ICO litigation and anti-litigation advisory services
2019 will be the year of ICO litigation
During the last few years, a total amount of US$ 30 billion has been spent for the acquisition of digital tokens under a so-called initial coin offering or token generating event. As of today, the vast majority of ICO projects have questionable roadmaps and long-term procedures. Just a few tokens represent feasible applications of the blockchain.
Companies selling new tokens or coins through ICOs to investors are taking a calculated risk. While U.S. regulators seem to take the most aggressive approach, other jurisdictions follow. Regulatory noncompliance is the moist easy starting point to ask for a refund of ICO proceeds. However, other legal arguments and procedure are possible as well. Most ICO buyers regret their investment. Therefore, 2019 will be the year of ICO litigation.
The Bangkok-based law firm PUGNATORIUS Ltd.
- advises ICO issuers, promoters, and developers on how to minimize the litigation risk by rethinking their token scheme’s structure to shield themselves from liability, and
- provides to ICO buyers legal advice and assistance on the prospects for the success of an ICO litigation.
The Swiss Tezos ICO as the role model for litigations abroad
Currently, the Tezos case in California is seen as the prototypical defendant for such a lawsuit and the door opener for the global ICO litigation industry. The Tezos Foundation is an independent non-profit organization under Swiss laws. The ICO token sale of the “Tezzies” raised proceeds of US$ 232 million.
The class action allegations against Tezos consist of selling unregistered securities, committing securities fraud, false advertising and unfair competition by making material misrepresentations and omissions. The case has been filed on October 25, 2017. Above all, the following topics are part of the legal disputes:
- Can plaintiffs sue foreign token sellers in US courts?
- Where does a token sale actually take place?
- Can a forum selection clause in the website or whitepaper exclude a statutory legal venue?
- What are the requirements that the purchaser agrees to the binding arbitration clause found in a token sale agreement?
- Who exactly can be held liable for ICO token sales?
Although the lawsuit may be the first of its kind in relation to the controversy, it is obvious that “copycat” litigation will emerge as time goes on, not only at U.S. courts.
The broad scope of contractual or legal liability grounds for a crypto lawsuit
ICO litigations can be expected to use the particularities of a token generating event for its legal arguments and statement of claim. This includes undue enrichment, noncompliance with securities regulations, criminal behavior and other facts and legal circumstances.
Undue enrichment: In case of an unjust enrichment, the law imposes an obligation upon the recipient to make restitution. Main cases are:
- Void agreements under various reasons
- Contestability of the contractual arrangements
- Cancellation, termination, and dismissal for a special reason
Securities regulations: Illegal marketing and promoting of unregistered securities might be the easiest way to request that the token sale could be rescinded and the refund of the proceeds can be requested. Cases are
- Classifying of the token as an unregistered investment token
- Unlawful sales of unregistered securities
- Classifying of marketing, pre-sale, etc. as securities business
Criminal behavior: The red lines between negligent behavior and a criminal action are thin and high proceeds for worthless tokens might be seen by an inexperienced court as an indication for fraud. Relevant tasks are
- Fraudulently promoted ICO
- Fraudulently abandoned ICO (Exit scams)
- Tort
- Tax evasion
- Ponzi schemes
Others: Other bases for claims include these legal considerations:
- Deliberate misrepresentations
- Acts of neglect
- Ignorance of due diligence, disclosure and information requirements
- Significance of disclaimers
Law infringers and liable parties
In a multi-jurisdiction environment with digital assets crossing various borders, a promising lawsuit will focus on the execution of a successful court proceeding. Therefore, The ICO developer and promoter is not at all the only target for the assertion of rights. Apart from the ICO promoter, all directors and executives, stakeholders, gatekeepers and even governmental agencies are a possible target of legal actions.
ICO developers and promoters will be sued mainly for these reasons:
- Void agreements under various reasons
- Contestability of the contractual arrangements
- Defaulting on representations and warranties
- Illegal acts and omissions.
