canvassing in relation to PFP Transactions would not be permitted. In order to ensure that PFP Transactions are limited in terms of scope and reach, the FSRA would require a PFP operator to restrict access to the details of PFP Transactions and PFP Prospects published on its platform to registered clients only. Clients would only be given access to the PFP if they meet the conditions set out by the PFP operator (e.g. Professional Clients or Retail Clients who have met the client suitability test), with access to the PFP Transactions only through clients logging onto the platform with their registered, controlled access details. Generally, we note that PFPs operate in this manner, and hence they should not have issues complying with this requirement. ISSUES FOR CONSIDERATION QUESTION 8:
THE FSRA SEEKS COMMENTS ON THE TRANSACTION DUE DILIGENCE REQUIREMENTS FOR PFP OPERATORS, AND WHETHER THERE ARE ANY OTHER SPECIFIC OBLIGATIONS THAT SHOULD BE PRESCRIBED TO ENHANCE CUSTOMER SAFEGUARDS AND CONFIDENCE UNDER THE PROPOSED PFP FRAMEWORK. QUESTION 9:
THE FSRA SEEKS COMMENTS ON THE PRIVATE FORUM OR MESSAGE BOARD FACILITY AND WHETHER IT IS SUITABLE TO GAUGE PRIOR INTEREST IN A POTENTIAL PFP PROSPECT.

The above restriction does not prohibit the PFP operator from promoting its
platform to the general public. Such communications may include general information about a PFP operator, its business model and performance, as well as PFP Prospects accepted on its platform, but the communications must not include any information on specific offers in relation to a PFP Prospect or PFP Transaction.
As with all other Authorised Persons, a PFP operator is required to ensure any
financial promotion and communication about the offerings on its platform and any Regulated Activities it undertakes is clear, fair and not misleading 21 .
I. MANAGEMENT OF POTENTIAL CONFLICTS OF INTEREST
In order to manage any potential conflicts of interest that a PFP operator may
have in promoting PFP Prospects and presenting the related PFP Transactions to its client base via its platform, the FSRA would prohibit PFP operators from carrying on the Regulated Activities of Managing a Collective Investment Fund and Managing Assets.
COBS Rule 3.5 specifies that “[A]n Authorised Person must take reasonable
steps to ensure that actual conflicts of interest between itself and its Clients and between one Client and another Client are identified and then prevented or managed”; in the context of this Section the term “Clients” in this Rule should be taken to refer to both PFP Prospects and the clients on the buy-side

21 As per COBS Rule 3.2. For instance, when setting out the amount of funds to be raised, the PFP operator must distinguish between funds raised on the platform from clients not connected to the PFP Prospect and those raised by clients who are connected to the PFP Prospect, otherwise, this may lead clients to believe there is greater interest in the PFP Transaction from non-connected clients than is the case. The use of words that imply greater capital security than really exists (terms such as ‘guaranteed’, ‘protected’, ‘safe’ or ‘secure’) should be avoided. ISSUES FOR CONSIDERATION QUESTION 10:
THE FSRA SEEKS COMMENTS ON THE PROPOSED RESTRICTIONS ON MARKETING COMMUNICATIONS FOR PFP OPERATORS IN VIEW OF THE NATURE OF PRIVATE FINANCING, AND WHETHER THERE ARE OTHER PRACTICAL APPROACHES THAT MAY BETTER ACHIEVE THE REGULATORY INTENT UNDER THE PROPOSED PFP FRAMEWORK.

of a PFP. In order to address any specific conflicts of interest that may arise in PFP activities the FSRA would impose the following requirements. (i) A PFP operator must clearly disclose the nature of all compensation and fees received from the PFP Prospect in connection with the PFP Transaction 22 . (ii) Where a PFP operator, its Associates or Employees may have a financial, or other, interest in the PFP Prospect 23 or participate in the PFP Transaction, the PFP operator must establish and maintain adequate policies and procedures to identify, address and manage any potential conflicts of interest arising from the proprietary or staff transactions. The PFP operator must clearly disclose any such interest in connection with a PFP Transaction. J. EXIT FACILITY
45. As highlighted in paragraph 17, clients participating in PFP Transactions are
exposed to liquidity risk, especially when seeking to exit their positions, given the nature of private capital markets. In order to help clients manage their liquidity risk in this case, a PFP operator may organise an incidental facility (termed the “Exit Facility”) to permit “seller clients” to exit their PFP Transactions, by allowing them to seek potential “buyer clients” to transfer their rights and obligations under their loan or investment agreements (via “Transfer Transactions”) .

22 This may be disclosed in a PFP Proposal document as per paragraph 34(iii) or within the platform itself. 23 Including Board participation in an SPV structure. 24 Such an Exit Facility could operate on a basis similar to an OTC ‘bulletin board’, where transactions are ultimately negotiated directly between the buyer and seller clients. The Exit Facility is not intended to operate as a trading venue (such as a Recognised Investment Exchange or Multilateral Trading Facility), and so may be considered an ‘incidental facility’ for a client to either exit from or to enter into a PFP Transaction. ISSUES FOR CONSIDERATION QUESTION 11:
THE FSRA SEEKS COMMENTS ON THE CONFLICT MANAGEMENT REQUIREMENTS FOR PFP OPERATORS, AND WHETHER THERE ARE ANY OTHER SPECIFIC DISCLOSURES OR PROHIBITIONS THAT SHOULD BE PRESCRIBED UNDER THE PROPOSED PFP FRAMEWORK.

The Exit Facility would not allow active trading by clients and would be solely
an ancillary service alongside the core financing activity of the PFP. In order to ensure that proper business conduct is observed in the operation of such an Exit Facility, the FSRA would impose the following requirements. (i) Only existing, registered clients of the PFP operator would have access to and may participate in the Exit Facility, to ensure that it is not open to the public. (ii) The PFP operator must provide appropriate information and disclosure on how the Exit Facility operates. (iii) A PFP operator must provide a buyer client with any and all information that was originally published and provided to the seller client in relation to the PFP Proposal and any and all updates subsequently provided to the seller client as a result of any material change in the circumstances of the PFP Proposal. (iv) In the case of investment-based PFP Transactions subject to the Exit Facility, a PFP operator and the PFP Prospect must continue to comply with the conditions under the Exempt Offers regime. It is not intended for the PFP operator or the PFP Prospect to be able to bypass the Exempt Offers restriction through the use of the Exit Facility 25 . (v) In order to safeguard against potential market abuse, as well as ensure that the Exit Facility is not used for active trading, the PFP operator must not deal in or facilitate trades as a market-maker, nor appoint a thirdparty market-maker. Further, the requirements in the COBS and General Rulebook (GEN) relating to communication, fraud and market conduct would apply to a PFP operator in relation to both loan- and investment-based financing. (vi) In order to address potential conflicts of interest, a PFP operator would be prohibited from advising and negotiating on behalf of any and all parties in relation to a Transfer Transaction. (vii) The PFP operator, its Associates or Employees who participate in a PFP Transaction and wish to transfer their rights to or obligations in a loan-

25 For example, if the PFP operator is relying on the condition to have investments from fewer than fifty Persons in any twelve-month period to qualify for an Exempt Offer, it is not allowed to breach the exemption condition through the Exit Facility.

or investment-based asset on the Exit Facility must disclose their identities and interests to the buyer client.
47. For clients who might wish to reserve the opportunity to use the Exit Facility
at some time in the future, a PFP operator may arrange for them to participate in an underlying PFP Transaction via a Special Purpose Vehicle (“SPV”) as “indirect” investors. The benefit of using an SPV is that it would allow a client holding shares or contractual rights in the SPV to transfer its holdings or rights to another investor, the buyer client in this case, without affecting the underlying PFP Transaction, which might otherwise be a very complex process 26 .
48. While the use of an SPV structure facilitates the exit of a seller client from a
PFP Transaction, it is often industry practice that the rights of a client in the position as an indirect investor or its entitlements in such a structure are not ranked pari passu with those of direct investors 27. Under those conditions, and in order for the PFP operator to establish an Exit Facility using an SPV structure, it usually requires the PFP operator to be nominated as a director of the SPV, where it may or may not have voting rights, in order to represent the indirect investors in relation to any administrative or corporate actions. The clients, as indirect investors through the SPV, do not get any voting rights and instead, would only get information rights. Consequently, in the event of multiple funding rounds, clients may not be able to avoid the dilution of the value of their shareholdings or subordination of their rights.
49. In order to ensure that clients in a PFP Transaction are aware of the risk that
other investors may receive more rights, e.g. anti-dilution rights in the event of multiple funding rounds, the PFP operator would be required to disclose to clients details of the attributes of the subscription classes, as well as of the

26 For example, the PFP Prospect may impose lock-in periods in the PFP Transaction that prohibit early exit, or require approval for any transfer of voting shares/contractual rights to ensure that only strategic, longer-term investors are on-boarded. Some PFP Prospects may also prefer an SPV nominee structure, which would allow them to interact with a single investor, i.e. the SPV, in respect of any administrative/corporate action, instead of many counterparties. 27 A common structure involves the largest/lead investor being nominated as a director of the SPV that would represent the rest of the investors for corporate actions. Another structure is that all indirect investors (typically referred to as "followers”) do not get voting rights and instead, would only get information rights. Only lead investors who invested directly would get voting rights.

roles and responsibilities that the PFP operator would or would not carry out on behalf of clients in any administrative / corporate actions 28 .
50. The FSRA would monitor the activities of such Exit Facilities as part of its
supervisory process. Where the Exit Facility exhibits characteristics of a trading platform (including depth, liquidity and significant “turnover” being provided via the Exit Facility) the PFP operator may be subject to the relevant requirements under the Market Infrastructures Rules (“MIR”) or section 8 of COBS as applicable to Multilateral Trading Facilities (“MTFs”) or Organised Trading Facilities (“OTFs”) 29, depending on the business model that the Exit Facility most closely resembles. Importantly, the application of the Market Abuse provisions of FSMR Part 8 would also then apply. K. REPORTING REQUIREMENTS
51. As per the current requirement for Category 4 firms authorised by the FSRA,
PFP operators would be required to comply with the financial reporting requirements under PRU and GEN.
52. Should the PFP operator be permitted to hold or control Client Money, it
would be required to comply with the applicable client reporting provisions under COBS Rule 14.2.1 and auditor reporting provisions under COBS Rule
14.2.13 and GEN Rule 6.6. Unless otherwise agreed by a client, the PFP
operator must provide the client with relevant information on transactions

