Since the dawn of ICO internet conventions, the question of legal actions towards the unregulated fundraising activities has raised several eyebrows.
ICOs have similar functions to their traditional counterpart – IPOs, and in the past few years of their existence have been a source of hope to many online and offline startup ventures; only, they are easy and quick to pull off, as compared to the counterpart that requires much legal paperwork to file. With an internet connection, a website and a concise whitepaper, one can easily pull off an ICO event.
It’s sad to say that the lack of regulatory properties has made this business tool an easy channel through which non-genuine business operators (scammers) thrive, and have targeted many investors, victimizing them.
The question of juristic documents depends on the legal standards provided by each country. However, the main character in any ICO event is the offering of ‘tokens’ which holds the sensitive interpretation –an identity to the general objective behind the overall project.
Initial Coin Offerings have a global impact because of the nature of the decentralized system. This spectrum makes it difficult to isolate or deny any particular prospective investors, and would invariably shape the way token presentation and fundraising are to be conducted.
There are no global laws directly associated with token sales, however, jurisdictional views of tokens and initial coin offering activities provide an unwritten strict guideline that impacts how an ICO is conducted. ICOs must comply with the local laws of those countries where funds are to be raised for their projects.
To run an ICO without attracting unwanted attention from the financial and commodities regulatory agencies, the following official documentations are the baseline for any legitimate Initial Coin Offering project:
Certificate of incorporation is the most fundamental requirement of any commercial venture. To operate under any given jurisdiction, the certificate of incorporation serves as a proof of legal identity to any project, company or institution. To avoid ambiguity, registering under a particular trade name and category helps financial regulators understand the business better and gives credence to the objective of the trade in question.
Initial Coin offerings are simply used by many startup organizations to shunt the complexities involved in the process of raising the capital. However, the credibility of the project and the organization is of great value and reassures investors trust in the project. Once an organization has a physical presence and a certificate of incorporation and (not always necessary) a historical background of business activities and the founding members, the Initial Coin Offering almost always goes smoothly.
In an Initial Coin Offering, certain percentages of the cryptocurrency or token are sold to early supporters of the project in exchange for fiat e-currencies or other cryptocurrencies, usually Bitcoin or Ethereum. These tokens (cryptocurrencies) sold by the organization, are speculated to become more valuable once the project successfully achieves its objectives.
On the other hand, IPOs and crowdfunding, sell stocks, shares, and rights to the public (anybody, including individuals, business/corporate organizations or institutions who were not involved at the beginning of the startup).
In the case of Initial Public Offering, the issuer (owner of the business) involves an underwriting firm to help determine the type of security to issue to the public, the best price per share or stock, the total amount of shares or stocks to be issued and the right time to bring it to public market. These activities coupled with other legal proceedings constitute the required juristic documents alongside the prospectus.
IPOs are dependent on macroeconomic factors and internal needs to raise fund to start new projects from within the organization or make transitory growth or expansion of products and services, therefore they require strict protocols set by security and exchange commission. The major document required here is the compilation of a prospectus which details information regarding the company to include; financial performance, historical (past, present and expected future) operations of the company. This document is filed with the SEC alongside officially audited financial statements before going public.
ICOs on the other hand, due to un-regulatory tags, do not undergo the rigorous standards set by the SEC or governing financial agency of the jurisdictional territory. As long as tokens are not viewed as securities, the ICOs they represent require no specific nor complex legality. Therefore, the term investors are frequently misconstrued in this sense, as the right term to associate with ICOs are ‘supporters’ or ‘backers’. Once the term investor is used, it implies a business transaction of a security is involved.
On the 25th of July 2017, when token sales (Initial Coin Offerings) were considered as in many cases securities by the SEC, it terrified most investors/contributors and Initial Coin Offering hosts within the crowdfunding community. Some may have thought that doing a crowdsale in other countries would solve the issue of jurisdictional penance. However, having to include an investor from the country where the jurisdictional laws are applied will invariably affect the crowdfunding.
Should the token be considered as a security by the jurisdiction, in order to continue the process of crowdsale in such a region of with individuals from such jurisdictions, the legal proceedings in compliance with the area should be taken into considerations, e.g. tax laws, LLC, incorporation policies, etc.
The smart contract program in an asset backed system becomes the ultimate juristic digital document in a crowdsale that ensures that the contract terms and conditions are adhered to by constituting parties of the contract.
This would involve a face behind the name of the organization, while it may be a decentralized system that promotes anonymity, it is not common for people to subscribe to ghost projects. While this may not necessarily serve as a tender document, profile of staff/team structure and strength with relevant historical background are some of the reassuring factors that promote a crowdfunding project.
This structure will include a Founder/CEO, Legal advisors, full stack developers/blockchain experts, publicity and media experts. In other words, Initial Coin Offering projects are never faceless. As people can only support or promote projects with a definite structure of command.
In rare cases, ICOs have had to emerge with no conventional management system/structure like the DAO (Decentralized Autonomous Organisation) project. But as consequence, it leads to a controversial and vulnerable system.
A special document needed in the organizing of token sale event is the white paper. It details the entire concept, algorithmic consensus, a roadmap of the project. One vital element added to the document is a legal disclaimer. This clause prevents the project from being sued for violating security and financial policies or laws.
Moreover, terms and conditions of use of products and services should be well spelled out in clear terms stating risks, uses, warranties, liabilities and other core legal issues that may arise essentially to the success of an ICO
Therefore, it is of utmost importance that one understands the risks involved with Initial Coin Offerings, as it applies to other forms of fundraising relatively.
At the moment, token sales have no legal standards due to regulatory shortcomings; it is a presumable fact that in the coming age, due to the expanding practical use case of the blockchain technology and the massive increase in the development of asset backed cryptocurrencies, there will be standardized and legalized protocols on how to conduct an initial coin offering to the public.
While it may conflict with the core nature of a decentralized system, the lines will only be blurred well enough to all the coexistence of Initial Public Coin Offerings and the traditional Initial Public Offerings of stocks.