Millions have been raised in minutes over the past few weeks as new business models form on top of Ethereum. However, even while the network was under DoS and Vitalik called for a temporary pause, some rushed through their token sale. What are, therefore, the legal, practical and moral implications of this rising trend?
It was not more than a month ago that suddenly a new ICO splashed onto the scene with slick marketing videos. No one had heard of them or the team, so I thought to ask some questions, but before I had blinked the crowdsale was over – in 15 minutes. This same situation has now been repeated a few times. There’s a vision, a marketing push, a token sale, and then we wait.
It isn’t clear whether there is any legal jurisdiction to sue if they don’t deliver. The money so having been received, the incentives are not clear. Moreover, often, there is no information about the team, making it difficult to ascertain whether the vision will be successfully executed. Sometime, outright allegations of scams surface, but after the sale.
The ecosystem currently fundamentally lacks any governance. There is no quality assurance. No independent audits. No vetting. Nothing really except for journalists like myself going around to ask questions and traditional law.
Are Token Sales Legal?
Token sales of up to $5 million are likely legal if investors are not misled and financials are provided in comparison to SEC’s crowdfunding rules. Uncapped token sales are probably illegal, especially if funds simply go to a plain smart contract address. Moreover, considering that token sales are in effect seed funding, often lacking any product or revenue, there is no reason why the first offering should be uncapped. In my view, therefore, uncapped sales should generally be avoided at all costs as, although there was much to blame for the Slock.it DAO, including, to some extent, the whole community, an uncapped sale was the crucial mistake.
U.S. Securities and Exchange Commission has not made any statements regarding token sales or whether they fall within their jurisdiction nor whether they see any difference between capped and uncapped offerings. In reply to our e-mail, they declined to comment on specific situations or organizations, directing us instead to the general laws and guidelines regarding crowdsales.
A new Paradigm or Yesterday but with Blockchain?
In many ways, authorities have not had sufficient time to analyses the fast moving ICO scene which contains three categories. Firstly, of course, there’s capped or uncapped, then capped at $5 million or above and, more interestingly, token sales that actually use blockchain’s new capabilities and those that simply use the blockchain in a traditional facilitating manner.
In regards to the latter category, smart contracts allow for a number of new capabilities. For example, token holders can, through a smart contract, become in effect CEOs or act as the board, by voting on release of funds, by approving or rejecting budgets, receiving dividends through their smart contracts, etc. A token sale which employs these capabilities is more difficult to judge from a legal, moral and practical perspective than a more traditional token sale which uses a plain smart contract address. The latter is simply crowdfunding and in my view has no difference whatever to traditional crowdfunding. The former, however, is something very new, requiring testing and experimentation before passing judgement or considering how laws or rules may or should apply.
In any event, there is clearly strong demand to fund new projects in this space so as to advance blockchain industry and take advantage of new invention which only increases the value of holdings. However, if suddenly token sale teams start running with funds or scamming or getting “hacked” the reputation of the entire industry is affected. Thus, strong due diligence is highly desirable as, although there are upsides for individuals and the whole space, there are also real risks.
Disclaimer: The views expressed in the article are solely that of the author and do not represent those of, nor should they be attributed to CCN.
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