28 As outlined under paragraph 34(iii) above, i.e. “features, structures, and subscription classes of the PFP Transaction … treatment, voting/contractual rights and claims of clients of the PFP Transaction in any particular subscription class”. 29 OTFs can operate a trading venue in relation to non-equity type instruments, including Debentures. ISSUES FOR CONSIDERATION QUESTION 12:
THE FSRA SEEKS COMMENTS ON THE REQUIREMENTS WHERE PFP OPERATORS SEEK TO PROVIDE AN EXIT FACILITY, AND WHETHER THERE ARE ANY OTHER SPECIFIC SAFEGUARDS THAT SHOULD BE PUT IN PLACE UNDER THE PROPOSED PFP FRAMEWORK.

or administrative / corporate actions executed on their behalf as set out in COBS Rule 6.10.
L. COMPLEX BUSINESS MODELS
53. Given the state of start-up / SME financing in the ADGM, the UAE and the
region, and the regulatory considerations set out in this paper, the proposed PFP Framework for ADGM would cater to the more common loan-based and investment-based PFPs, where the funding sought is intended to fund the business growth and/or cash flow needs of the PFP Prospect.
54. There are other PFPs with more complex / innovative business models,
including those involving PFP Transactions that are pooled among different PFP Prospects and sold to multiple investors through the securitisation of SPVs or back-to-back loan agreements. Through such innovative structures there is also the potential for maturity transformation 30 of investments. The pooling of investments and thereby risks (among other factors) may mean that these platforms are undertaking other Regulated Activities, e.g. Managing a Collective Investment Fund, and hence would be subject to the appropriate requirements under the FSMR.
55. On balance, the FSRA is of the view that the proposed PFP Framework would
be appropriately calibrated to foster the development of practical yet effective alternative financing channels, while protecting the interests of the community providing the funding, whether loan-based or investment-based.

30 For instance, loan-based PFP Prospects may borrow on the usual terms, for loan periods of five years, but through securitization, clients may be allowed to take out their money after a thirty-day notice period; this could be deemed as deposit-taking, depending on the precise nature of the arrangement, and hence be considered a Regulated Activity. ISSUES FOR CONSIDERATION QUESTION 13:
THE FSRA SEEKS COMMENTS ON THE ONGOING REPORTING REQUIREMENTS UNDER THE PROPOSED PFP FRAMEWORK, AND WHETHER THERE IS OTHER ESSENTIAL INFORMATION THAT SHOULD BE REPORTED TO CLIENTS OR THE FSRA.

Where potential applicants wish to establish PFPs with business models that fall outside the proposed PFP Framework, the FSRA would work with them on identifying the relevant Regulated Activities to be covered by the an FSP. The FSRA would continue to monitor market developments and refine our regulatory approach in future depending on how the PFP market evolves. IMPLEMENTATION OF THE PROPOSED REGULATORY FRAMEWORK AMENDMENTS TO FSRA RULES & ISSUANCE OF GUIDANCE
56. In order to implement the PFP Framework, the FSRA is considering the
introduction of a new Regulated Activity relevant to PFPs, as outlined in paragraph 16, and related definitions that would allow for a differentiated but suitable framework to apply to PFP operators. The relevant FSRA Rules will also be amended to implement the PFP Framework.
57. In addition, the FSRA will draft guidelines detailing the associated
authorisation criteria and ongoing requirements that PFP operators would need to comply with. ISSUES FOR CONSIDERATION QUESTION 14:
THE FSRA SEEKS COMMENTS ON WHETHER THE SCOPE OF THE PFP FRAMEWORK IS APPROPRIATE TAKING INTO ACCOUNT THE STATE OF THE INDUSTRY FOR START-UP / SME FINANCING IN THE UAE AND THE REGION.

Annex A – Draft amendments to Financial Services Markets Regulations (FSMR)

Annex A
FINANCIAL SERVICES AND MARKETS
(AMENDMENT NO 2) REGULATIONS 2018
*In this Annex, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Annex A
FINANCIAL SERVICES AND MARKETS (AMENDMENT NO 2) REGULATIONS 2018 Regulations to amend the Financial Services and Markets Regulations 2015. Date of Enactment: [] 2018 The Board of Directors of the Abu Dhabi Global Market, in exercise of its powers under Article 6(1) of Law No. 4 of 2013 concerning the Abu Dhabi Global Market issued by His Highness the Ruler of the Emirate of Abu Dhabi, hereby enacts the following Regulations–

Amendments to the Financial Services and Markets Regulations 2015
Part 2 Rules and Guidance
Chapter 1 Rule-making Powers
….
Islamic Finance Rules
The Regulator may make Rules applying to Authorised Persons— (a) prescribing the requirements that must be met by a person applying for a Financial Services Permission to carry on Islamic Financial Business; (b) providing for such requirements to be varied in cases where an Application is made by an Applicant which is, at the time at which it submits its Application, regulated in a jurisdiction other than the Abu Dhabi Global Market; (c) prescribing certain persons or categories of person to be exempted from the requirements referred to in paragraph (a); and (d) prescribing exemptions from any requirements imposed by or under these Regulations under paragraph (a) that are to be— (i) limited to certain Islamic Financial Business activities or Specified circumstances; or (ii) subject to certain conditions and restrictions as the Regulator may determine. 5A. Operating a Crypto Asset Business (1) The Regulator may by Rules prescribe – (a) Accepted Crypto Assets that meet the requirements for engaging in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market; (b) requirements and factors that, in the opinion of the Regulator, are to be taken into account in determining whether or not the relevant Crypto Asset meets the requirements to be considered an Accepted Crypto Asset; (c) the requirements applicable to the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market; and

Annex A
(d) such additional requirements as the Regulator considers appropriate that Authorised Persons Operating a Crypto Asset Business must comply with, including any requirements imposed under the Rules made under these Regulations. (2) Without limiting the generality of its powers the Regulator may, by written notice— (a) exclude the application of any requirements for engaging in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market imposed by the Rules; or (b) impose on an Authorised Person engaged in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market any additional obligations that the Regulator considers appropriate; or (c) require an Authorised Person engaged in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market to take such action as is specified by the Regulator; or (d) require an Authorised Person Operating a Crypto Asset Exchange to obtain a Recognition Order to become a Recognised Investment Exchange under section 121 of these Regulations, and the Rules made under these Regulations, where the Regulator is satisfied that it is in the interests of the Abu Dhabi Global Market to do so and on such terms and conditions as the Regulator considers appropriate. ….
Part 8 Market Abuse
Market abuse
92. Market abuse
(1) For the purposes of these Regulations, Market Abuse is Behaviour (whether by one person alone or by two or more persons jointly or in concert) which— (a) occurs in relation to— (i) Financial Instruments admitted to trading on a— (A) Prescribed Market; or (B) a similar market or trading venue situated inside or outside the Abu Dhabi Global Market and accessible electronically, or otherwise, from within the Abu Dhabi Global Market; (ii) Financial Instruments in respect of which a request for admission to trading on such a market has been made; or (iii) in the case of subsection (2) or (3) Behaviour, instruments which are Related Instruments in relation to such Financial Instruments; and or (iv) an Accepted Crypto Asset admitted to trading on a Crypto Asset Exchange; and (b) falls within any one or more of the types of Behaviour set out in subsections (2) to (6).

Annex A
...
93. Supplementary provision about certain Behaviour
(1) Behaviour is to be taken into account for the purposes of this Part only if it occurs— (a) in the Abu Dhabi Global Market; or (b) in relation to— (i) Financial Instruments which are admitted to trading on a Prescribed Market situated in, or operating in, the Abu Dhabi Global Market; or (ii) Financial Instruments for which a request for admission to trading on such a Prescribed Market has been made. or (iii) Accepted Crypto Assets admitted to trading on a Crypto Asset Exchange. ….
Part 9 Misleading Statements and Impressions
102. Misleading Statements
(1) Subsection (2) applies to a person ("P") who— (a) makes a statement which P knows to be false or misleading in a material respect; (b) makes a statement which is false or misleading in a material respect, being reckless as to whether it is; or (c) dishonestly conceals any material facts whether in connection with a statement made by P or otherwise. (2) P commits a contravention of these Regulations if P makes the statement or conceals the facts with the intention of inducing, or is reckless as to whether making it or concealing them may induce, another person (whether or not the person to whom the statement is made)— (a) to enter into or offer to enter into, or to refrain from entering or offering to enter into, a Relevant Agreement; or (b) to acquire, dispose of, subscribe for or underwrite, or refrain from acquiring, disposing of, subscribing for or underwriting; or (bc) to exercise, or refrain from exercising, any rights conferred by – a Financial Instrument, a Specified Investment or an Accepted Crypto Asset, as applicable. ….
103. Misleading Impressions
(1) A person ("P") who does any act or engages in any course of conduct which creates a false or misleading impression as to the market in or the price or value of any Financial Instruments or Accepted Crypto Assets commits a contravention of these Regulations if—

Annex A
(a) P intends to create the impression; and
(b) the case falls within either subsection (2) or (3) or both.
…
Chapter 4 Transaction Reporting
149. Obligation to report transactions
(1) A Recognised Investment Exchange or MTF shall report details of transactions in Financial Instruments traded on its platform which are executed, or reported, through its systems. (2) A Crypto Asset Exchange shall report details of transactions in Accepted Crypto Assets traded on its platform which are executed, or reported, through its systems. (23) The Regulator may make Rules specifying— (a) the information to be included in reports made under subsection (1) and (2); and (b) the manner in which such reports are to be made. …
Part 22 General
….
258. Definitions
(2) In these Regulations, unless the context otherwise requires— E-money means a digital representation of Fiat Currency used to electronically transfer value denominated in Fiat Currency. Fiat Currency means, for the purpose of paragraph 73B of Schedule 1, government issued currency that is designated as legal tender in its country of issuance through government decree, regulation or law. Operating a Crypto Asset Business means the Regulated Activity specified in paragraph 73B of Schedule 1. Accepted Crypto Asset means a Crypto Asset that, in the opinion of the Regulator, meets the requirements for engaging in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market. Crypto Asset means a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store

Annex A
of value, but does not have legal tender status in any jurisdiction. A Crypto Asset is - (a) neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the Crypto Asset; and (b) distinguished from Fiat Currency and E-money. Crypto Asset Custodian means operating as a Crypto Asset Custodian operating within Abu Dhabi Global Market as part of the Regulated Activity of Operating a Crypto Asset Business. Crypto Asset Exchange means a Crypto Asset Exchange operating within Abu Dhabi Global Market as part of the Regulated Activity of Operating a Crypto Asset Business. Direction means, for the purposes of— (a) sections 9 and 10, a direction under section 9; (b) Reporting Entities and their obligations under
Part 6, a direction under section 84;
(c) suspending an investigation into Market Abuse, a direction under section 99; (d) the name of a Fund or Sub-Fund, a direction under section 117; (e) the Regulator's powers under Part 12, a direction under sections 130, 132, 133 and 137; (f) the Regulator's powers under Part 13, a direction under sections 153, 162 and 164; and (g) the Regulator's powers under Part 17, a direction under sections 206 and 217.; and (h) Authorised Person Operating a Crypto Asset Business, a direction under sub-section 5A(2). Relevant Agreement means, for the purposes of sections 102(2), an agreement— (a) the entering into or performance of which by either party constitutes an activity of a kind specified in the Rules made by the Regulator; and (b) which relates to a Designated Investment.

