What is an ICO?

Introduction of initial offering of tokens concept to the public coined a new term, which is ICO (Initial Coin Offering). It is closely related to blockchain technology and cryptocurrency.

ICO is a sale of digital tokens for fiat money or cryptocurrencies. Investors typically act as buyers.

By its nature, an ICO can be viewed as something similar to an IPO (Initial Public Offering), which involves sale of a company's shares, but during an ICO instead of shares tokens are being sold. The Scheme below shows the difference between an IPO and ICO:

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Why projects need an ICO?

It is common knowledge that any project requires financing to launch and start developing new revolutionary product or service. ICO is another option, which recently came to the party, allowing to raise funds and get that vital initial financing. To put it simple, during an ICO a project engages in issuing of its own tokens which later get exchanged to fiat money or cryptocurrency by the project, giving it means to set off toward its goals on one hand and buyers of such tokes to get certain bonuses within the project on the other. ICOs are typically held at an early stage of a project's existence before its full-fledged infrastructure was created. Marketing and final stage of development are also usually financed from the raised funds.

Why ICOs are deemed appealing to investors?

By purchasing tokens offered during an ICO, investors will primarily (however, dependant on a project):

  • Exchange tokens to receive services at a lower price;
  • Potentially receive benefit from selling tokens at a higher rate.

Initial Coin Offering - potential risks to look out for.

To date, fraud is a major risk. Some projects merely attract investors, collect money, and vanish away. Partially it happens due to the lack of ICO-related regulatory laws in a lot of jurisdictions, which means perpetrators must only create a vision of legitimacy without much proof behind it. Plus the wave of hype, a lot of swindlers learned to exploit, facilitates it and should not be ruled out.

Currently, Initial Coin Offerings usually involve one-time financing. Instances of additional financing are seldom.

It is imperative to treat an ICO seriously and remember the following.

An experienced investor always carefully examines Token Sale Agreements. Said document usually contains certain vital details which creators of a project did not mention anywhere publicly either with or without an ill intent.

When creating a project, investors must have a proof of the following:

  • People behind the project have an unstained reputation;
  • White Paper and other documents are drafted properly and correctly;
  • There is a working prototype. In certain cases, there is an escrow agent or any other guarantee of a refund;
  • All proper policies and offers are on a website, easily accessible;
  • Project is implemented through a real company.

What to consider from a legal stand point

ICOs nowadays have the following issues:

  • No unified legal regulation;
  • Problems with opening bank accounts for projects;
  • Jurisdiction of a future company depends on a planned type of activity and turnover of a project, no predefined solution here;
  • All documents related to a project must be meticulously drafted, which is resource consuming;
  • Technical component of a project must correspond to legal requirements;
  • Lack of established case law results in unpredictable legal repercussions for projects.

During our turn-key ICO consulting we not only help you leapfrog the above issues, but also avoid many other pitfalls.

Avoid “ICO” abbreviation

ICO abbreviation and the phrase itself create an additional reason for claims from third parties.

Reasons:

  • Mislead: projects issue tokens, and not coins, technically.
  • May resemble IPO more than it should. Better use ITO (initial token offer) or TGE (token generating event).

ICO-related risks

A number of states, especially the United States, consider tokens issued during ICOs as securities (referring to criteria for determining investment contracts in Howey v. Securities and Exchange Commission (1946)).

There are a number of various options, allowing for risk reduction:

  • Position issued tokens as a utility, service or license, and not as method of passive income generation.
  • Investors should perform certain work within a project (e.g. calculations, information gathering, etc.)
  • When an investor must undertake certain actions to get a profit from his investment (for example, voting), then the third condition of Howey test no longer applies. Worth mentioning though, it is not universal and differs from state to state in the United States.
  • Eliminate the ability to invest for US citizens, citizens of Singapore and a number of other countries in project papers along with technical restrictions.

Project’s paperwork

One should consider the following when it comes to drafting project’s documents:

Whitepaper T&C AML / KYC

Avoid comparing your ICO with any investment instruments or opportunities, refrain from mentioning a distribution of profits, issuance of any currency or securities.

Provide information on guarantees to provide a service to users (escrow, bank guarantee, etc.)

White paper should be unambiguous in its content, designate its target audience.

Terms&Conditions/Offer posted on a website is an agreement in a form of a browse-wrap contract.

Either avoid using browse-wrap agreements or inform users about them.

Use click-wrap agreements by implementing a pop-up window with a text of the agreement and a button confirming acceptance of terms.

It is important to include applicable law, place of dispute resolution, prohibition for participation of legally incapable and under-aged people and citizens of certain jurisdictions.

It is also recommended to mention that sale of tokens involves high risk.

Jurisdiction of incorporation of a company for an ICO, applicable law to an agreement, AML (anti-money laundering) regulation should be taken into account.

In certain cases, a mechanism for verification of users’ identity is also required (subject to personal data processing laws regulation).

 

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Law&Trust International team of experts have a substantial experience in legal support of ICOs and will be happy to share their knowledge providing turn-key ICO consulting for your project.