In my view, an ICO lawyer should first and formost evaluate whether a token design makes sense. If it does, LBC can take care of all legal requirements every step of the way: from ensuring compliance with securities regimes and KYC/AML regulations to the implementation of a suitable legal structure and contracting.
A note on ICOs and ‘ICO Lawyers’
Initial coin offerings can be an interesting avenue of fundraisings for startups wishing to overcome the challenges presented by network effects. For early adopters, any possible relative lack of early utility provided by a network, marketplace or protocol is compensated for by additional potential financial upside, realized through the appreciation of a token’s value.
However, immense speculation and seemingly endless liquidity led to companies doing ICOs without actually having a viable business or token model. As the value of a well-designed token should rise when the underlying system is successful, these companies started focusing on signaling success, instead of focusing on actual adoption of their protocols or dApps. Many companies that sold tokens during the ICO boom moreover neglected to care for their investors, violating securities laws, while so-called ‘ICO lawyers’ neglected their gatekeeping duties. To no one’s surprise, the resulting ICO market was extremely unsustainable. The ICO boom and bust has left a significant dent in the space’s reputation and a lot of the liquidity for legitimate issuers has vanished. As a result, we now see increasing amounts of class action law suits, regulatory enforcement actions and issuers that are ‘redesigning’ their tokens or even refunding all investors.
LBC sees this is a good thing. Only the best companies are still able to raise funding using an ICO, and the ‘get-rich-quick’ folks have started to disappear. More importantly, the ‘popping of the bubble’ has forced the crypto-space to reevaluate and properly think about the creation of long term value again.
Personally I have strong opinions on proper tokenomic design and help clients figure out (i) whether an ICO makes sense for their system/product and if so (ii) how their tokenized ecosystem should be designed in order to focus on adoption and long-term value creation, instead of speculation. LBC only works with companies that align with its vision of healthy ICOs and helps those that are willing to take the right approach in terms of tokenomic design and legal compliance with the legal implementation of ICOs, including contracting, legal structuring and compliance to securities regimes globally. So far, no ICO has met LBC’s criteria.
During the ‘tokenomic-design’ stage it is important to keep in mind your customer/investors, as well as the legal implications of your token’s design. If not done right, your token might be considered a security in a multitude of jurisdictions. If it is, you are bound to comply to stringent requirements in terms of the filing of information disclosures (a prospectus), procedural requirements, know your customer rules, anti-money laundering requirements and insider trading restrictions.
Be mindful that every country or region has its own set of securities laws. If you sell to investors in a certain jurisdiction, you have to comply to that jurisdiction’s laws. For global offerings, a large multitude of jurisdictions might be applicable. Even for those tokens that might not be deemed securities, the legal structuring and contracting of your offer is of vital importance. Depending on jurisdiction, your token’s buyers are protected by general contract, property and consumer laws (as they should be!).