Annex A
…
Schedule 1
“Chapter 17B Operating a Crypto Asset Business The activity 73B. Operating a Crypto Asset Business (1) Operating a Crypto Asset Business is a specified kind of activity. (2) Operating a Crypto Asset Business involves undertaking one or more Crypto Asset activities in or from the Abu Dhabi Global Market. (3) For the purposes of sub-paragraph (2), Crypto Asset activities include – (a) Buying, Selling or exercising any right in Accepted Crypto Assets (whether as principal or agent); (b) making arrangements with a view to another person (whether as principal or agent) Buying, Selling or providing custody of Accepted Crypto Assets; (c) advising on the merits of Buying or Selling of Accepted Crypto Assets or any rights conferred by such Buying or Selling; and (d) operating - (i) a Crypto Asset Exchange; or (ii) as a Crypto Asset Custodian. (4) In sub-paragraph 3(c)(i), Operating a Crypto Asset Exchange means the trading, conversion or exchange of - (a) Fiat Currency or other value into Accepted Crypto Assets; (b) Accepted Crypto Assets into Fiat Currency or other value; or (c) one Accepted Crypto Asset into another Accepted Crypto Asset. (5) In sub-paragraph 3(d)(ii), Operating as a Crypto Asset Custodian involves - (a) safeguarding, storing, holding or maintaining custody of Accepted Crypto Assets belonging to another person; or (b) controlling or administering Accepted Crypto Assets for the purpose of sub-paragraph 5(a). Exclusions 73C. The following activities do not constitute Operating a Crypto Asset Business– (1) the creation or administration of Crypto Assets that are not Accepted Crypto Assets; (2) the development, dissemination or use of software for the purpose of creating or mining a Crypto Asset; (3) the transmission of Crypto Assets; (4) a loyalty points scheme denominated in Crypto Assets; or (5) any other activity or arrangement that is deemed by the Regulator to not constitute Operating a Crypto Asset Business, where necessary and appropriate in order for the Regulator to pursue its objectives.” ….

Annex A
2. Short title, extent and commencement
(1) These Regulations may be cited as the Financial Services and Markets (Amendment No 2) Regulations 2018. (2) These Regulations shall apply in the Abu Dhabi Global Market. (3) These Regulations come into force on the date of their publication.

Annex B – Guidance: Regulatory Framework for Private Financing Platforms

Annex B
Guidance – Regulatory Framework for Private Financing Platforms

Annex B
TABLE OF CONTENTS

INTRODUCTION...............................................................................................................................3
OBJECTIVES OF THE PRIVATE FINANCING PLATFORM FRAMEWORK.............................................3
KEY FEATURES OF THE PRIVATE FINANCING PLATFORM FRAMEWORK.........................................4
AUTHORISATION CRITERIA FOR PFP OPERATORS...........................................................................6
ONGOING REQUIREMENTS FOR PFP OPERATORS ........................................................................11
OTHER CONSIDERATIONS FOR PFP OPERATORS...........................................................................15
APPENDIX A: EXEMPT OFFER CRITERIA.................................................................................................16

Annex B

INTRODUCTION
1.1 This Guidance is issued under section 15(2) of the Financial Services and Markets
Regulations 2015 (“FSMR”). It should be read in conjunction with FSMR, the relevant Rulebooks of the Financial Services Regulatory Authority (“FSRA”) and the Guidance & Policies Manual (“GPM”) of the FSRA.
1.2 It is applicable to an applicant for a Financial Services Permission (“FSP”) to carry on
the Regulated Activity of Operating a Private Financing Platform, as defined in
Schedule 1, Chapter 17C, Section 73E of FSMR, and Authorised Persons having
received an FSP to do so.
1.3 This Guidance includes the authorisation criteria that applicants must satisfy to be
authorised to undertake the Regulated Activity of Operating a Private Financing Platform (a “PFP Operator”) in addition to their ongoing regulatory requirements.
1.4 This Guidance, together with the applicable Abu Dhabi Global Market (“ADGM”)
Regulations and FSRA Rules governing PFP Operators, is collectively referred to as the “PFP Framework”.
1.5 This Guidance is not an exhaustive source of the FSRA’s policy on the exercise of its
statutory powers and discretions. In the discharge of its regulatory mandate, the FSRA may impose other conditions to address any specific risks posed by the proposed activities of a PFP Operator.
1.6 The FSRA is not bound by the requirements set out in this Guidance and may waive or
modify these requirements at its discretion where appropriate.
1.7 The term “client” is used in this paper to denote the lenders and investors on the buyside of a transaction facilitated through a PFP (a “PFP Transaction”); the PFP Operator
will have duties in respect of those clients.
1.8 Unless otherwise defined or the context requires otherwise, the terms contained in
this Guidance have the same meanings as defined in FSMR and the Glossary (“GLO”).
OBJECTIVES OF THE PRIVATE FINANCING PLATFORM FRAMEWORK
2.1 Private Financing Platforms (“PFPs”) are online platforms that allow private
companies, such as start-ups and small and medium enterprises (“SMEs”) from early to pre-IPO stage, to source financing from private and institutional investors to launch and scale their businesses.
2.2 PFPs can play an important role in improving access to alternative financing for startups and SMEs, which are key engines of economic growth and diversification in the
MENA region. PFPs may include equity funding, private placement and invoice financing platforms that leverage data and technology to unlock new ways of raising money for small businesses from professional investors such as high net worth

Annex B
individuals, private equity, venture capital, family offices, accelerators / incubators and angel investors.
2.3 Notwithstanding the benefits of a PFP Framework to the financing ecosystem for startups and SMEs, there are risks associated with PFP Transactions that include, but are
not limited to, the following:
(a) Loss of capital: PFPs will mainly attract start-ups and SMEs that have no or very little established track record, for which the observed failure rate is generally high. (b) Lack of liquidity: In the absence of a ready secondary market for PFP Transactions, clients face the risk of not being able to exit their PFP Transactions or having to transfer them at a significant discount. (c) Lack of information: There may not be sufficient information on the start-ups and SMEs (“PFP Prospects”) seeking financing through the PFP to enable clients to conduct proper due diligence and make fully informed investment decisions. (d) Platform failure: Clients of a PFP may not be able to readily recover their assets in the event that a PFP Operator that handles Client Assets fails and becomes insolvent. (e) Conflicts of interest between the PFP Operator and clients: The remuneration of a PFP Operator is typically linked to the amount of funds raised so the interests of a PFP Operator may be more aligned with those of the PFP Prospect than those of its client providing financing.
2.4 In light of these considerations, the FSRA has developed a proportionate, risk-based
PFP Framework that facilitates access by start-ups and SMEs to alternate sources of funding, rather than traditional channels, while applying the necessary regulatory safeguards to ensure they operate in a safe and sound manner to protect their clients.
3. KEY FEATURES OF THE PRIVATE FINANCING PLATFORM FRAMEWORK
3.1 Definition of Regulated Activity
The Regulated Activity of Operating a Private Financing Platform is defined in
Schedule 1, Chapter 17C, Section 73E of FSMR and captures a number of alternative
financing arrangements.

Annex B
3.2 Clients
As retail investors, in general, may not fully appreciate the high risks associated with the transactions facilitated through a PFP, the FSRA intends to restrict the accessibility to PFPs under the PFP Framework to primarily Professional Clients. PFP Operators generally do not provide financial advisory services to clients. Under these circumstances, the onus is on clients to seek independent financial advice or to make their own evaluation of the risks associated with any potential loan or investment. Professional Clients are considered to be more sophisticated and have more resources and capacity to make informed decisions on prospective debt and equity instruments offered through a PFP after considering the inherent risks. There may be instances where a PFP Operator would like to offer its services to potential, sophisticated clients who do not meet the current financial criteria to be classified as a Professional Client. The FSRA may consider allowing the participation of these clients where the FSRA considers them able to adequately understand the risks associated with PFP Transactions, based on their knowledge, skills and experience. In such circumstances, the FSRA may impose other appropriate conditions or safeguards upon the PFP Operator. All clients must be pre-screened and on-boarded by the PFP Operator, in accordance with COBS Chapter 2, before being given access to the PFP.
3.3 PFP Prospects
A PFP Prospect must be a Body Corporate. The FSRA is of the view that a PFP would be an inappropriate forum for use by natural persons seeking financing for a business venture for a number of reasons, including:
(a) the inappropriateness of a PFP for the formation of partnerships between individuals; and (b) the undesirability of posting personal information enabling the clients of a PFP to ascertain the creditworthiness of an individual. The FSRA is additionally of the view that a PFP would be inappropriate for capitalising ventures at the pre-incorporation stage of their development, given the lack of track record and the limited scope of potential due diligence that may be undertaken.
3.4 Exempt Offers
A Security being offered to the public within the ADGM must be accompanied by a Prospectus under Section 61 of FSMR, unless it qualifies as an Exempt Offer. Accordingly, the FSRA will only allow an investment-based offer to be made through a PFP where it qualifies as an Exempt Offer through satisfying any of the criteria set out in Markets (“MKT”) Rule 4.3.1, also bearing in mind Rules 4.3.2 and 4.3.3, which

