Recommendations for companies preparing for initial placement, from the partners of the legal group Singularis Eugene Ryabov and Daniel Reitman. Now comes the boom. ICO (initial coin offering — the initial placement of the coins). And while its a legal puzzle for investors, lawyers, and state regulators.
In parallel with the boom is the development of attitudes, opinions on this phenomenon. And while no one knows exactly how it will be interpreted the issue of tokens and their handling in the future. But we can already draw several conclusions. To reduce the likelihood of claims from third parties it is better to use the term ITO (initial token offering) or TGE (token generating event) and not ICO as available (“emitted”), it is tokens, not coins (in the traditional sense).
This is exactly the case when it is better to call a spade a spade and not mislead anyone with the use of established expressions. In any case, as long as the question of the legality of the existence of the cryptocurrency will not be solved at the state level, as happened, for example, in Japan. ICO — generally not a good term.
First, it is inaccurate. Coins tokens called when theres nothing else they could do — only to belong to someone and something to share. Now, when the word “token” has spread, it would be more accurate to speak about “walk” tokens. Second, he hints at the similarity with the IPO.
One of the main tasks of a lawyer to accompany this process — to make it less similar to the IPO, not to introduce state regulators into temptation. From here there are more frequent recommendations of lawyers generally refrain from such language and use the most appropriate term — TGE (token generating event — the event for the token generation). The use of such terms may not affect the opinion of the regulator, who will still try to look inside, but at least can help to reduce the likelihood of incidents and increase investor confidence. In the following article, we will use a cross between ICO and TGE — term ITO.
Due to the fact that the legal framework of the regulation ITO now resembles a wasteland with rolling barbed wire, the relationship between the token Issuer and the persons purchasing them, is regulated in such documents as the white paper, terms and conditions and so on. Now these documents in the framework of the ITO is a public offer to join the person acquiring tokens. And as a public offer defines the “game rules” between the owners of various Internet services and their users, and these documents establish the rules of the game in each specific ITO.
Therefore, in these documents it is better to register the ITO target, the mutual rights and obligations of the Issuer of the tokens and their buyers to identify investment or non-investment nature of ITO, the use of token and return it to the Issuer (if thats even possible), resolution of conflict situations. The more detailed and honest written white paper, terms and conditions and other documents, the less likely negative legal incidents in the future. Hope that some game rules will be supplemented by a good legislator or a code audit, not worth it.
Since we are talking about big money investors and the Issuer are filled with excessive optimism when entering a relationship with each other, and if something goes wrong, each of them will interpret any ambiguity in their favor. And it is very dangerous. First, lawyers worldwide use tricky principle called contra proferentem, any ambiguity is interpreted against the one who suggested. This means that if you were “muddy” white paper — and you prove that you not a camel.
Second, among cryptoendoliths you can often find a position “code is law” — if we wrote a smart-contract, all our relationships are defined by them. Entered into the smart contract, and he threw something unexpected. “Well, it was necessary to audit the code to do what you”. But this position is so hard, how naive.
The probability that any court acknowledges, tends to zero. And heres why. Smart contracts often compared to a vending machine in which you Deposit money and you get the bar. When the contract is opened and published in the repository is a glass of the vending machine.
On the one hand, you can go to explore all of its gears and drives, draw a diagram and assume that, when and under what conditions there will fall out. On the other hand, it has a sticker “Bar — 100 rubles”. And here you put your bill to buy a candy bar, but nothing happens. You go to court, where the owner of the machine said that it was necessary to study all the technical details of the machine and then youd find out that actually there are additional conditions for the purchase of the bar or he did not there could have been.
Who do you think will win in this situation?. The same thing happens when code is not doing what promises of white paper or other legally binding document. If you sell something to people, they look at the label — they must not go into gear. If the mechanism is not working, he needs to understand that who put it.
This means that if ITO only works on smart contracts, the reversal of these contracts and adaptation of the results of their work will be the headache of the Issuer. Oh, they are immutable, “unstoppable applications”. In such a situation will have to put up with penalties for failure to comply with judicial decisions.
