Legal Risks of Running an ICO
Still haven’t got your head around why you require a Legal Firm’s assistance for setting up your ICO? Let us guide you through some of the main points you should consideration.
Risk of your Token being classified as a security
Today, this risk is by far the biggest factor when preparing your offering. The amount of incorrect information currently on the web is frightening. What is even more scary, is the amount of ICOs we are seeing live which do fall foul. Most of these ICOs are not fraudulent, they are just purely unknowledgeable or simply misadvised. The wrong wording of in your T&Cs is enough transform your Utility Token into a security. The Legal Risks of running your ICO with a token that gets classified as a security are enormous. You are exposing yourself to fraud charges and especially compensation claims. Even founders of successful ICOs could end up in a lot of trouble. It has taken our team endless hours of analysing various laws and regulations related to token. This, however, puts us be in a position to advise on how to mitigate this risk.
Other Legal Risks in launching an ICO
Once I get comfort that my token is a utility token, then I can run an unregulated ICO right? Wrong. Somehow, most of the discussions on legal risks of an ICO seem to centre on the nature of their token. While this is a major factor, there are other risks you need to consider.
Consumer protection: Legal considerations for ICOs
Whatever form your token takes, Utility or Securitised, you need to consider other regulations. Consumer protection laws are in place as a safeguard to your clients’ rights. You cannot just paint a wonderfully unrealistic picture of your ICO. Consumer protection legislation covers a wide range of topics relevant to ICOs. These include fraud, unfair business practice, product liability, privacy and misrepresentation. The legal risk of your White Paper falling short of these regulations is high. Also, such laws are written to prevent scams and fraud from contracts and other client interactions.
Launching an ICO, using a utility token, might have made you avoid securities legislation. Great. However you still have a legal obligation to your token holder. This is the obligation to run your company in the right manner. Also laws exist in every country on Corporate Governance. Thus, Corporate Governance laws regulate how you operate, manage and control your company. Again, incorrect corporate governance exposes you to your token purchasers.
Contract Law: Another legal Implication to consider for your ICO.
Your white Paper, T&Cs, Privacy Policies and Token Agreement are all contracts you are issuing in your ICO. These are all legally binding documentation between the ICO issuer and the token purchaser. Consequently, if you do not draft these correctly, you are exposing yourself to legal risks. Notably, in extreme cases, a court could also decide to not recognise your ICO documents.
The above is not an exhaustive list. There are many other minor laws that affect your ICO. Not giving importance to your ICO’s Legal risks could be a very costly decision. At E&S we will guide you through the process of making your ICO as legally sound as possible.