Annex B
are included in Appendix 1 of this Guidance.
3.5 Client Assets
As best practice, a PFP Operator should appoint an Eligible Custodian to safeguard Client Assets. However, alternative arrangements may be permitted by the FSRA where appropriate safeguards are implemented. In the case that a PFP Operator does not appoint an Eligible Custodian, it must comply with:
(a) the higher capital requirements set out in Prudential – Investment, Insurance Intermediation and Banking (“PRU”) Chapter 3 and Section 4.3(f) of this Guidance; and (b) where applicable, the following Conduct of Business (“COBS”) Rules:
(i) Chapter 14 – Client Money Rules(if holding or controlling Client Money, Providing Custody or Arranging Custody); (ii) Chapter 15 – Safe Custody Rules (if holding or controlling Client Investments, Providing Custody or Arranging Custody); and (iii) Chapter 16 – Recovery & Resolution Planning for Client Money & Safe Custody Assets (if holding Client Money or Client Investments).
4. AUTHORISATION CRITERIA FOR PFP OPERATORS
4.1 When reviewing an FSP application from a proposed PFP Operator (a “PFP Applicant”),
the FSRA will consider the Threshold Conditions set out in FSMR and Chapter 5 of the General (“GEN”) Rulebook and the matters set out in Chapter 2 of the GPM.
4.2 The Threshold Conditions set out in GEN Rule 5.2.7, require a PFP Applicant to
demonstrate to the satisfaction of the FSRA that it:
(a) has adequate and appropriate resources, including financial resources; (b) is fit and proper; (c) is capable of being effectively supervised; and (d) has adequate compliance arrangements, including policies and procedures, that will enable it to comply with all the applicable legal requirements.

Annex B
4.3 Chapter 2 of the GPM sets out in detail the FSRA’s approach to assessing whether an
applicant for an FSP meets the Threshold Conditions above. Some key considerations for PFP Applicants are the following. (a) Business Model The FSRA will consider the PFP Applicant’s proposed business model and assess any potential risks it poses. In particular, the FSRA will consider:
(i) the nature and structure of the products offered on the PFP; (ii) the PFP Applicant’s target clients; (iii) the roles and responsibilities of the PFP Applicant; (iv) whether the PFP Applicant might have any perceived conflicts of interest when authorised and how these might be managed; (v) any proposed outsourcing arrangements with third party service providers; (vi) whether the PFP Applicant is proposing to carry out any other Regulated Activities; and (vii) the safekeeping arrangements for Client Assets if the PFP Applicant intends to hold these. In the case that a PFP Applicant proposesto carry out other Regulated Activities such as Advising on Investments or Credit, Managing Assets or Managing a Collective Investment Fund, the PFP Applicant would need to demonstrate how it would manage any potential conflicts of interest that these activities may pose. (b) Track Record A PFP Applicant should demonstrate that it or its Group has an established track record in corporate finance or a related business, of a minimum of five years, in a jurisdiction that has a legislative and regulatory framework that is of comparable standard to that of the FSRA. The PFP Applicant or its Group, where applicable, should also be subject to proper supervision by a competent regulatory authority. Alternatively, where a PFP Applicant does not have an established track-record of at least five years or meet the regulatory status requirement, the FSRA may take into account (i) the track record of the PFP Applicant’s Controllers/substantial shareholders and (ii) the experience and qualifications of the PFP Applicant’s key individuals, when assessing the application.

Annex B
(c) Governing Body
(i) Licensed Directors – A PFP Applicant which is a Body Corporate incorporated in the ADGM, must register all its Directors with the FSRA in accordance with GEN Rule 5.5.4. (ii) Licensed Partners – A PFP Applicant which is Partnership established in the ADGM, must register all its Partners with the FSRA in accordance with GEN Rule 5.5.5. These appointments are not required for PFP Applicants that are branches of legal entities domiciled outside the ADGM. The PFP Applicant must demonstrate that its Governing Body has sufficient collective skills and experience in corporate finance or related fields to oversee the firm’s operations. (d) Mandatory Appointments A PFP Applicant must also appoint the following individuals in accordance with GEN Rule 5.5.1:
(i) Senior Executive Officer (“SEO”) – an SEO who is ultimately responsible for the day-to-day operation, supervision and control of the firm’s operation. The SEO must possess a minimum of five years’ relevant and demonstrable experience and qualifications. (ii) Finance Officer (“FO”) – a Finance Officer with the relevant expertise to prepare and oversee its financial reporting. (iii) Compliance Officer (“CO”) – a suitably experienced and qualified Compliance Officer who is independent of the firm’s operations and oversees the compliance function. (iv) Money Laundering Reporting Officer (“MLRO”) – a suitably experienced and qualified MLRO who is independent of the firm’s operations and responsible for the implementation of the firm’s antimoney laundering controls and the day-to-day oversight of its compliance with the Anti-Money Laundering and Sanctions (“AML”) Rules and Guidance. Other considerations for PFP Applicants:
 The SEO, CO and MLRO must all be resident in the UAE;  The CO and MLRO functions may be carried out by the same individual; and  The FO, CO and MLRO may be carried out in-house or outsourced to

Annex B
another Group entity or service provider.
The FSRA will consider the collective suitability of all of the PFP Applicant’s proposed staff and whether there is a sufficient range of individuals with appropriate knowledge, skills and experience to understand, operate and manage the firm's affairs in a sound and prudent manner. (e) Systems and Controls The FSRA will assess the following governance and control requirements in relation to the PFP Applicant. Requirement Rule(s) Note Risk Management GEN 3.3.4 – 3.3.6 A PFP Operator must establish and maintain risk management systems and controls to enable it to identify, assess, mitigate, control and monitor its risks. This framework should include measures to minimise technology risks associated with the PFP. In particular, a PFP Operator should have measures in place to ensure data integrity and the protection of its technology from fraud, impairment, tampering, misuse or unauthorised access. Compliance Arrangements GEN 3.3.7 – 3.3.12 A PFP Operator must establish and maintain compliance arrangements, including processes and procedures that ensure and evidence, as far as reasonably practicable, that it complies with all Regulations and Rules. While compliance support may be provided by a related entity and/or third party service providers, the ultimate responsibility for compliance with applicable laws and regulations lies with PFP Operator’s SEO and Governing Body. Internal audit GEN 3.3.13 – 3.3.15 A PFP Operator’s internal audit arrangements should be appropriate to the scale, nature and complexity of its operations. The internal audit may be conducted by the internal audit function within the PFP

Annex B
Operator, its Group’s internal audit function or outsourced to a third party service provider. Conflicts of Interest GEN 2.2.7 &
3.3.21 –
3.3.24
A PFP Operator must have arrangements in place to ensure that conflicts of interest between itself and its Customers, between its Employees and Customers and between one Customer and another are identified and prevented or managed, or disclosed, in such a way that the interests of a Customer are not adversely affected. (f) Capital Requirements A PFP Operator will fall within Prudential Category 4. As set out in PRU Chapter 3, a PFP Operator must maintain at all times Capital Resources in excess of its Capital Requirement, which is the higher of its Base Capital Requirement or Expenditure-Based Capital Minimum. The table below sets out the Capital Requirement for PFP Operators:
Client Asset Arrangements Base Capital
Requirement
(USD)
Expenditure
Based Capital
Minimum
PFP Operator does not hold or control
Client Assets
10,000 6/52 x AAE 1
PFP Operator holds or controls Clients
Assets
150,000 18/52 X AAE
(g) Professional Indemnity Insurance (“PII”) In accordance with PRU Rule 6.12, a PFP Operator must maintain PII cover appropriate to the nature, size and risk profile of its business.

1 Annual Audited Expenditure, calculated in accordance with Rule 3.7.2

Annex B
4.4 Prior to issuing an FSP, the FSRA may require the technology utilised by a PFP to be at
a suitably advanced staged in order for the PFP Applicant to demonstrate the functionality of the platform and its compliance with the PFP Framework.
4.5 For more details on the process for authorisation as a PFP Operator, please contact
the FSRA at: authorisation@adgm.com.
5. ONGOING REQUIREMENTS FOR PFP OPERATORS
5.1 Upon authorisation, a PFP Operator, as a holder of an FSP, must comply at all times
with the relevant requirements in FSMR and the FSRA Rulebooks, including GEN, COBS, PRU and AML.
5.2 The principal conduct rules that apply to PFP Operators are set out in
COBS Chapter 18, and are outlined below:
(a) Risk Warning
A PFP Operator must publish a prominent risk warning on the PFP which identifies the risks involved in participating in a PFP Transaction. As a minimum the risk warning should address the risks set out in section 2.3 of this Guidance. Prior to registering a Client to access the PFP, a PFP Operator must obtain their acknowledgement that they fully understand the risks set out in the risk warning. (b) Due Diligence The PFP Operator is required to undertake appropriate and proportionate due diligence on a PFP Prospect covering the matters set out in COBS Section 18.4, as a minimum. Where reasonable and prudent, the due diligence review of a PFP Prospect may require independent verification. A PFP Operator is not required to disclose its due diligence assessments to clients, although it may choose to do so. However, it is required to disclose and explain in a clear way its selection and acceptance criteria for a PFP Transaction to be offered on its platform. It must also disclose its due diligence methodology for each of its criterion including where the due diligence is undertaken by a third party. A PFP Operator must keep records of the due diligence undertaken on all PFP Prospects for the FSRA’s review. A PFP Operator must also form a reasonable basis for believing that the PFP Prospect has adequately set out relevant information regarding its proposal in a clear, fair and not misleading manner for clients to make an informed decision including, but not limited to:

Annex B
(i) general information about the PFP Prospect including details of its incorporation, commercial licence, directorships, major shareholders, beneficial holders; (ii) the business proposal and business model; (iii) financial information about the PFP Prospect; (iv) criteria by which the PFP Transaction would be regarded as being in default; (v) a wind-down plan, including information on the return of Client Assets, in the event of business default/failure of the PFP Prospect; (vi) features, structures, and subscription classes of the PFP Transaction; (vii) basis of subscription class and allotment to each client; (viii) treatment, voting / contractual rights and claims of clients of the PFP Transaction in any particular subscription class; (ix) pricing and valuation basis of the PFP Transaction; (x) risks specific to the PFP Prospect and PFP Transaction; (xi) parties involved in the PFP Transaction and any conflicts of interest, including any financial or other interests that the PFP Operator, its key officers, Employees and Associates have in the PFP Prospect or PFP Transaction; (xii) procedures and obligations for clients in any administrative / corporate actions; (xiii) whether the PFP Prospect is seeking funding from other sources at the same time; (xiv) intended use of funds; (xv) treatment of oversubscriptions and maximum amount accepted, if applicable; (xvi) any cancellation rights; (xvii) format / frequency of performance reporting to clients; and (xviii) format / frequency of ongoing disclosure of applicable information in relation to the PFP Transaction and PFP Prospect.

