Legal Support for the Token Issuance and Sale, ICO, IEO
The attorneys at AURUM provide a full range of services related to the structuring and legal support of the token issuance and sale, including via an Initial Coin Offering (ICO) or Initial Exchange Offering (IEO) procedures.
All the way through the initial token offering, we work closely with the project team. Our lawyers help correctly structure the token, develop the tokenomics, provide corporate structure, establish necessary companies, draw up the token sale documentation, as well as identify and mitigate all major regulatory risks and weaknesses of the project.
Choice of jurisdictions for the token sale (ICO, IEO), incorporation
- Development of the corporate and legal structure for the project, which includes selecting the most appropriate jurisdictions for setting up the “tokenizer” company (i.e., the entity that will issue the token and carry out the token sale) and the “operating” company (i.e., the entity that will be holding the rights to the project and running the business).
- Incorporation of the aforementioned entities.
- Structuring the relationship between the operating company and the tokenizer company.
- Incorporation of the escrow agent (if necessary).
- Preparation of shareholders agreement between the beneficial owners.
- Opening of accounts with banks or payment systems.
Drawing up the token sale documentation
- Drafting the agreements between the operating company and the tokenizer.
- Drawing up pre-ICO agreements and related documentation (if necessary).
- Drawing up the Terms of the Token Sale (Token Generation Event) and private token purchase agreements.
- Preparation of the escrow documentation (if necessary).
- Drafting form agreements with the team and advisors of the project.
- Development of Terms of the bounty campaign.
- Development of other documentation pertaining to the conduction of the Token Generation Event.
Legal opinion on the project and legal status of the token
AURUM lawyers draw up a detailed legal opinion analysing the project, the structure of the token and token sale, tokenomics, and the circumstances pertaining to the Token Generation Event. The legal opinion answers the following questions:
- Will the token be deemed to meet the definition of a security under US legislation, including the Howey Test, the Family Resemblance Test, and the Risk Capital Test criteria?
- Will the token be deemed to meet the definition of a security under the laws of the jurisdiction where the ICO is being structured?
- Will the token sale fall under the framework of collective investment schemes, AIFs and transferable securities under the applicable legislation?
- Will the token sale fall under the applicable distributed ledger technology regulatory frameworks, if any?
Restrictions for residents of certain jurisdictions
The project should approach the distribution of tokens in different jurisdictions with the utmost caution, given the everyday changes in the cryptocurrency regulation, the tightening of the supervision over the ICOs in different jurisdictions, and the national supervisory authorities’ varying approaches to the question of the token sale. For example, some states may have a ban on token sales, while even friendly states may have additional rules that create further legal issues.
AURUM performs a complete analysis of the project, examines the token structure, the manner of the offering, and the legislation of the key jurisdictions where the project intends to sell the tokens, as well as positions of respective regulatory authorities and sanction lists. Based on the results of the analysis, we identify jurisdictions where the token sale may be considered to be violating local laws and provide the client with detailed recommendations on the jurisdictions where the sale of tokens would carry substantial risks for the project. We further advise on various blocking regimes, e.g., blocking IP addresses, displaying warnings and disclaimers, etc.
The client also receives recommendations concerning compliance with the applicable sanctions in the course of the token sale, including the lists of OFAC and EU.
A thorough approach to the aforementioned issues allows the project to anticipate and avoid possible problems with the law, regulators and listing of the token on the known exchanges.
Legal analysis of the whitepaper and marketing materials
We review the project whitepaper and key marketing materials for the violation of third-parties’ intellectual property rights, applicable legislation, unfair competition regulations, etc.
AURUM elaborates a separate section titled “Legal Status of the Token” within the whitepaper, draws up the disclosure of risks statement to be included in the whitepaper, and also provides all necessary disclaimers regarding forward-looking statements, assumptions, liability, regulatory uncertainty and so forth.
As practice shows, utility tokens are frequently positioned as securities (i.e., an investment and speculative tool) by the projects. Poor positioning of the token and, in some cases, even certain public statements made by the team, may lead to the token being viewed as a security by regulators in certain jurisdictions, in particular, the Securities and Exchange Commission (SEC) in the US (see the “Munchee case”).
To prevent situations like this, AURUM provides recommendations and develops a set of rules which must be followed by the project team during the marketing campaign and in the course of preparation of related marketing and other materials.
AML/CTF compliance, development of necessary internal policies and KYC procedures
Irrespective of the country where the token sale is structured, the project should understand whether the requirements set forth by the anti-money laundering (AML) and combating terrorist financing (CTF) laws are applicable to it. According to the FAFT recommendations and the EU AMLD5, the token issuer may be required to carry out all applicable due diligence procedures, including identification of the token purchasers.
Violation of AML and CTF requirements as a matter-of-course will result in problems with banks (e.g., when exchanging to fiat currencies), with the listing of the token on the known exchanges, and may further lead to the liability and penalties provided by local law. AURUM provides each client with individual instructions concerning the AML/KYC procedures and necessary internal AML and CFT policies.
Private Token Placement in the USA
In the event that AURUM attorneys conclude that there is a high risk for the token to be considered a security in the US, another option may be to conduct a private token offering under one of the exemptions provided by the securities exchange laws, particularly under rule 506(c), Regulation D, which allows selling tokens to accredited investors in the US without the tokens being registered with the US Securities and Exchange Commission.
Where it is viable to do so, AURUM helps correctly structure private token offerings in the US under the Reg D procedures via the simple agreement for future tokens (SAFT framework). For these purposes, we engage our Silicon Valley-based of counsel as necessary.