FAQ regarding ICO

Interview with Elena Mashina, one of the leading experts in the field of legal support for ICO projects, an employee of Law&Trust.

Greetings, Elena. Just want to thank you for your time devoted for our conversation. We have prepared a whole list of the most frequently asked questions by clients regarding legal support of ICO/ITO.

1. What are main threats of holding an ICO off the books, without involving lawyers and compliance with all necessary laws?

E. M. – Responsibility of organizers for holding such an ICO will depend on a type of the proposed token. At least, we can accurately say that competent state bodies will force organizers to cease holding such ICO campaign, and significant monetary penalties may be imposed (for example, a fine in Singapore for holding an ICO that falls under securities legislation without proper registration is about 250 000 $). Organizers can even be brought to criminal liability.

2. What is the current trend of ICO regulation in the world?

E. M. – There is a progressive tendency to toughen legal regulation of ICO in almost all jurisdictions. Country regulators introduce additional requirements for ICO projects, for example, a necessity to obtain a license or to comply with special norms of ML policy and KYC rules. Such changes make the role of a lawyer in organization of ICO even more significant and important.

3. You talk so much about the need to cooperate with lawyers for a successful ICO, but what exactly is the role of a lawyer?

E. M. – A lawyer performs a huge scope of work in the process of organizing an ICO, in particular:

• provides legal analysis of the essence/nature of token, planned to be issued during ICO;
• selects a jurisdiction for ICO of each specific project;
• carries out registration of a company in a chosen jurisdiction;
• prepares agreements with counterparties of an initiating company and advisers;
• compiles Token Sale Agreement (TSA). This agreement is one of the most important legal grounds for receiving funds from participants and transferring project tokens to them;
• develops Privacy Policy (PP), that determines the methods and means of processing, storing, using personal data of ICO participants;
• prepares Terms and Conditions, describing the rights and obligations of using services on a project's website;
• makes AML policy, which determines what activities aimed at combating the financing of terrorism and money laundering are conducted within a company;
• adjusts the provisions of White Paper to minimize possible legal and other risks to a project (see case Munchee and others);
• advises on optimization of a company's tax burden;
• selects suitable methods for converting cryptocurrency funds to fiat money;
• etc.

4. Does the scope of legal work vary depending on a jurisdiction for holding an ICO?

E. M. – Yes, depending on a particular jurisdiction, the amount of work of a lawyer can be both increased and decreased. For example, since January 1, 2018, the requirements on mandatory special licenses to be obtained by blockchain-projects entered into force in Gibraltar.

5. You indicated that a lawyer selects jurisdiction for holding an ICO. Could you clarify any factors to be taken into account by a specialist and by which she/he will be guided when choosing countries?

E. M. – In order to give a client the fullest possible answer regarding jurisdiction, our team analyzes a number of criteria, among which we can distinguish:

• urrent legal regulation of cryptocurrency in a country, prospects for amendments;
• essence/nature of token to be issued during ICO;
• taxation;
• residence of the founders of a company;
• other factors.

Our company, in particular, always offers several jurisdictions based on above parameters.

6. We have repeatedly seen in various articles that it is customary to single out so-called "respectable jurisdictions" among other jurisdictions. What does this mean and what are their advantages compared to other jurisdictions?

E. M. – The main criterion for such differentiation is the existence of a sufficiently detailed regulation of holding an ICO in the country. Selection of such a country will most likely have a positive impact on investors' confidence in the seriousness of a company's intentions and will be an additional guarantee that a project was not conceived as a scam.

7. Why is it not possible to organize an ICO in some offshore and not worry about legal risks?

E. M. – Offshore jurisdiction does not guarantee the fact that organizers will not be held accountable in case of violation of legislative norms. This is primarily due to the fact that tokens in one way or another can be obtained by residents of countries with fairly strict legal regulation (for example, US citizens). In this case, regulator may require termination of such an ICO and impose a fine. In addition, investors can be wary of a project, registered in offshore. On the other hand, ICO is not regulated in offshore jurisdictions. Such a legal vacuum simplifies the process of holding an ICO, opening a bank account, etc. Moreover, selection of offshore jurisdiction allows to avoid undesirable normative regulation. In any case, ICO team must weigh all the pros and cons and make a conscious choice.

8. What is the reason to adjust the content of White Paper? As far as I understand, this document is purely informational in nature. Moreover, what are the reasons to amend the provisions of marketing materials?

E. M.: – You are not 100% right. Relatively recently, in December 2017, the SEC (US regulator) decided to stop such ICO project as Munchee and ordered the team to return all the collected funds to investors. The reason for making such a decision in particular corresponds to promises and assurances concerning future economic benefit from acquisition of tokens of the project, contained in marketing and other materials. The team was confident that their token is not a security, and accordingly, there is no need to comply with the requirements of relevant US legislation, since their token does not have such an important feature of investment contract as reasonable expectation of profit. However, presence of such promises in the marketing materials of the project, along with some other factors, served as clear reason for the SEC to stop ICO campaign of this project.

9. Does your company maintain the listing of tokens on cryptocurrency exchanges?

E. M.: – Yes, moreover, our portfolio contains several successful examples of listing tokens on exchanges. We are aware of the requirements of crypto-exchanges and are ready to provide the necessary assistance to clients with similar requests.

10. What jurisdictions would you recommend for start-ups to be considered in order to establish a cryptocurrency exchange?

E. M. – For our part, we can offer to consider Japan, Estonia and a number of other countries. It is worth paying attention to the fact that Japan is a very "expensive" jurisdiction with high requirements for such companies.

P. S. The foregoing is only the first part of the interview. To be continued.