Annex B
Any material changes to the information disclosed in the proposal to clients must be updated and notified to clients within a reasonable timeframe and at least ten business days prior to closing of the PFP Transaction. (c) Forums / Message Boards A PFP Operator is not required to comply with the above disclosure requirements where it is merely gauging the interest of clients on a potential PFP Transaction where the related start-up or SME is not identified. In such instances, the PFP Operator should monitor the forum or message board used to gauge client interest to remove any potentially misleading or fraudulent posts. (d) Marketing As access to PFPs is restricted to registered clients only, mass solicitation, advertising or canvassing is not permitted. However, a PFP Operator may promote its platform to the general public. Such communication may include general information about the PFP Operator, its business model, performance and the PFP Prospects accepted on its platform. Such communication must not include any information on specific offers, research or recommendations relating to a PFP Prospect or a PFP transaction. (e) Disclosure A PFP Operator must disclose the following information to its clients, either in written form or electronically through the PFP, to enable them to make an informed decision on whether to participate in a transaction on the PFP:
(i) how the PFP operates (e.g. whether it offers loan or investment based financing opportunities, the process for participating in a financing opportunity; how Client Assets are held, how transactions through the PFP may be structured); (ii) the PFP Operator’s remuneration model (e.g. whether the PFP Operator is remunerated entirely by PFP Prospects by a percentage of funds raised or on a transaction basis by its clients); (iii) the PFP Operator’s roles and obligations (including to clients in any administrative / corporate actions in relation to the PFP Transactions). Where the PFP Operator and clients relationship is non-advisory in nature, the PFP Operator must clearly disclose the fact and that the information presented does not constitute personal advice or a recommendation);

Annex B
(iv) the recourse available to clients in the event of the failure of the PFP Operator or the PFP Prospect; (v) in the event that there is a material adverse change in the circumstances of PFP Transaction or the PFP Prospect defaults, the PFP Operator’s roles and obligations, including any arrangements in relation to the recovery of the Client Assets; and (vi) the general disclosure obligations set out in COBS (e.g. where applicable, the client agreement content in Rule 3.3.2 and potential conflicts of interest in Rule 3.5.4). (f) Exit Facility A PFP Operator may offer an incidental facility (termed an “Exit Facility”) to permit clients to exit their PFP transactions by allowing them to seek potential “buyers” who are also clients of the PFP Operator in order to transfer their rights and obligations under their loan or investment agreements. The Exit Facility should not allow active trading by clients and should be solely an ancillary service provided by the PFP Operator. The Exit Facility must comply with the requirements set out in COBS Section 18.8. In particular, the PFP Operator should not be remunerated for any transaction made through this facility nor should it provide advice to or make arrangements on behalf of clients using this facility. Where an Exit Facility exhibits characteristics of a trading facility, the PFP Operator may require a separate FSP for Operating a Multilateral Trading Facility or Operating an Organised Trading Facility 2 . Any investment-based offer made through the Exit Facility must continue to comply with the Exempt Offer criteria set out in Appendix A of this Guidance. (g) Intermediate entities Where a PFP Operator structures a PFP Transaction using a special purpose vehicle, that vehicle must be incorporated in the ADGM to ensure the ease of administration and greater regulatory oversight in the event of the failure of the PFP Operator.
5.3 A PFP Operator will also need to consider the applicability of other ADGM Regulations
including, but not limited to, the Companies Regulations 2015, Insolvency Regulations 2015, Data Protection Regulations 2015 and the Common Reporting Standard Regulations 2017; as well as other international regulations including the Foreign Account Tax Compliance Act.

2 Defined in FSMR Schedule 1, Part 2, Chapter 9.

Annex B
5.4 Chapter 3 of the GPM sets out in detail the FSRA’s risk-based approach to the
supervision of Authorised Persons.
6. OTHER CONSIDERATIONS FOR PFP OPERATORS
6.1 Fees
Pursuant to the Fees Rules, a PFP Operator will be required to pay the following fees:
Initial Authorisation
Fee
$5,000 for the Regulated Activity of Operating a Private Financing Platform. An additional $5,000 would apply for each Regulated Activity for which it also seeks an FSP. Approved Person Application Fee $500 for each Approved Person for whom it is seeking authorisation. Annual Supervision Fee $5,000 for the Regulated Activity of Operating a Private Financing Platform. An additional $5,000 would apply for each Regulated Activity for which it has an FSP.
6.2 Islamic Financial Business
The Islamic Finance Rules (“IFR”) apply to:
(a) every Authorised Person, including a PFP Operator, who carries on, or holds itself out as carrying on, an Islamic Financial Business in the ADGM whether as an Islamic Financial Institution or through an Islamic Window; and (b) an Authorised Person, including a PFP Operator, making an Offer in the ADGM relating to a Security which is, or is held out as being, a Shari'a-compliant Security. Accordingly, should a PFP Operator itself wish to promote a Specified Investment as being Shari’a compliant, it must hold the requisite Islamic Financial Business qualification on its FSP.

Annex B
APPENDIX A: EXEMPT OFFER CRITERIA
MARKETS (“MKT”) RULE 4.3
Guidance
This section prescribes the type of Offer that is an Exempt Offer. The prohibition in section 58(1) of the FSMR does not apply to such Offers. Accordingly, a Person may make an Offer of Securities to the Public in the circumstances specified in this Rule without a Prospectus.
4.3.1 For the purposes of section 61(3)(a) of the FSMR the Regulator hereby prescribes the
circumstances in which an Offer is an Exempt Offer:
(1) an Offer made to or directed at only Professional Clients other than natural Persons; (2) an Offer in or from the ADGM which is directed at fewer than 50 Persons in any 12 month period, excluding Professional Clients who are not natural persons; (3) an Offer where the total consideration to be paid by a Person to acquire the Securities is at least $100,000, or an equivalent amount in another currency; (4) an Offer where the Securities are denominated in amounts of at least $100,000, or an equivalent amount in another currency; (5) an Offer where the total aggregate consideration for the Securities offered is less than $100,000, or an equivalent amount in another currency, calculated over a period of 12 months; (6) an Offer where Shares are issued in substitution for Shares of the same class as already issued, where the issue of the new Shares does not involve any increase in the issued Share capital; (7) an Offer where the Securities are Convertibles issued under a Prospectus to existing members or creditors of the Issuer or a member of its Group and there is no additional consideration to be paid; (8) an Offer where the Securities are offered in connection with a Takeover and a document is made available containing information which is considered by the Regulator as being equivalent to that of a Prospectus; (9) an Offer where the Securities are offered, allotted or to be allotted in connection with a merger if a document is available containing information which is regarded by the Regulator as being equivalent to that of a Prospectus;

Annex B
(10) an Offer where the Securities are offered, allotted or to be allotted in connection with a rights issue where:
a. the Securities are of a class subject to Reporting Entity disclosure; and b. a document is made available containing information on the number and nature of the Securities including rights attaching to those Securities and the reasons for and details of the Offer; (11) an Offer where the Shares are offered, allotted or to be allotted to existing Shareholders free of charge or dividends paid out in the form of Shares of the same class as the Shares in respect of which the dividends are paid, and a document is made available containing information on the number and nature of the Shares and the reasons for and details of the Offer; (12) an Offer where the Securities are offered, allotted or to be allotted to an existing or former Director or Employee, or any Close Relative of such a Director or Employee, of the Issuer or a member of the same Group as the Issuer and a. the Issuer or the member of the Group already has its Securities admitted to trading on a Regulated Exchange; and b. a document is made available to the offerees containing information on the number and nature of the Securities and the reasons for and details of the Offer.
4.3.2 Where any Securities, which were previously the subject of an Exempt Offer, are
subsequently offered to the public, such a subsequent Offer will be regarded, for the purposes of Part 6 of the FSMR and the Rules made for the purposes of that Part, as a separate and new Offer of Securities to the Public, unless that Offer meets one of the criteria in Rule 4.3.1.
4.3.3 An Offer of Securities remains an Exempt Offer even if the Offer falls in whole or part
within more than one of the circumstances specified in Rule 4.3.1, as long as all of the Offer falls within at least one of those circumstances.

Annex C – Discussion Paper No. 1 of 2018

CONSULTATION PAPER
NO. 2 OF 2018
30 APRIL 2018
INTRODUCTION OF CRYPTO ASSET
REGULATORY FRAMEWORK IN ADGM

CONTENTS
INTRODUCTION..........................................................................................................................3
BACKGROUND............................................................................................................................6
PROPOSED LEGISLATIVE FRAMEWORK......................................................................................7
REGULATORY APPROACH...........................................................................................................................7
RISK MITIGATION..........................................................................................................................................8
NEW REGULATED ACTIVITY........................................................................................................................9
REGULATORY REQUIREMENTS............................................................................................................... 11
SUPPLEMENTARY GUIDANCE................................................................................................................. 11
RISK-BASED FEE STRUCTURE .................................................................................................................. 12
DRAFT AMENDMENTS TO OTHER FSRA RULEBOOKS...................................................................... 13

INTRODUCTION
WHY ARE WE ISSUING THIS PAPER?

