Launching an ICO is an important step for any blockchain start-up hoping to get things off the ground. While there are many things to consider if you want to launch a successful token offering, having a firm legal understanding of what you’re trying to accomplish is as essential as every other aspect of your project.
To prove this point, there have been several examples in the past where ICO’s that were not structured properly had their management teams Subpoenaed from multiple jurisdictions. In the United States, the Securities and Exchange Commission (SEC) recently launched a crackdown on ICO’s, with its chairperson, Jay Clayton, promising sanctions for companies that don’t adhere to the summons.
While we are not trained legal professionals, the following is a short list of legal factors to consider while planning your ICO. Hopefully, this article will help you have a better understanding of the world behind ICO launches as well as some things that you should keep in mind, especially if this is your management team’s first time launching a blockchain project.
Before we begin, it goes without saying that the advice of a trained lawyer with experience in the cryptocurrency/ICO world is an irreplaceable investment. While any legal articles on the topic are an important primer, they are best meant to be supplemental to an actual consultation with a legal expert – whether that be a trained attorney or some type of wholistic ICO advisory firm.
Structuring Your Initial Coin Offering
The first consideration you will need to keep in mind is how you’re going to structure you ICO. While this isn’t strictly a legal detail per say, these details will still play an important role both in the business/marketing side of things as well as any subsequent legal technicalities that may arise from these details.
This includes things such as;
- Establishing a cap on the number of token sales
- The type of token you’re creating and what benefits/features will it bring?
- How are tokens sold (first come, first serve or some other way)?
- Will your tokens convey any voting privileges?
- Will there be any dividend distributions?
The Issue of Classification
The first thing to take into account is whether your token or ICO will be characterized as a security by authorities or some other type of token that would fall into a different regulatory structure. This classification issue will end up affecting the other aspects of your ICO, including who you can market your token to and potentially even restrict some of your prospective buyers.
Depending on what country your project is based in, how your token is classified by regulatory bodies can also decide whether you want to incorporate or register the legal entity issuing the ICO.
But regardless of the legal classification of your ICO token, you will also need to make sure you are complying with the counter-terrorism financing (CTF) and anti-money laundering (AML) regulations that are present in almost every nation that permits the exchange of cryptocurrencies.
The difficulty is that these details all can change depending on which country your project is based on. In the United States, for example, various different regulatory bodies are striving to claim digital currencies fall under their jurisdiction. The SEC has stated that cryptocurrencies (especially security/equity tokens) fall under the jurisdiction of securities law, and for most ICO’s that are entering the market, these regulations are going to be the ones that you will need to comply by. If your token doesn’t classify as a securities token (which some projects deliberately do to get around these regulations) then you’ll have another, simpler code to comply with.
Each nation has its own ruling on cryptocurrencies classification, which will usually be a reflection of the current legality of digital currencies.
It might surprise some people to learn that legal contracts have evolved over the past 100 years, and in today’s age, you don’t necessarily need to sign something in order for it to be regarded as a legal contract.
When it comes to enforcing a contract without a physical signature on it (as sometimes is the case), one will need to be able to demonstrate that a reader as (a) read it, and (b) agreed with its contents. Usually, this is done by some kind of clause or condition where you accept something such as “if you purchase our tokens you agree to our terms.”
While this can be good enough, some jurisdictions have unique laws regarding the acceptance of digital contracts due to their nature. It’s possible to argue that a person did not read the terms or acknowledge them and simply clicked “accept” out of habit. As such, make sure there is some method that any contracts or terms that need to be accepted come with a clear reference of verification – like a box with an agreement tick.
Using a Different Jurisdictions Laws
One thing to consider is that when writing a contract, most of the time one is free to define whichever jurisdictions laws that will regulate the contract in the event of a dispute. What that means is that it’s entirely possible to write a contract applies the laws of England to be enforced by the courts of Canada.
Now while you would need to ensure that this remains legal to do so for your desired jurisdictions, most nations across the world accept this as freedom of contract. For all intensive purposes, if you have a jurisdiction such as Singapore or one of the Latvian countries, which are great for running an ICO, but perhaps have contract laws or a court system that could be inconvenient, you can choose which countries laws would apply to your agreement.
Again, consult a legal professional about this idea, as certain regulatory bodies such as the SEC might find your legal declarations worth investigation.
Addressing Marketing Materials
Your whitepaper, website-copy, and other marketing details are the foundation of any pre-ICO project looking to gain traction in the marketplace, and it’s important to market your unique selling points, benefits and features your crypto-project brings.
From a legal perspective, however, everything that was mentioned in your marketing materials is the reason why your prospective buyers entered into a contract with your company in the first place. Therefore, you need to clearly mention that your marketing materials are exactly that, and any statements made by them are for marketing purposes only.
Worst Case Scenario
Lastly, make sure that any contract you write for potential ICO buyers has a clause or separate agreement addressing the possibility that you might be forced to refund their investments.
Last year a Virginia-based ICO from the company Prostarr, was shut down after receiving a call from the SEC. After speaking with their lawyers, the team decided that the best way to resolve their situation was unfortunately to call off their token offering. They ended up refunding all of their crowdsale payments to their originating wallet addresses.
Even if that might be a worst-case scenario, it’s smart to make sure you have a way out in case things go bad for whatever reason. Having an exit strategy to either close down your ICO or even to transfer the contract to a new jurisdiction to continue operations is an essential consideration to keep in mind.
The legal world is a murky place, and it goes without saying that companies planning a potential ICO should have all their I’s dotted and t’s crossed. Professional legal advice is indispensable in the constantly changing world of ICO legality, and whichever firm or consultancy company you work with needs to have a history of work in this field. However, the above article has given some food for thought in terms of the legal possibilities and limitations surrounding an initial coin offering.
Also published on Medium.