Looking at Legal Issues of ICO Terms and Conditions: Do’s and Don’ts
This article aims to provide useful tips that might help develop ICO terms and conditions.
There are mixed views on if a company rolling out their offering should generate their own terms for the Initial Coin Offering phase alone.
To answer this question, one must keep in mind that an ICO phase is not only the most potentially lucrative, it is also the most dangerous. We have seen a couple of examples where ICO's have not been structured properly and the responsible party has received more than one Subpoena (or summons - depending on where you are from) from multiple jurisdictions.
The ICO is a totally separate phase of Coin life cycle and you should treat it like that from every aspect including marketing, compliance, budget and strategy. This article aims to provide useful tips that might help develop ICO terms and conditions.
The key challenge facing any company that is looking to roll out their ICO is what jurisdiction to base your operation from. The Singapore, Hong Kong, Switzerland, and his list goes on, battle still continues to rage between industry experts. However, from a compliance perspective one thing often gets overlooked, the contract laws of the jurisdiction.
Contracts that are written for and on behalf of your company must be compliant with their incorporation jurisdiction. Take a moment to think about that. Your Singapore company cannot write contracts that do not conform with Singapore law (or whichever country you form in). Granted, this does not cause such an issue when it comes to the actual writing of a contract for most jurisdictions as contract law has evolved to make writing contracts easy. However, if I read another contract that doesn't feature terms that are compliant with the countries laws I may start throwing papers off my desk.
When writing your contract, even if it is just a first draft to put in front of a lawyer, make sure that you do some basic research on the required provisions of contract law within the country you have formed your business in.
Many people are still of the age old belief that someone needs to sign something in order for it to be a legal contract. Sorry folks, but most every country on the planet got rid of that concept some 100 years or so ago.
That being said, in order for a contract to be enforceable without a physical signature on it, you need to have some way of showing that the reader has (a) read it, and (b) agreed with everything that is in it. Most of the time this is done with a unilateral acceptance clause or an action clause such as “if you buy our coins/tokens you agree to these terms.”
However, because of the nature of online contracts, most jurisdictions have special laws around an individual accepting a digital contract. This flows from the point above but is different because you need to make sure this is physically included within the contract.
Make sure there is some way that the contract is actually accepted within the agreement and make sure that you give clear reference to it. A box with an agreement tick seems to be most favorite but again, ensure acceptance is actually within the contract.
Whose law is it anyway?
There is a little-known rule that when writing a contract, you are free to put whatever jurisdiction's laws you want to govern the contract in the event of a dispute. Putting that in simple, non-lawyer speak, it means you can write a contract that applies the laws of Singapore which can be enforced by the courts of Hong Kong (for example).
This is, of course, subject to the actual laws of the jurisdiction and making sure that it is perfectly legal to do so (see my first point). However, in most all jurisdictions it is commonly accepted as freedom of contract.
Therefore, if you find a jurisdiction which is great for the purposes of running an ICO but has terrible contract laws, you can make the laws of whichever country you want to apply to your agreement.
Secondary to that, you can also make the contract enforceable wherever you are. It is work taking note that there are a couple of “flow through” jurisdiction locations in the world such as Hong Kong, New York State and England. For example, English courts will apply the laws of any country as long as the contract cites that it is enforceable within England. Pretty cool, right?
That means if you form your company in Singapore but live America, you can make it enforceable in England according to the laws of Hong Kong. This then means you can have an English speaking court resolve your issues that isn't the other side of the globe or using a confusing court system. It takes roughly as long to fly from California to New York as it now does to fly from Boston to London.
Before you ask the question, the answer is yes. This means if you do happen to live in the United States you can still use your home state courts to resolve issues. However, please consider the Securities and Exchange Commission before you get put on record saying that you are conducting an ICO somewhere else in the world.
Kill the marketing material
Your marketing materials are a lifeline during your pre-ICO and ICO phases. It is important you don't hold back on any Unique Selling Points (USP's) or fail to deliver any technological knowledge to your potential investors as transparency is key.
That being said you need to remember that everything you print on your marketing materials does count as inducement, selling, and general information about the offering you have. For the end user, it's the reason they enter into a contract with you.
Therefore, make sure that in your contract you dismiss all of your marketing material as exactly that. Marketing materials. They don't form part of the contract and any of the statements made within them are for marketing purposes only. If you think any company on the planet does it any differently, you're wrong.
It's going to look terrible for you if your marketing misleads people down one route through simple miscommunication. Especially in the age where serious investors are now playing in this space.
Make sure that your contract has a way to get out of the ICO and the contract altogether without you or your investors getting burned. This is the single most reason to have a separate ICO contract over your general terms of business which take effect after the ICO is over.
If you don't know already, Protostarr pulled out of their ICO and returned all of the investment currencies to individuals in the United States after a phone call from the SEC.
Only a fool would believe that they don't need a way out in case things go bad. With the ever changing landscape of the cryptocurrency market, it is well worth having a way to exit and assign (transfer) the contract if you need to move to a new location to continue operations.
Remember, for the sake of marketing and reputation. Do not make the contract so one sided that you can walk away without returning any investment currencies or money spent on investing in the ICO. People will spot that a mile off and you will find regulators and law enforcement agencies around the world won't take kindly to people grabbing cash and then folding their cards.
Strongly consider an English lawyer for the project of writing your contract. Or at least an English trained one. Not an English speaking lawyer, but an English one. English law school is one of the most comprehensive on the planet and graduates are required to physically pass writing and drafting assignments before they can practice. I've checked and it's to an extent unlike anywhere else. This means that their writing style is often the best. Side note: this means an English lawyer that has taken the Legal Practice Course – Not trained as a barrister, there is a difference.
Twinned with the fact that the Brit's just have way with words that most other countries don't, it makes for a solid combination to have a great contract made for you. Additionally, most countries in the ICO debate come from good old' England. Singapore, Hong Kong, Isle of Man, Jersey and even America have all at one time been English controlled, so their law still sticks with the countries. It's the reason English lawyers find it easy to relocate to other countries.
Use an industry expert
If all else fails, sometimes it’s better to bite the bullet and have someone write the terms for you. Most ICO's will have this built into their budget, but it is appreciated that not every ICO has a huge budget after development costs have overrun.
Make sure you ask before engaging any firm exactly how much it will cost and what experience the firm has in the space. Please also use a legally trained expert, not a technological one. Developers write code, not contracts.
- By Cal Evans
Cal Evans is an International Technology Lawyer from London who studied Financial Markets at Yale and has experience working with some of the best-known companies in Silicon Valley. In 2016 Cal left a top 10 California law firm to start Gresham International a legal service and compliance firm which now has offices in the U.S. and U.K. specializing in the technology sector.
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