We have seen a number of ICOs and proposed ICOs use poorly thought-out, copied and pasted, or DIY ICO agreements. This could cause a whole range major problems in the long, medium and short term.
A fundamental part of setting up an Initial Coin Offering or Token Generation Event (which we’ll collectively refer to as an ICO) is creating the legal agreements between the ICO hosts and the ICO investors/purchasers.
Emotionally, investors/purchasers (which we’ll use interchangeably in this article) are ‘buying into’ the idea and project goals in the whitepaper. Legally — and to a large extent commercially — they are buying the rights set out in the ICO agreements.
ICO agreements govern those rights, and the obligations of the ICO hosts, so are central to the ICO (subject to certain legal rules). However, in our experience, the importance of ICO / token sale agreements and documentation is often overlooked.
Why does it matter?
In short, commercial risk management. There are two key components to this.
1. ICO Agreements & Investor Relations
First, the ICO agreements can be the key basis for determining what rights and obligations existing between the ICO host and investors.
Clearly identifying the rights of investors helps them understand what they are buying in exchange for their cryptocurrency/fiat investment. This helps investors make an informed decision as to whether or not they should buy into your ICO.
The whitepaper could propose the best new crypto project of the year, but if investors have little or no commercially-valuable rights in the project because of a poorly thought-out ICO agreement, then few informed investors will want to buy in — especially now the ICO market is much more competitive than it used to be.
This is particularly true of seasoned and institutional investors who are more likely to get legal advice on the ICO agreements before making a substantial token investment.
Conversely, post-ICO projects often don’t go exactly to plan. Issues arise that weren’t foreseen. New opportunities present themselves to change the direction of a project. Being too closely locked in can by poorly drafted ICO agreements can limit the ability of a project to adapt and capitalise on new opportunities (think Tezos and the problems they’ve had recently).
In many cases, ICO agreements are also the ‘go to’ document if disputes were to arise. Often, the clearer the agreement is, the easier it is for parties to identify their rights, and the easier it can be for the ICO host to effectively manage the on-going commercial risk of disputes with investors/purchasers (hopefully without costly legal involvement).
2. ICO Agreements & Regulatory Outcomes
The second big thing to consider is that the regulatory treatment of ICOs can depend on the nature of the rights afforded to ICO investors/purchasers.
The biggest example of this surrounds whether or not ICO tokens are securities (though it should be noted that most jurisdictions’ laws won’t treat ICO agreements as the only determining factor).
We have seen a wide range of whitepapers that go to great lengths to explain that their ICO tokens are not securities. Often, no such effort is expended on the ICO agreements (and arguably, this is usually it counts most).
Similarly, corporations tax, VAT, financial/corporations law, consumer law, intellectual property, general commercial law, and a whole host of other legal considerations can turn largely on the drafting and rights in the ICO agreements.
You may have sought excellent advice on complex legal issues — or have experience in-house advisors who can do so — but if your ICO agreements do not line up with this advice, it could potentially be useless.
If you want to get your project off on the right regulatory foot, getting advice on — or better yet, having a lawyer prepare — your ICO agreements can be the best place to start.
Lupercal Capital (lupercalcapital.com) is an expert cryptocurrency advisory company. We provide strategic consulting and ICO project management to ICOs for start-ups and established companies looking to implement blockchain technology or run an ICO. We also advise investors and purchasers on which crypto projects have addressed key issues, and set themselves up for long-term success.
If you’re thinking about an ICO or want to learn more about cryptocurrency, blockchain or ICOs, we’d love to hear from you.
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This article is not, nor is it intended to be, legal or financial advice.