The Abu Dhabi Global Market ("ADGM") together with the Financial
Services Regulatory Authority ("FSRA") have issued this Consultation Paper to invite public feedback and comments on proposed amendments to ADGM regulations and specific FSRA rulebooks.
In October 2017, ADGM was the first jurisdiction in the MENA region to
publicly support the development of certain digital assets, including Initial Coin Offerings (ICOs). Noting the value that ICOs can generate in transforming capital raising activities and the capital markets landscape generally, ADGM clarified its regulatory treatment of ICOs in respect of coins or tokens that have the characteristics of a Security. The guidance also confirmed the FSRA’s treatment of crypto assets as commodities, and clarified that derivatives over crypto assets would be regulated within ADGM.
In February 2018, the FSRA issued a press release informing the market that
it is ‘reviewing and considering the development of a robust, riskappropriate regulatory framework to regulate and supervise activities of virtual currency exchanges and intermediaries’.
The FSRA would now like to invite comments on its proposed regulatory
framework for the regulation of crypto asset activities conducted in or from ADGM, including exchanges, custodians and other intermediaries engaged in crypto asset activities (the “Spot Crypto Asset Framework”).
The proposed framework involves amendments to the ADGM’s regulations
and FSRA Rules, including:
a. the introduction of a new Regulated Activity of Operating a Crypto Asset Business (“OCAB”), to be set out in Chapter 17B of the Financial Services and Markets Regulations 2015 (“FSMR”); b. amendments to the FSRA Fees Rules 2015 (“FEES”) to introduce fees for the new Regulated Activity of Operating a Crypto Asset Business;

c. amendments to the FSRA Conduct of Business Rules (“COBS”) to
introduce a new Chapter 17 addressing specific requirements for the Regulated Activity of Operating a Crypto Asset Business; d. amendments to the FSRA Market Infrastructure Rulebook (“MIR”) proposing rules applicable to Recognised Investment Exchanges operating a Crypto Asset Exchange; and e. amendments to terms defined in FSMR and the FSRA Glossary (“GLO”).
6. The proposed Spot Crypto Asset Framework is set out in Annex A and
Appendices 1 - 4 to this Paper.
7. Unless otherwise defined, capitalised terms referred to in this Paper have
the meanings attributed to such terms as contained in FSMR or GLO. WHO SHOULD READ THIS PAPER?
8. This Consultation Paper may be of interest to a number of parties, including
individuals, organisations and investors looking to carry on crypto asset activities in or from ADGM and their professional advisers, as well as Recognised Investment Exchanges wishing to operate a Crypto Asset Exchange within ADGM. HOW TO PROVIDE COMMENTS
9. All comments should be in writing and sent to the address or email
specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. If relevant, please identify the organisation you represent when providing your comments.
10. FSRA reserves the right to publish, including on its website, any comments
you provide, unless you expressly request otherwise at the time of making any comments. Comments supported by reasoning and evidence will be given more weight by FSRA.

WHAT HAPPENS NEXT?
11. The deadline for providing comments on this proposal is 28 May 2018.
Once we receive your comments, we will consider whether any modifications are required to the proposed amendments to the ADGM’s legislative framework. The Board and FSRA will then proceed to enact the proposed regulatory framework. We will issue a notice on our website when this happens. COMMENTS TO BE ADDRESSED TO:
Consultation Paper No. 2 of 2018
Financial Services Regulatory Authority
Abu Dhabi Global Market Square
Al Maryah Island
PO Box 111999
Abu Dhabi, UAE
Email: consultation@adgm.com

BACKGROUND

Technological innovation is transforming the financial services industry.
Rapid advances in new technologies, including the development of distributed ledger technologies and creation and utilisation of crypto assets, have provided opportunities for significant change and disruption to financial services and other related activities globally.
From being almost non-existent ten years ago, crypto assets have now
become an asset class in their own right, and are increasingly recognised as a medium of exchange for the payment of goods and services. Over 200 trading venues now exist worldwide for spot trading of over 1500 crypto assets.
To date, regulators have been monitoring developments in the trading
activities of crypto assets very closely, given the significant risks involved, including the potential for criminal activity and fraud (e.g., tax evasion, money laundering and counter-terrorist financing (AML/CTF)) and significant consumer losses (due to price volatility and technology governance issues), as well as custody issues, information asymmetry and a lack of market integrity.
Worldwide, regulators have taken divergent approaches to the regulation
of crypto asset spot trading:
 The majority of regulators do not licence spot crypto asset activities, focusing rather on AML/CTF risks;  In some jurisdictions regulators have banned spot trading of crypto assets; and  In a limited number of jurisdictions regulators have licenced entities undertaking crypto asset activities and sought to take a more holistic approach to their regulation.
This year has seen a significant shift in the position of regulators in relation
to spot trading of crypto assets. The G20 has required that recommendations for the effective regulation of spot trading be put

forward by July 2018 and a general consensus appears to be forming amongst regulators that a global standard is required for the regulation of crypto asset spot trading. PROPOSED LEGISLATIVE FRAMEWORK REGULATORY APPROACH
6. Noting the growing global consensus that spot trading of crypto assets
should be regulated, the FSRA has sought to implement an appropriate and effective regulatory regime.
7. Based on its engagement with industry experts, one of the principal issues
that the FSRA has identified is that crypto asset markets have so far been predominately ‘retail’, and therefore highly volatile in nature, with institutional players remaining on the sidelines due to their concerns over current regulatory controls.
8. In formulating the proposed Spot Crypto Asset Framework, the FSRA has
identified and sought to address each of the key risks associated with spot crypto asset activities appropriately, in order to create a comprehensive framework so as to allow for both conventional institutional players as well as large crypto asset players to operate in ADGM.
9. While extremely important, the FSRA believes that the regulation of
AML/CTF/KYC risks alone will not sufficiently mitigate certain wider Crypto Asset related risks, and therefore would not allow us to meet our medium to long term regulatory objectives.
10. In order to provide regulatory certainty to operators, participants, and
investors both institutional and retail, engaged in crypto asset activities, the FSRA has addressed issues around consumer protection, custody, technology governance, disclosure/transparency, Market Abuse, and by applying controls over Crypto Asset Exchanges such that they are regulated in a manner similar to how securities exchanges are regulated globally.

By extending our regulatory oversight in this way, FSRA’s aim is to establish
a first-in-the-world crypto asset market that all relevant players are comfortable participating in. RISK MITIGATION
The FSRA has identified five main risk areas associated with spot Crypto
Asset markets, and has developed mitigations for each of these risks, as identified below. RISK MITIGATION STRATEGY AML/CTF/TAX The FSRA AML Rulebook applies in full to the new Regulated Activity of Operating a Crypto Asset Business (OCAB). Entities engaged in OCAB must consider their reporting obligations in relation to FATCA and Common Reporting Standards. CONSUMER PROTECTION All material risks associated with Crypto Assets generally, each particular Crypto Asset, and an OCAB entities’ products, services and activities must be disclosed. TECHNOLOGY GOVERNANCE Systems and controls in relation to:
 Crypto Asset wallets
 Private keys
 Origin and destination of Crypto Asset funds  Security  Risk management. ‘EXCHANGE-TYPE’ ACTIVITIES Crypto Asset Exchanges will be regulated in a manner similar to FSRA’s regulation of Multilateral Trading Facilities (MTFs), and will be required to have in place, among other requirements, the following:
 Market surveillance

 Settlement processes
 Transaction recording
 Transparency & public disclosure mechanisms  Exchange-like operational systems and controls (including in relation to access). CUSTODY Crypto Asset Custodians will be regulated in a manner similar to FSRA’s regulation of ‘conventional’ custodians. Changes have been made to include Crypto Assets as Client Assets and Investments, and to require more frequent reconciliations/ reporting. NEW REGULATED ACTIVITY
13. To implement the proposed Spot Crypto Asset Framework, the FSRA
proposesto introduce a new Regulated Activity of Operating a Crypto Asset Business. This will differentiate the regulation of Crypto Asset activities from the FSRA’s current regulatory framework which was designed with traditional Financial Instruments in mind.
14. The new Regulated Activity would include:
(a) General activities, such as -
 buying or selling Accepted Crypto Assets(see paragraph 17 below) as principal or agent;  making arrangements with a view to another person buying, selling or providing custody of Accepted Crypto Assets; and  advising on the merits of buying or selling Accepted Crypto Assets. (b) Specific activities, that will attract additional regulatory requirements, namely -  Operating a Crypto Asset Exchange; or

 Operating as a Crypto Asset Custodian.
15. OCAB will not cover certain activities, such as –
 the creation or administration of Crypto Assets that are not Accepted Crypto Assets;  the development, dissemination or use of software for the purpose of creating or mining Crypto Assets;  the transmission of Crypto Assets; and  loyalty point schemes denominated in a Crypto Asset.
16. The FSRA’s definition of ‘Crypto Assets’ is based on the well accepted
definition of ‘virtual currency’ of the Financial Action Task Force (FATF).
17. FSRA would have a general power to determine Accepted Crypto Assets –
those Crypto Assets that will be permitted in relation to OCAB activities within ADGM, in order to prevent higher-risk activity involving or relating to illiquid or immature Crypto Assets, by – (a) applying a market capitalisation/maturity threshold (proposed to be of at least 4 USD billion); and (b) retaining sufficient discretion for the FSRA to take additional factors (e.g., security, connectivity, market demand/volatility, type of distributed ledger, innovation and practical application) into account in order to assess the suitability of Crypto Assets based on our risk appetite. ISSUES FOR CONSIDERATION Q1: DO YOU AGREE WITH PROPOSED APPROACH TO REGULATE CRYPTO ASSET EXCHANGES AND CUSTODIANS AS WELL AS INTERMEDIARIES? Q2: DO YOU AGREE WITH THE PROPOSED DISTINCTION BETWEEN GENERAL ACTIVITIES CAPTURED WITHIN THE REGULATED ACTIVITY OF OCAB AND SPECIFIC ACTIVITIES (SUCH AS OPERATING A CRYPTO ASSET EXCHANGE OR A CRYPTO ASSET CUSTODIAN) ATTRACTING ADDITIONAL REGULATORY REQUIREMENTS?

