Legal assessment of a project is one of the most important factors that dictate the success of an ICO, IEO or STO. In the past few months, we have seen various blockchain project receive penalties and some even being forced to close down due to issues with the law.
BitClave, for example, will have to pay back the $25 million it raised in its ICO back in 2017 after the U.S. Securities and Exchange Commission (SEC) said that the ICO was unregistered. Meta 1 Coin will also have to refund $9 million after a court ruled in favour of the SEC, which argued that the initial coin offering (ICO) was fraudulent. Telegram, on the other hand, had to completely throw in the towel on its TON blockchain project after issues with SEC about its ICO.
To avoid falling into the same trap with your blockchain project, it would be wise to seek a competent legal advisor to handle the legal assessment of your project.
As in the above case scenarios, legal issues could jeopardize the whole project. If a case is filed against the way you raised your capital, you could end up being forced to refund the money. This would throw you back to the drawing board to try and find sources of funds to run the project. However, this time, things could prove to be hard since it would be hard for investors to trust you again and you would be forced to abandon the entire project altogether just like Telegram did.
What to expect from good ICO/IEO/STO legal advisor
- Whitepaper assessment
Since the whitepaper acts as the main source of information about your blockchain project. The legal advisor should ensure that it contains all the required legal documentation. Of essence, the whitepaper should contain legal disclaimers and the terms of sale for the tokens.
The legal advisor should help in drafting the legal disclaimer to ensure that all the risks and restrictions (e.g. restriction of investors from certain countries) are included.
Again, the terms of the token sale should be clearly stated to ensure that investors make informed decisions.
Another issue that has been a source of conflict, especially between the SEC and blockchain startups, is the token and funds distribution. This information should be laid out bare for investors to see.
- Review of the adopted token model for the IEO/STO/ICO
By reviewing the token model used for the ICO, STO or IEO, the legal advisor shall be able to verify the compliance of the token issuance with the laws and regulations and also give remedies in case of any arising issues.
Security tokens have different regulations compared to the utility tokens and this is the main thing that a legal advisor looks at. If the project uses a utility token or a security token, does it comply with the laws set in place in the regions where it expects its investors to come from?
- Aspects of the KYC/AML to be used
Know Your Customer (KYC) and Anti Money Laundering (AML) are some of the basic requirements for blockchain/cryptocurrencies around the world. Therefore, the legal advisor gives guidance on the model that should be adopted and also works closely with any of the involved third parties.
- Legal audit of the Project internal processes and documentation
A good legal advisor will also do an audit of the internal processes of the project behind the ICO, IEO or STO to ensure that everything complies with any existing local regulations.
The audit could also include an audit of the smart contracts to ensure that they are executed exactly as the whitepaper and website stipulate.
- Evaluation of Tax compliance and the company structure
The legal advisor also helps with accounting, bookkeeping, insurances, tax declarations and domiciliation services among other things through the network of its partners.
Depending on the country, companies dealing with digital tokens are taxed differently depending on the type of tokens they involve themselves with. In Singapore for example, there was a recent update on the Digital Tokens Tax Guidelines.
These ensure that the company remains in good books with the authorities within the country where it is registered.
- STO prospectus
Where a legal prospectus is required like in Taiwan, Switzerland and the European Union, the legal advisor helps in preparing it to ensure that it meets all the legal requirements.
- Commercial agreements
The legal advisors help in drafting terms and conditions, token sale agreements and any other commercial agreements like the Memorandum of Understanding, the Advisory Agreement, the Financing agreement, etc.