Why it’s worth making sure your ICO agreements are water-tight

Background

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 into the rights that the ICO agreements provide them.

ICO agreements govern those rights — and the obligations of the ICO hosts —  so are central to the ICO. However, in our experience, the importance of precise, expert-drafted ICO agreements and documentation is often overlooked.

Why does it matter?

There are two key reasons:

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 considered investors will want to buy in — especially now the ICO market is much more competitive than it once was.

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 (to some extent, Tezos’s legal issues are demonstrative of this).

In many cases, ICO agreements are also the ‘go to’ document if disputes were to arise. 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.

2. ICO Agreements & Regulatory Outcomes

The second big thing to consider is that the regulatory treatment of ICOs often depends 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 may not treat ICO agreements as the only determining factor).

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 could be where 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.

Conclusion

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 can be largely useless.

If you want to get your project off on the right regulatory foot, getting advice on — or better yet, having an expert, specialist lawyer prepare — your ICO agreements can be the best place to start.

Next Steps

Lupercal Capital (lupercalcapital.com) and its network of specialist advisers have worked with many ICO projects to guide them through complex commercial, financial and regulatory considerations of running an ICO.

We also advise investors and purchasers on which crypto projects have addressed key issues, and set themselves up for long-term success. 

Please contact us at enquiries@lupercalcapital.com if you would like to talk with one of our experienced advisers about how Lupercal can help you.

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