In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from Blockchain technology and ICO funding to taxation, regulation and cryptocurrency adoption by different sectors of the economy.
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Imagine that your ICO raised $50 mln and your cryptocurrency is trading at 100x from where you launched. Everyone loves your project, your friends and family are impressed, and you’re the darling of Blockchain. Congratulations and welcome to the big leagues! You now have a significant enterprise to protect, demanding stakeholders to satisfy, and a challenging product roadmap to deliver on. Besides talented engineers and marketers, you need a in-house lawyer on your team. Here are some reasons why.
Corporate Governance: There’s no such thing as a project when it comes to corporate law. Don’t accidentally leave yourself open to unlimited personal liability by failing to create an appropriate entity. Whether you’re a non-profit foundation or a for-profit corporation, you’ll need to observe proper corporate formalities. This means having your paperwork in order, filing with the appropriate federal and state governments, holding proper meetings, and maintaining good business practices. Observing corporate formalities is not something that’s done once and forgotten about. It’s a never-ending process that requires constant time and attention.
Non-profit organizations are highly regulated entities: You can’t just snap your fingers and become a non-profit. Assuming you consulted with legal experts and properly filed your paperwork, there are still many hurdles you’ll need to satisfy to achieve and maintain tax-free status. For starters, a non-profit organization must pursue charitable purposes, like relieving poverty, educating people, advancing religion, or some other purpose that benefits society. Can a Blockchain project meet these requirements? Sure. But having founders walk away with huge windfall gains after an ICO won’t help your cause. Be very careful here, as the Internal Revenue Service (IRS) is watching.
Open Source: All your copyright is open source, so you don’t need a copyright lawyer, right? Wrong. Open source issues are highly technical and can have a huge impact on your project. Every detail matters when it comes to open source, including the license you are using, its compatibility with other licenses, how you manage the works you create and how you choose other open source works to borrow from. A little upfront legal work on these matters can help you avoid a contentious open source license dispute down the road.
Trademarks: Your project has launched and your 10,000 token holders voted on a name they love. Did you consult with a trademark lawyer to make sure the name was not already taken? Have you registered your mark with the appropriate regulatory bodies? A surprisingly large number of high market cap cryptocurrencies have not bothered to register a trademark, and several are operating under a mark that is confusingly similar to other pre-existing marks. Do some due diligence before it’s too late and you find yourself on the receiving end of a trademark infringement complaint.
Employees/Consultants: As a formal entity, you must have proper documentation in place with your employees and consultants to ensure regulatory compliance and that the intellectual property created by their efforts is properly owned and licensed. While many of the documents used are “boilerplate” the devil is in the details, and these details get more complicated when you are working with developers spread around the world. Don’t be lazy here. Failure to sign the proper paperwork can have significant consequences to your intellectual property.
Regulatory Compliance: The arm of the U.S. government is very long. Anarcho-capitalist rhetoric can be enticing until you receive your first subpoena from the Securities and Exchange Commission (SEC) or IRS and realize you need to hire a New York City law firm at $1,000/hour to defend yourself against these agencies. You have a fiduciary duty to your stakeholders to be compliant with applicable laws and in a new space like Blockchain this can be extra challenging since nobody knows for certain which laws apply or how they apply. There are banking and money transfer laws to consider, securities and communications laws and even traditional matters like data privacy. Don’t think regulations are just something for venture capital backed software companies to worry about. You have a lot on the line.
Taxes: I could have included taxes in the section above along with securities, banking, money transfer and other regulatory concerns but taxes deserve a special call-out because nothing irks the U.S. government like a group of smart entrepreneurs that beat the system. If you want to know what’s in store for cryptocurrency founders that don’t comply with IRS rules, just read up on what happened to online gaming companies and Swiss banks. Long story short, they were squashed like bugs. Don’t be a bug, and comply with tax regulations.
Contracts: Want to get your cryptocurrency listed on a new exchange? Buy D&O insurance? Enter into a development deal with a consulting firm in India? Or maybe just rent some office space in Zug? All of these transactions will involve legal contracts for you to review, revise and negotiate. Managing the day-to-day legal needs of an enterprise worth $100 mln is a full-time job for a professional. Don’t try and handle all of these matters yourself.
Can’t an external law firm handle all of this? Not really. Just as it wouldn’t be wise to outsource all your engineering needs to an external consulting firm, you shouldn’t outsource all your legal needs to an external law firm. At a certain point you need a dedicated lawyer to manage your legal affairs and deliver valuable strategic advice. Only someone who is intimately involved in the day-to-day business operations can do this. That’s the role a General Counsel plays. Hire one today before it’s too late!
The views and interpretations in this article are those of the author and do not necessarily represent the views of Cointelegraph.