ICOs and Crypto Capital: Common Legal Questions

When you’re in the process of launching a business, regardless of your sector or your area of focus, you’ll need to take a universal first step: fundraising. Tech startups, wholesalers, and restaurants all typically start the same way: they incur debt, issue equity, or enter into convertible loan agreements.

A growing number of startups are choosing a totally new option: selling digital tokens (cryptocurrency).  But this path is relatively untested, and while some ICOs make news and generate instant millions, others fall far below the expectations of both issuers and investors.

And in almost all cases, ambitious startups begin the process with a series of common legal questions that need to be sorted out before they proceed. In the age of cryptocurrency, here are some of the smart questions we hear most often from startup teams.


Will our business model / white paper attract crypto-focused investors?

Many crypto investors are looking for new opportunities to invest after hitting it big in a previous ICO, and they are looking to roll over their BitCoin, Ethereum, or other crypto currency into a potential new opportunity. Crypto investors will be looking for a strong white paper, a strong team, and a strong investment case that the digital token answers a market need, both in terms of implementation as well as with expected growth. While some are looking for any token opportunity, many crypto investors are highly sophisticated and want to make sure that a company isn’t simply sprinkling the words “ecosystem” and “blockchain” throughout a poorly written white paper.

We encourage our clients to treat the offering of a token as any other securities offering, not only with respect to compliance and legal, but also with respect to the marketing of a prospectus. Does the white paper make a strong investment case? Is the vision realistic? Does the white paper make promises that no one could possibly meet? Counsel should absolutely vet the white paper to make sure that the Company is not making statements that may lead to claims of misrepresentation later.

How will we structure our ICO?

As you structure your ICO, you’ll need to decide whether and how to cap the number of tokens you sell, and whether you’ll sell the available tokens on a first come-first served basis (or some other way). Most startups who chose the ICO path cap their tokens and sell to first-comers. But that’s not your only decision; you’ll also have to determine how the price is set. Will you base the price on market value? Will you set a fixed price based on your own criteria? Or will you sell a certain percentage of your tokens at a fixed price and allow purchasers to make bids? You may also want to take some tokens and set them aside for your own team, employees, and/or advisors, but this may have an impact on the price of those that remain up for purchase.

How can we stay out of trouble and stay compliant with regulatory requirements?

Companies that are selling tokens are now coming under very intense scrutiny from regulators, including the SEC. And unfortunately, much of the legal advice that has been offered publicly to companies has simply been wrong.

For example, it is very likely the case that there is no such thing as a “utility” token, and as this article from Venture Beat points out, companies that issued SAFTs on the assumption that they were offering utility tokens are almost certainly going to be subject now to regulatory action.

We have strongly advised our clients to assume that any and all tokens they offer will be considered securities, and to treat the token offering as any other offering of securities. We recognize this is a conservative approach given current market practice, but we believe current market practice to be illegal, and that there will be a reckoning. The SEC will not stand idly by as companies sell tokens.

Also keep in mind that the regulatory rules will also vary based on the jurisdiction in which you operate, and the jurisdictions in which you offer the tokens. The US, China, Singapore, and Europe are all overseen by a host of regulatory agencies with varied requirements. In the US, the sale of tokens should be assumed to be a sale of securities, and are subject to securities rule. Again, there’s no need to abandon the prospect of an ICO in the face of daunting regulations, and in your case, the fundraising potential of your ICO may be well worth the extra step of navigating through these thorny issues. Find out before you move forward.