As we all know, blockchain lawyers are routinely assigned to write token legal opinion letters to determine a Formal Legal Opinion on Status of Utility Token. Essentially, to determine if utility tokens are regulated, a thorough Review and Analysis of Utility Token is conducted during utility token due diligence. As far as the Utility Token Definition is concerned, such tokens provide various benefits to the users, without any percentage of shareholding in the project that keeps the utility tokens outside the scope of token security laws.
Accordingly while Writing Utility Token Legal Opinion Letter, the crypto lawyers sign the Legal Opinion Letter for Utility Tokens at the end to attest to the validity of the utility tokens. The best practices for Writing Legal Opinion Letter to Determine a Token as a Utility Token also include a thorough analysis of the utility aspects of crypto tokens. Subsequently, during utility token due diligence, crypto investors and crypto exchange platforms study the Contents of Token Legal Opinion Letter. Hence, a legal opinion on cryptocurrency framed as a crypto legal opinion letter with reference to the legal regulations of utility tokens becomes a crucial legal document. To decide if the crypto tokens are legal, or to determine the purpose of utility tokens, such token legal opinion letters really come in handy to all the stakeholders.
From the perspective of launching of blockchain projects, by way of such token opinion letters, the team is able to project the correct value of utility tokens via the documents explaining the legal opinion on utility token. In certain projects, the letter stating the legal opinion on security token or the legal opinion on nature of tokens are also needed to highlight the advantages of token legal opinion, which is executed by performing the Howey’s test during token legal opinion analysis. To conclude, such legal opinion letters form a routine part of utility token due diligence process.
Lawyers with expertise in blockchain technology prepare legal opinion to determine if tokens qualify as utility tokens. Legal opinion is an extensively drafted consultation on the activity or specific queries of a client. The document is needed to review and assess an undertaking from a legal standpoint. In America, the US Securities and Exchange Commission (SEC) governs the country’s financial markets and they monitor fresh ICOs when they are investment properties traded to American customers. For instance, the creator of Telegram raised $1.7bn in an ICO previous year, but the SEC is currently trying to stop the undertaking due to alleged unlawful actions by the development team.
The HOWEY TEST was formulated by the US Supreme Court to define particular trades as investment contracts. Now, the Test is employed in the ICO / STO / IEO realm to deduce the essence of a specific cryptocurrency. It authorizes the project organizers to resolve the primary issue of whether the tokens published by the outlet, qualify as securities under US law. While a legal ICO can be created, the SEC pursues statutes and the Howey Test to deduce if the ICO is tradable security. ICOs that do not fulfil the Howey Test are prone to all the identical laws as public stocks, and they are registered to obey rigorous securities law.
The financial and logistic responsibilities of establishing compliant, publicly-sold security are elevated for many businesses, let alone start-ups in the blockchain. Accordingly, an ICO for American consumers must uphold the Howey Test to allow their incorporation. The European Union also mirrors the Howey Test’s procedures.
Considering an Initial Coin Offering (ICO) requires expert legal strategy due to the dynamic nature of applicable laws, including, securities, taxation, corporate structure and agreements. An ICO is also considered as a Token Generation Event (TGE), which refers to a novel way to raise capital by issuing crypto tokens. Companies issuing tokens or coins via ICO generally structure the offering in a manner such that the tokens or coins are linked to a smart contract on the Ethereum blockchain or similar platform. Cryptocurrency exchanges require legal opinion to determine confirming that blockchain tokens are utility tokens.
In essence, the tokens or the coins are issued as a right to use the technology that is being funded by the ICO. It would be apt to compare an ICO with an Initial Public Offering (IPO), wherein shares of a company are issued to the investors. It is a common belief that tokens or coins issued by way of ICO are equivalent of securities, whereas mostly they are different from securities, and hence, it is important for companies to highlight such difference to their investors and token buyers. Since the tokens or coins do not represent equity shares of the company, issuing these during ICO shall not affect or dilute the equity of the founders.
A crucial strategy to structure ICO involves having separate legal entities to issue the tokens or coins and to operate the business. This can ensure minimum legal liabilities and further allow the founders to have flexibility to opt for desired legal structures for both the entities. For example, ICO can be executed using a trust or a foundation, whereas operating entity can be a private limited company capable of issuing equity shares to the founders and investors. In addition, it may be more advantageous to incorporate both the entities in different jurisdictions to avail the advantages of local laws and regulations. For example, ICO operating entity can be incorporated in any of the jurisdiction selected from, Switzerland, Singapore, Hong Kong, British Virgin Islands, Cayman Islands, Isle of Man etc.
Legal aspects of Blockchain and ICO are crucial for business consideration due the dynamically changing nature of this field. Beginning from ICO legal opinions to ICO structuring, to legal entity incorporation, and further including international legal compliance, ICO lawyers and Blockchain attorneys always work on the edge to assist their clients.
Blockchain is the main innovation behind bitcoin. The distributed data storage is at its heart. Any individual who takes an interest in the blockchain network has its data store that stores the entirety of the exchanges that at any point occurred on the system (this is otherwise called the dispersed ledger).
Admissions are kept inside a cryptographic chain of blocks. At each stage, the network of members must concur about the most recent square of exchanges. The agreement is made through a procedure of majority agreement, removing all the duplicate sections, twofold spending, and so forth. This procedure and the cryptographic layering of the blocks make the concurred blockchain irreversible and changeless. The ‘historical backdrop’ of occasions inside the blockchain can’t be adjusted by any of the members without the agreement by the majority from the assemblage.
A Smart Contract is a code that is conveyed to the blockchain. Every smart contract comprises of code that can have a set of sources of information. Smart contracts can likewise store data. Following the disseminated model of the blockchain, smart contracts run on each hub in the blockchain, and each agreement’s information is put away in each hub. This information can be questioned whenever necessary.
Smart Contracts can likewise call other keen agreements, authorize consents, run work process rationale, perform figurings, and so on. Smart contract code is executed within a blockchain exchange, to ensure that the information kept because of running the smart contract (for example the state) is a piece of the blockchain’s changeless ledger.
Technology lawyers and law firms that are required to review legal aspects of Blockchain and ICO focus primarily on laws applicable to a business that is on the verge of implementing a Blockchain technology for business operations. This legal analysis also includes determining the best jurisdiction to incorporate legal entity, obtain the required licenses and permits, ensure local and international legal compliance (KYC and AML compliance) etc.
For issuance of coins or tokens during the ICO, lawyers assist clients by reviewing and auditing the ICO legal structure, application of the Howey Test, Family Resemblance Test, Risk Capital Test etc. Additional services include review and audit of the ICO White Paper to ensure compliance with domestic and international laws.
Global Blockchain Lawyers (www.GlobalBlockchainLawyers.com) is a digital platform to discuss legal issues, latest technology and legal developments, and applicable laws in the dynamic field of Digital Currency, Blockchain, Bitcoin, Cryptocurrency and raising capital through the sale of tokens or coins (ICO or Initial Coin Offerings).
Blockchain ecosystem in India is evolving at a rapid pace and a proactive legal approach is required by blockchain lawyers in India to understand the complex nature of applicable laws and regulations.
Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter
Patent Forum (Munich, Germany) | News Channels | Ministry of Corporate Affairs | ASSOCHAM | FICCI | Brand Licensing India | BioEnergy International
Economic Times | The Hindu | BioSpectrum | International Bar Association | LawAsia | SwissInfo | Global Legal Post | HT Live Mint | Outlook Money