Please refer to Annex A for the proposed amendments to FSMR, including
the new Regulated Activity, definitions and consequential amendments. REGULATORY REQUIREMENTS
Once granted a Financial Services Permission, OCAB entities will be
regulated under the FSMR and the FSRA Rulebooks as Authorised Persons.
To implement the Spot Crypto Asset Framework, the FSRA proposes to
introduce a new Chapter 17 to COBS setting out additional Rules applicable to the OCAB activity. These requirements will be applied proportionately, depending on the level of risk that the proposed activity poses, with -  general obligations imposed on all OCAB entities, including dealers and advisors (such as AML/CTF protections, capital requirements, technology governance and controls, and specific disclosure requirements); and  further obligations applicable to Crypto Asset Exchanges and Crypto Asset Custodians in addition to the general obligations (in the case of a Crypto Asset Exchange, specific MTF obligations, including market surveillance, settlement processes, transaction recording and transparency requirements, and in relation to a Crypto Asset Custodian, additional client asset protections).
Please refer to Appendix 1 for the proposed amendments to COBS.
SUPPLEMENTARY GUIDANCE
The features and regulatory requirements of the Spot Crypto Asset
Framework, as well as FSRA’s approach to the regulation of OCAB activities, ISSUES FOR CONSIDERATION Q3: DO YOU HAVE ANY CONCERNS ABOUT THE PROPOSAL FOR THE FSRA TO DETERMINE ACCEPTED CRYPTO ASSETS FOR THE PURPOSE OF ENGAGING IN THE OCAB ACTIVITY IN OR FROM THE ADGM? Q4: HAVE THE MARKET CAPITALISATION AND OTHER DISCRETIONARY FACTORS THAT FSRA MAY TAKE INTO ACCOUNT BEEN APPROPRIATELY SET?

will be set out in detail in Guidance. The FSRA will publish this Guidance shortly. RISK-BASED FEE STRUCTURE
23. The proposed risk-based fee structure for the new Regulated Activity is
tiered, as set out in Table 1 below:
Table 1
Activity Authorisation
Fee
Supervision
Fee
Trading Levy
OCAB - General $20,000 $15,000 N/A
Operating a Crypto
Asset Exchange
$125,000 $60,000 0.0015% of daily trading value, payable monthly
24. The proposed fee structure sets a high watermark in order to –
 recognise the substantial risks posed by the new Regulated Activity; and  cater to those Applicants who are able to demonstrate their willingness and ability to comply with the requirements of the Spot Crypto Asset Framework.
25. The higher authorisation and supervision fees and Trading Levy proposed
for Crypto Asset Exchanges reflect a heightened supervisory burden for FSRA in terms of human resources, technology and technical costs.
26. Please refer to Appendix 2 for the proposed amendments to FEES.
27. The FSRA is also considering the establishment of a Compensation Scheme
in the future, aimed to assist with compensation of Crypto Asset Exchange clients who have suffered a loss in certain circumstances, and is proposing to apply a proportion of the Trading Levy towards this scheme. The FSRA is currently considering the manner in which such a scheme would be governed, the circumstances in which it would offer an avenue of redress for clients and the appropriate timeframe for the scheme to be established. We will update the market on the developments in this regard in due course.

DRAFT AMENDMENTS TO OTHER FSRA RULEBOOKS
28. FSRA also proposes to introduce a number of consequential amendments,
including - a. amendments to MIR, proposing rules applicable to Recognised Investment Exchanges operating a Crypto Asset Exchange, as set out in Appendix 3 to this Paper; and b. new definitions associated with the Spot Crypto Asset Framework, mirroring the definitions introduced in section 258 of the FSMR, in GLO, as set out in Appendix 4 to this Paper. ISSUES FOR CONSIDERATION Q7: DO YOU HAVE ANY CONCERNS ABOUT ANY OF THESE PROPOSALS? IF SO, WHAT ARE THESE CONCERNS AND HOW SHOULD THEY BE ADDRESSED? ISSUES FOR CONSIDERATION Q5: DO YOU HAVE ANY COMMENTS ON THE PROPOSED FEES IN RELATION TO EACH CRYPTO ASSET ACTIVITY? Q6: DO YOU HAVE ANY COMMENTS ON THE PROPOSAL TO ESTABLISH A COMPENSATION SCHEME OR VIEWS ON THE MANNER IT OUGHT TO BE GOVERNED?

Appendix 1 - Draft amendments to the Conduct of Business Rulebook (COBS)

Appendix 1
Conduct of Business Rulebook (COBS)
*In this Appendix, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Appendix 1
Contents

Introduction ............................................................................................................1
Client Classification.................................................................................................1
Core Rules – Investment Business, Accepting Deposits, Providing Credit and
Providing Trust Services........................................................................................13
Additional Rules – Accepting Deposits and Providing Credit ...............................22
Additional Rules — Providing Trust Services........................................................24
Additional Rules – Investment Business...............................................................27
Core Rules – Insurance..........................................................................................41
Additional Rules: Operating an MTF or OTF ........................................................51
Core Rules – Operating A Credit Rating Agency ...................................................55
Core Rules – Operating a Central Securities Depository ......................................67
Records of Orders and Transactions.....................................................................69
Key Information and Client Agreement................................................................72
Periodic Statements..............................................................................................74
Client Money Provisions .......................................................................................76
Safe Custody Provisions......................................................................................101
Recovery and Resolution Planning for Client Money and Safe Custody Assets.107
Additional Rules - Operating a Crypto Asset Business 112

Appendix 1
17. ADDITIONAL RULES – OPERATING A CRYPTO ASSET BUSINESS
17.1. Application and Interpretation
17.1.1. This chapter applies to Authorised Persons Operating a Crypto Asset Business.
17.1.2. Authorised Persons Operating a Crypto Asset Business must comply with all requirements
applicable to Authorised Persons in the following Rulebooks, unless the requirements in this
chapter expressly provide otherwise –
(a) this Conduct of Business Rulebook (COBS); (b) the General Rulebook (GEN); (c) the Anti-Money Laundering and Sanctions Rules and Guidance (AML); (d) the Islamic Finance Rules (IFR); and (e) the Rules of Market Conduct (RMC), made by the Regulator in accordance with section 96 of the Financial Services and Markets Regulations 2015.
17.1.3. For the purposes of Operating a Crypto Asset Business all references to -
(a) “Investment Business” shall be read to include “Operating a Crypto Asset Business”; (b) “Client Investments” in GEN shall be read as encompassing “Crypto Asset” or “Crypto Assets”, as applicable; and (c) “Financial Instruments” in RMC shall be read as references to “Crypto Asset” or “Crypto Assets”, as applicable.
17.1.4. The following COBS Rules should be read as applying to all Transactions undertaken by an
Authorised Person Operating a Crypto Asset Business, irrespective of any restrictions on application or any exception to these Rules elsewhere in COBS - (a) Rule 3.4 (Suitability); (b) Rule 6.5 (Best Execution); (c) Rule 6.7 (Aggregation and Allocation); (d) Rule 6.10 (Confirmation Notes); (e) Rule 6.11 (Periodic Statements); and (f) Chapter 12 (Key Information and Client Agreement).
17.2. Accepted Crypto Assets
17.2.1. An Authorised Person engaged in the Regulated Activity of Operating a Crypto Asset Business
in or from the Abu Dhabi Global Market when using Crypto Assets must only use Accepted Crypto Assets.
17.2.2. For the purposes of determining whether, in its opinion, a Crypto Asset meets the
requirements of being an Accepted Crypto Asset, the Regulator will consider – (a) a maturity/market capitalisation threshold in respect of a Crypto Asset; and (b) other factors that, in the opinion of the Regulator, are to be taken into account in determining whether or not a Crypto Asset in question meets the requirements to be considered appropriate for the purpose of the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market.

Appendix 1
17.2.3. For the purposes of Rule 17.2.1, the maturity/market capitalisation requirements are set out
in Guidance to this chapter.
17.3. Capital Requirements
17.3.1. The capital requirements set out in MIR Rule 3.2 (Capital Requirements) shall apply to
Authorised Persons Operating a Crypto Asset Business.
17.3.2. For the purposes of Operating a Crypto Asset Business, all references in MIR Rule 3.2 to
“Recognised Investment Exchange” shall be read as references to “Authorised Person”.
17.4. International Tax Reporting Obligations
17.4.1. Authorised Persons Operating a Crypto Asset Business where applicable should consider any
reporting obligations in relation to, among other things – (a) FATCA, as set out in the Guidance Notes on the requirements of the Intergovernmental Agreement between the United Arab Emirates and the United States, issued by the UAE Ministry of Finance in 2015 and as amended from time to time; and (b) Common Reporting Standards, set out in the ADGM Common Reporting Standard Regulations 2017.
17.5. Technology Governance and Controls
An Authorised Person Operating a Crypto Asset Business must, as a minimum, have in place systems and controls with respect to the following:
Crypto Asset Wallets
(a) Procedures describing the creation, management and controls of Crypto Asset wallets, including:
(i) wallet setup/configuration/deployment/deletion/backup and recovery; (ii) wallet access privilege management; (iii) wallet user management; (iv) wallet rules and limit determination, review and update; and (v) wallet audit and oversight. Private keys (b) Procedures describing the creation, management and controls of private keys, including:
(i) private key generation;
(ii) private key exchange;
(iii) private key storage;
(iv) private key backup;
(v) private key destruction; and
(vi) private key access management.
Origin and destination of Crypto Asset funds (c) Systems and controls to mitigate the risk of misuse of Crypto Assets, setting out how –

Appendix 1
(i) the origin of Crypto Assets is determined, in case of an incoming transaction; and (ii) the destination of Crypto Assets is determined, in case of an outgoing transaction. Security (d) A security plan describing the security arrangements relating to:
(i) the privacy of sensitive data;
(ii) networks and systems;
(iii) cloud based services;
(iv) physical facilities; and
(v) documents, and document storage.
Risk management
(e) A risk management plan containing a detailed analysis of likely risks with both high and low impact, as well as mitigation strategies. The risk management plan must cover, but is not limited to:
(i) operational risks;
(ii) technology risks, including ‘hacking’ related risks; (iii) market risk for each Accepted Crypto Asset; and (iv) risk of Financial Crime.
17.6. Additional disclosure requirements
17.6.1. Prior to entering into an initial Transaction for, on behalf of, or with a Client, an Authorised
Person Operating a Crypto Asset Business shall disclose in a clear, fair and not misleading manner all material risks associated with (i) its products, services and activities (ii) Crypto Assets generally and (iii) the Accepted Crypto Asset that is the subject of the Transaction.
17.6.2. The risks to be disclosed pursuant to Rule 17.6.1. include, but are not limited to, the following

(a) Crypto Assets not being legal tender or backed by a government; (b) the value, or process for valuation, of Crypto Assets, including the risk of a Crypto Assets having no value; (c) the volatility and unpredictability of the price of Crypto Assets relative to Fiat Currencies; (d) that trading in Crypto Assets is susceptible to irrational market forces; (e) that the nature of Crypto Assets may lead to an increased risk of Financial Crime; (f) that the nature of Crypto Assets may lead to an increased risk of cyber-attack; (g) there being limited or, in some cases, no mechanism for the recovery of lost or stolen Crypto Assets; (h) the risks of Crypto Assets being transacted via new technologies, (including distributed ledger technologies (‘DLT’)) with regard to, among other things, anonymity,