By the way, in our opinion, on the basis of the documents and defines the legal nature of the tokens. There is a rule. As called ship, so it will float. For example, if you call token calculation unit, so it will be perceived.
If tied to the token a possibility of “dividends”, then most likely it will be perceived as an investment tool. If you just amitrole tokens, and say that they can be redeemed by the Issuer on demand of the holder and do not bring the “dividends”, in this case, the token will be considered as the analogue of the loan. If you indicate that the token does not pay dividends and the holder of the token is not entitled to require the Issuer to repurchase, the token is likely to be perceived as an instrument of charitable involvement in the development of the project.
We think in the future all tokens depending on their destination are divided into types (types, groups), and legal and economic implications of their sale or purchase will be determined on this basis. The question of what is meant by the transfer of the token is similar to the question of what is meant by presenting the paper with the text. To answer this question, you have to read what it says, and where it all has to be written, we discussed above.
Now in the world of bitcoin has started to appear, the arbitrators intended to resolve disputes between the parties ITO. Of course, the decision of arbitra the traditional way (getting a writ of execution in state court and present it for execution to the appropriate authorities) is unlikely to be interesting for the participants, ITO. Especially considering the fact that many companies-issuers of the tokens incorporated in distant jurisdictions.
Much more interesting when a person that is trusted by both parties, becomes a party to the smart contract concluded between the parties to ITO. This person ensures that the performance rendered by the arbitrator decision. A separate important question is under which legal framework will be determined in the dispute. After all, national legal orders are now unlikely to do this developed.
While this framework is either the opinion of the arbitrator of right and justice, or the conditions of white paper documents, terms and conditions and other. Of course, trust the arbitrator, whom see for the first time, its quite dangerous. Therefore, at first more properly governed by the terms of these documents. Another question, how professionally and fully spelled out.
Although to solve the problem of confidence in the arbitrators can publish on the net all rendered in disputes solutions. In this case, each participant in the ITO market will be able to see the vision of a particular arbitrator and to choose him as a mediator in dispute resolution. Another question is whether the buyers of tokens to influence the choice of the arbitrator.
Because arbitration clauses are now being incorporated into the white paper documents or terms and conditions, and the purchasers tokens just take (accept) them as the public offer. Lets see if the practice to develop a more equitable method of selecting arbitrators in disputes arising out of ITO. By the way, one of the new ways to protect investor assets that were directed to the Issuer in the framework of the ITO — decentralized escrow, which is implemented, for example, a project descrow.org.
This method eliminates the risks associated with dishonesty or a lack of security of specific persons to be used as escrow agent. An example is a hacker attack on a major stock exchange, which worked perfectly for a long time, earned a reputation, but in the blink of an eye has been hacked. Decentralized escrow, the owners of token majority of the votes control the redistribution of tokens, take and carry out decisions about the future of the assets (to continue funding the project or stop it, or even produce a return on investment in case of a complete loss of confidence in the Issuer).
Undoubtedly, the adoption of certain decisions by investors based on the legally significant documents, the road map project and is bound to her obligations. Each Issuer must ensure that the production and sale of tokens to exclude the use of any fraudulent schemes. In other words, you need to avoid any form of lies and unfulfillable promises, publicly posted or documented before, during and after the ITO.
It is better to use white paper, terms and conditions as a means of unleashing the most complete information about the company and tokens of all the possible prospects of their acquisition, ownership, resale and disclosure requirements to repurchase. Of fraud often begin to say where something was left outside or was specified ambiguously written, or when there was dissonance between what was expected (it was stated), and what happened actually. To avoid such situations it is better to identify all possible risks and as detailed as possible to prescribe the consequences of these scenarios.
The views of individual States relative to the ITO are very different. There are countries with favorable and unfavorable conditions. Surely it is better to block the ability to purchase tokens to citizens of the country in which their issuance and circulation are under the direct ban. Now white paper, terms and conditions of the majority of the companies conducting ITO contain a ban on the purchase of tokens, citizens of the United States, Puerto Rico, the U.S. virgin Islands and other U.S. dependent areas.