Directors and executives: The personal and unristricted responsibility of corporate officers may apply for these tasks:
- Classifying of the token as investment token
- Classifying of marketing, pre-sale, etc. as securities business
- Individual misrepresentations and misleading assertions in public or statements
Gatekeeper liability: Disputes with key stakeholders in an ICO involve a legal clarification of these aspects under the local jurisdiction:
- The scope of the duty to guard the gate for ICO advisors, lawyers, auditors, underwriters, dealers.
- The qualification of celebrities as a gatekeeper.
- Details on the obligation to “close the gate”, preventing fraudulent ICO transactions from being consummated
More: Other accessible market players and prospective defendants in an ICO litigation include
- Financial institutions (KYC/CDD/AML infringement)
- Partner in crime (unlimited co-liability)
- Governmental (control obligations, insufficient application of the law)
Watch your six! The gatekeeper liability
Although the gatekeeper concept had been developed under U.S. laws, for example, Thailand has a long tradition in gatekeeper liability for its highly regulated FDI legal framework. Recently, a prominent law firm had been draconically punished for opening the gate for foreigners to buy land through illegal investment structures. On an ICO level, the gatekeeper qualification, possible gatekeeper projects, misbehavior and scope of liability will wait for a judicial clarification.
Gatekeeper qualification: Who can be liable under the gatekeeper doctrine for losses and damages:
- Market professionals, especially lawyers, accountants, underwriters, and dealers
- Gate guarding, public appearances, reputation lending, mentioning in whitepaper and website.
- Celebrities?
An even broader definition might include all market participants, which under the U.S. SEC policy includes individuals or entities – including directors, officers, leading investors, public relations firms, and formally unaffiliated persons – who are directly involved with selling, issuing, or transferring shares, soliciting investors, or issuing investment materials for ICOs.
Gatekeeper project: Which cases and business ventures can result in a gatekeeper liability?
- Areas in which authorities expect that gatekeepers need to focus on their responsibilities
- Traditionally recognized in the area of highly-regulated transactions (and tax planning)
- Main case: SEC
Gatekeeper misbehavior: What are the specific requirements for the gatekeepers acts and omissions?
- Speak up to close the gate or disassociate from the transaction.
- Dual responsibility to both the client and to the public
- But not whistle-blowers for the government.
- Details in ICO cases unclear
Gatekeeper liability: Which types of liability and responsibility has the gatekeeper to be aware?
- Charging the gatekeeper for aiding and abetting the fraud
- Civil liability for damages
- Not yet tested under Thai ICO regulations
- Similar policies under Thai foreigner legislation
The path between a partner-in-ICO to a partner-in-crime might be short and the qualification as gatekeeper or participant might open the gate for an unlimited civil liability. 2019 will be the year of ICO litigation and all crypto stakehodlers should be well prepared for defense and attack.
ICO litigation and anti-litigation advisory services
PUGNATORIUS Ltd. advises and supports on challenging ICO projects in a multi-regulatory and multi-legislation environment. The law firm advises in these complex cases on
- the design and set-up of the overall corporate structure,
- the selection and handling of the ICO portal company,
- the licensing for ICO and, as the case may be, other required licenses,
- the possible civil law, tax, and criminal consequences,
- a risk-reducing legal and tax structuring,
- the advisable marketing and whitepaper strategy, as well as social media presence,
- the operating of the ICO project on a long-term basis..
The PUGNATORIUS group also advises on ICOs which are no longer in good standing and have been identified as a ticking time-bomb for the promoters, directors as well as gatekeepers. This depends on the ICO completion phase, the risk assessment, the need for action including restructuring and the protection of assets and participants for negative impacts.
With respect to cryptocurrencies, digital asset businesses and ICOs, the Bangkok law firm offers mainly these seven legal and tax services:
- Thai crypto-compliant company formations
- Regulatory-avoiding and tax-efficient cross-border structuring
- Digital asset and financial services licensing
- Blockchain and ICO advisory services
- Thai and cross-border tax structuring
- Cryptotransaction support services
- Legal opinions and professional statements
Details can be found at “Legal advice, tax structuring, transaction support services and business matchmaking on Fintech, cryptocurrency and digital asset ventures“.