Appendix 1
irreversibility of transactions, accidental transactions, transaction recording, and settlement; (i) that there is no assurance that a Person who accepts a Crypto Asset as payment today will continue to do so in the future; (j) that the nature of Crypto Assets means that technological difficulties experienced by the Authorised Person may prevent the access or use of a Client’s Crypto Assets; (k) any links to Crypto Assets related activity outside ADGM, which may be unregulated or subject to limited regulation; and (l) any regulatory changes or actions by the Regulator or Non-ADGM Regulator that may adversely affect the use, transfer, exchange, and value of a Crypto Asset.
17.7. Additional Rules Applicable to Authorised Persons Operating a Crypto Asset Exchange
17.7.1. In addition to the general requirements applicable to Authorised Persons Operating a Crypto
Asset Business, as set out in Rules 17.1 – 17.6 above, Authorised Persons that are Operating a Crypto Asset Exchange must comply with the requirements set out in – (a) COBS, MIR and GEN, as set out in Rules 17.7.2 – 17.7.6 below; and (b) Rule 17.8 below if also Operating as a Crypto Asset Custodian.
17.7.2. Authorised Persons that are Operating a Crypto Assets Exchange must comply with the
requirements set out in COBS, Chapter 8, save for Rules 8.4.6 and 8.6.
17.7.3. For the purposes of Rule 17.7.2, the following references in COBS, Chapter 8 should be read
as follows:
(a) references to “Operating a Multilateral Trading Facility ("MTF")” or “Operates a Multilateral Trading Facility ("MTF")” shall be read as references to “Operating a Crypto Asset Exchange”; (b) references to an “MTF Operator” shall be read as references to a “Crypto Asset Exchange Operator”; (c) references to an “MTF” or “Facility” shall be read as references to a “Crypto Asset Exchange”; (d) references to “Investment” or “Investments” shall be read as references to “Crypto Asset” or “Crypto Assets”, as applicable; and (e) references to “Financial Instrument” or “Financial Instruments” (including those in MIR as incorporated by virtue of COBS Rule 8.2.1) shall be read as references to “Crypto Asset” or “Crypto Assets”, as applicable.
17.7.4. Authorised Persons that are Operating a Crypto Asset Exchange must comply with the
following requirements set out in MIR, Chapter 5 - (a) Rules 5.1 - 5.3; and (b) Rule 5.4.1, in the circumstances identified in Items 18, 19, 23 (a) and (b), 26, 27, 31, 32, 33, 34, 36, 37, 38, 39, 40, 42, 44, 45, 47, 48, 49, 51, 52, 53, 54, 56, 57, 58, 59, 60 and 61.
17.7.5. For the purposes of Rule 17.7.4 all references to -

Appendix 1
(a) “Recognised Body” or “Recognised Bodies” shall be read as references to “Authorised Person”; and (b) “Financial Instrument” or “Financial Instruments” shall be read as references to “Crypto Asset” or “Crypto Assets”, as applicable.
17.7.6. Rule 5.2.14 of GEN shall apply to Authorised Persons Operating a Crypto Asset Exchange, and
all references to –
(a) a “Multilateral Trading Facility” shall be read as references to a “Crypto Asset Exchange”; and (b) “Investment” shall be read as references to “Crypto Assets”.
17.8. Additional Rules Applicable to Authorised Persons Operating as a Crypto Asset Custodian
17.8.1. In addition to the general requirements applicable to Authorised Persons Operating a Crypto
Asset Business, as set out in Rules 17.1 – 17.6 above, an Authorised Person that is Operating as a Crypto Asset Custodian must comply with the requirements set out in COBS, Chapters 14, 15 and 16, as set out in Rules 17.8.2 – 17.8.3 below.
17.8.2. For the purposes of Rule 17.8.1, the following references in Chapters 14, 15 and 16 should be
read as follows -
(a) references to “Client Assets” shall be read as encompassing “Crypto Assets”; (b) references to “Investment” or “Investments”, (and, a result, the corresponding references to “Client Investments”) shall be read as encompassing Crypto Asset” or “Crypto Assets”, as applicable; (c) references to “Investment Business” shall be read to include “Operating a Crypto Asset Business”; and (d) references to “Providing Custody” in COBS, Chapters 14, 15 and 16 shall be read as references to “Operating as a Crypto Asset Custodian”, within the Regulated Activity of Operating as a Crypto Asset Business, as defined in sub-paragraph 73B(5) of Schedule 1 of the Financial Services and Markets Regulations 2015.
17.8.3. For the purposes of Authorised Persons that are Operating as a Crypto Asset Custodian, the
following requirements in COBS, Chapters 14 and 15 shall be read as follows - (a) the reconciliations of the Client Accounts required under COBS Rule - (i) 14.2.12(a) shall be carried out at least every week; and (ii) 14.2.12(d) shall be carried out within 5 days of the date to which the reconciliation relates; (b) the statements required under COBS Rule 15.8.1(a) shall be sent to a Retail Client at least monthly; and (c) all reconciliations required under COBS Rule 15.9.1 shall be conducted at least every week.

Appendix 2 - Draft amendments to the Prudential – Investment, Insurance Intermediation and Banking Rules (PRU)

Appendix 2
Prudential – Investment, Insurance Intermediation and Banking Rules (PRU)

Appendix 2
1 APPLICATION, INTERPRETATION AND CATEGORISATION …
1.3 Categories of Authorised Persons
…
Category 4
1.3.6 An Authorised Person is in Category 4 if:
(a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of Arranging Credit, Arranging Deals in Investments, Advising on Investments or Credit, Arranging Custody, Insurance Intermediation, Providing Trust Services (where it is not acting as trustee in respect of an express trust), Insurance Management, Acting as the Administrator of a Collective Investment Fund, Operating a Multilateral Trading Facility or Organised Trading Facility, or Operating a Private Financing Platform; and (b) it does not meet the criteria of Categories 1, 2, 3A, 3B, 3C or 5. … 3 CAPITAL AND LEVERAGE …
3.3.2 The table below sets out the Base Capital Requirement for each Category of Authorised
Persons.
Category Base Capital Requirement (US $)
1 10 million
2 2 million
3A 500,000
3B 4 million
3C
250,000, except where an Authorised Person has a Financial Services Permission only to carry out the Regulated Activity of Managing a Collective Investment Fund, in which case the Base Capital Requirement is the higher of:
a) 150,000 if the Authorised Person manages a Public Fund or any other type of fund that is available to retail customers; or b) 50,000 otherwise.

Category Base Capital Requirement (US $)
10,000, except where an Authorised Person has a Financial Services Permission to carry out the Regulated Activity of Operating a Private Financing Platform and holds Client Assets, in which case the Base Capital Requirement is 150,000. 5 10 million … 6 OPERATIONAL RISK …
6.1.1 This Chapter applies to an Authorised Person as follows:
(a) Sections 6.1 to 6.9 apply to an Authorised Person in any Category; (b) Sections 6.10 and 6.11 apply only to an Authorised Person in Category 1, 2, 3A or 5; (c) Section 6.12 applies only to an Authorised Person in Category 3B, 3C or 4 which undertakes one or more of the following Regulated Activities:
…
(xiii) Operating a Multilateral Trading Facility or Organised Trading Facility; or (xiv) Providing Money Services.; or (xv) Operating a Private Financing Platform. …

Appendix 3 - Draft amendments to Glossary (GLO)

Appendix 3
Glossary (GLO)
*In this Appendix, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Appendix 3
Defined Terms Definitions
Eligible Custodian Means a Person who is a separate legal entity from the Authorised Person which engages it to Provide Custody Fund Manager and who also meets one of the following criteria:
(a) an Authorised Person whose Financial Services Permission authorises it to Provide Custody; (b) an Authorised Person that is a Bank; (c) a Recognised Body or Remote Body; (d) a legal entity that is authorised and supervised by a Non‐ADGM Financial Services Regulator in a Recognised Jurisdiction for providing custody services in respect of a Fund and is subject to a minimum capital requirement of $4 million or its equivalent in any other currency at the relevant time and has had surplus revenue over expenditure for the last two financial years; (e) a legal entity where it, or its holding company, is: (i) in respect of its financial strength, rated or graded as at least "investment grade" by Moody's, Fitch or Standard & Poor's or such other international rating agency as may be recognised by the Regulator; and (ii) authorised and supervised by a Non‐ADGM Financial Services Regulator in another jurisdiction which is a Zone 1 country; (f) a legal entity that is authorised or recognised by a Non‐ADGM Financial Services Regulator to operate as an exchange or a clearing house in a Recognised Jurisdiction; (g) a legal entity that is and remains: (i) controlled and wholly owned by one or more of the national governments of the six member states of the Gulf Cooperation Council; (ii) authorised and supervised by a Non‐ADGM Financial Services Regulator or Central Bank of at least one of the said national governments; and (iii) rated or graded as at least "investment grade" by Moody's, Fitch or Standard & Poor's or such other international rating agency as may be recognised by the Regulator; or (h) any other legal entity otherwise acceptable to the Regulator.

Appendix 3
Defined Terms Definitions
Investment Business Means the business of:
(a) Dealing in Investments as Principal;
(b) Dealing in Investments as Agent;
(c) Arranging Credit;
(d) Managing Assets;
(e) Advising on Investments or Credit;
(f) Managing a Collective Investment Fund;
(g) Providing Custody;
(h) Arranging Custody;
(i) Managing a Profit Sharing Investment Account; (j) Operating an MTF or OTF; or (k) Operating a Private Financing Platform; or (kl) Acting as the Trustee of an Investment Trust. PFP Client A user of a Private Financing Platform that is not a PFP Prospect. PFP Operator An Authorised Person engaged in the Regulated Activity of Operating a Private Financing Platform. PFP Prospect A Body Corporate seeking financing by publishing a financing proposal upon a Private Financing Platform. Private Financing Platform (PFP) Has the meaning given in FSMR.

Appendix 4 - Draft amendments to the Fund Rules (FUNDS)

Appendix 4
Fund Rules
*In this Appendix, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Appendix 4
2. ARRANGEMENTS NOT CONSTITUTING A FUND
…
Private Financing Platforms
2.1.19 An arrangement does not constitute a Fund if it is an arrangement made for the purpose of
facilitating investment through a Private Financing Platform.
….