Liability for violation of KYC or AML procedures. More and more jurisdictions require the identification of the person from whom you are taking money. If you ignore these requirements in the best way you can get tired to explain to your Bank the source of the funds, at worst to be embroiled in a corruption scandal, if your project will invest unjustly earned money, for example, an unscrupulous civil servant or a Colombian drug Lord.
Responsibility for violation of legislation on securities market. Perhaps the most likely story if you have not attended to the legal logic of the token and launched the “tentacles” of the blockchain into the United States. The U.S. Commission on securities (SEC, Securities and exchange commission) very jealously guards the rights of its citizens.
If the issue of securities that are not registered with the SEC, the consequences will be. Administrative or even criminal unpleasant and extraterritorial — that is, until you are able to reach and to punish, even if no connection with the territory of the United States you do not. “But, you say, because I offer a token, something strange computer, not security.
Were in a legal vacuum, isnt it?”. Not quite. SEC uses a private version of the “duck” test, which calls Howie Test. This test was developed in 1946 in the case against Howey-in-the-Hills Service company, sold the citizens of the land in Florida.
It would seem, and here securities. Having bought the land, the citizens gave the land back under cultivation of citrus and receive the regular income. The court considered that the whole scheme was the offer of investment tool. The buyers were not farmers, did not live in Florida, do not make an effort to generate income — they paid the money, signed the papers and received regular yield.
In this case the defendant advertised that such a scheme, rather than the delights of the holiday vacation on the purchased plot. “Thats not right,” said the court and fined Howey-in-the-Hills. In order to not pass such a test in its current wording, the Issuer must simultaneously:
If there are all three conditions, you will need to register with the SEC. In order to pass the test, you need to remove any of the terms. First, you can give tokens for free. This will solve the problem, but may revoke the ITO sense.
Secondly, you can release the token as a commodity, service or license and not as a way to make. Thirdly, it is possible to force their investors to work to perform calculations, provide information, and so on. If the income from the token will be determined by the Commission of any useful action by the investor, then there will be no third condition. It should be understood that the courts of different States will be different ways to apply these criteria, and for each of the project risks need to be worked out separately.
Not so dramatic but a similar story is happening now in Singapore. The local regulator eyes on companies conducting ITO in the country, but under one condition — if the citizens of Singapore is not affected. If you decide to overstay their welcome and offer tokens to the local population, there is a chance to get under legal liability. Decide on your promises and clearly indicate them in the public papers.
Be responsible to the contents of the white paper and T&C are all important that you forget to register, can be the basis for the presentation you in the future lawsuit. Since everything is written really very difficult, to determine at least the applicable law. Select the jurisdiction which regulation is most similar to what you would write yourself. Let her legislator can help to fill the gaps in your environment.
Write code honestly, but lay in their contract is at least the possibility of execution of court decisions. If you receive a decision requiring the investor to return the invested funds, and these funds will be locked on smart contract — it will only be your problem. Do not lie to investors and do not do anything that seems like a lie. ITO is already causing a lot of suspicion in society. Decide your dispute resolution.
Can prescribe the jurisdiction of the state court of a particular state or transfer cases to the commercial arbitration. Thus it is necessary to be prepared for the fact that the arbitration clause can fail if the relationship will be recognized as consumer. The government can ignore the decision of the arbitration if it is contrary to public policy. The main advice — do not underestimate national legislation and jurisprudence in General. Legal principles were formed thousands of years, and is unlikely to go beyond their effect so quickly (and to leave) as it seems now, many cryptomnesia.
In the world there are only two options for the regulation of relations. Or obedience to the law (contract) or the law of force. And in this dichotomy certainly is better to choose first, whatever opportunities are not promised a modern development of information technologies. Send columns, corresponding to the requirements of the editorial Board, [email protected]