Introduction

Recently BetterTokens announced the first results of the review process for the month of January.

We already started to receive comments and feedback from the community. Based on those, we would like to emphasize the following:

BetterTokens developed due diligence standards for companies and individuals involved in the tokenization of assets which are publically available on our website, namely referred to: tokenization as a blockchain funding tool; disclosures to the investors; risk management; record keeping; ensuring healthy market practices; and due diligence best practices.

We base our review on the information that the projects provide during the application process, as well as additional communications for clarifications that we conduct with them. We also understand that we are not protected against the risks that the information provided by the projects could be inaccurate or manipulated specifically to pass the review process — because of that we reserve the right to monitor any additional information that may arise in respect to the projects, asses it and reconsider the classification if such information may affect the project’s status.

During the process, we only assess the project against Tokenization Standards based on information provided by the project via application form. Our review does not cover such matters as design of project’s website, its logo or trading volume of project’s token. A project can have a bigger or smaller community and intend to solve wider or closer range of market needs — this is something that falls out of our review.

Our review cover such matters as design of project’s website, its logo or trading volume of project’s token. A project can have a bigger or smaller community and intend to solve wider or closer range of market needs — this is something that falls out of our review. As mentioned in our previous publications, BetterTokens’ main task is to conduct a careful assessment of tokenisation projects under clear guidelines. Our goals do not include the analysis of investment attractiveness or risks of bankruptcy of the projects, or any other considerations which fall out of scope of our activities.

Following the first results of the review process we decided to take a step forward and make a brief guide in order to draw the attention of the issuers on the areas where most of our findings were detected, which are presented below in a short guide.

Tokensale guide

Business model

Based on best practices in the investment markets, projects that are conducting fundraising in any form shall prepare a business case outlining the value that they bring to the investors and describing their operational model, providing the investors with details of the project which are required to make an informed investment decision.

Functionality of the tokens

The functionality of token is closely connected to the legal classification of the asset, hence creating a set of requirements for the issuer. Projects that are issuing tokens with investment characteristics that are similar to classic securities need to assess the applicability of the securities market laws, as this can affect the selected mechanism of fundraising.

Even If the token has utility nature at the first glance or is aimed to be an internal currency for the project, it is still advisable to engage legal advisors and obtain a legal opinion on the token classification, rights of the token holders and obligations of the issuer.

Types of token issuers

Tokens are digital assets created on blockchain. Despite their decentralized nature, any token that is used for fundraising purposes from legal perspective has an issuer, being an individual, a group of individuals or a legal entity, that stand behind the idea and the realization of the project and the process of collecting investments and controlling the distribution of funds after the fundraising campaign.

An individual person acting as the issuer may face additional obligations, related to regulatory compliance and personal taxation. Those have to be carefully considered before launching the project.

As a general rule fundraising is considered as business activity and there are very limited number of cases where conducting such activity as an individual could be a feasible option, mainly taking into account legal risks and tax implications.

Jurisdiction

Notwithstanding the broad and international character of most ICOs on the market, the selection of jurisdiction for incorporation might be complicated for the issuer. The main reason for these complications is the lack of clear regulatory regime.

As a general rule, when selecting the jurisdiction the projects consider the following:

the market practice of launching ICOs from particular jurisdiction;

crypto-friendly and open regulator or ICO rules in place;

tax and accounting matters in respect of cryptocurrencies and tokens.

Launching an ICO from a jurisdiction which do not cover the above may present additional uncertainty and risks for the project, which ultimately may affect its future development and its investors.

White Paper

The White Paper is the core public document for any project involved in tokenization. This document is reviewed by the investors, the regulators and the crypto exchanges processing the listing requests. Based on that, the project’s team should put the main focus in disclosing the relevant information in a comprehensive way, including the results of relevant market and legal analysis, as well as the rationale behind the idea and the project itself, including:

Issuer-related information.

The project’s business model. When using market statistics or research, a reference to relevant sources shall be included. It is also a best practice to include a detailed roadmap and token distribution chart.

Disclosure of founders and key team members.

Disclosure of ICO details. The hard cap and soft cap, token issue standard, safekeeping of funds and refund policy are basic details of the token sale.

Disclosure of post-ICO lifecycle. Additional issue policy or buyback (if contemplated), information about exchanges for future listing and communication channels with the investors of tokens shall be considered.

Blockchain

If the project’s business case involves the use of the blockchain, the rationale behind the use of technology and how if affects the related business model shall be described in details. In addition, the project shall asses and disclose the risks (if any) of using the blockchain technology in its business model.

AML/KYC

AML/KYC procedures are the main concern of the regulators. Anonymity associated with crypto industry is considered as a high risk not only from money laundering perspective, but also from sanctions related restrictions standpoint.

There is a number of exceptional cases of projects that conducted an ICO during the period of uncertainty characterized by the absence of guidelines from the regulators regarding the applicability of AML/KYC requirements to ICO projects. However, it is reasonable to affirm that starting from Spring, 2017, most of international and local regulators clearly stated their positions in this respect and contributed to building a high level of awareness amongst market participants regarding the requirement to conduct AML/KYC procedures during the ICOs.

In addition, several reports by The Financial Action Task Force (FATF) which outline the responsibilities required to be fulfilled when attracting funds from the investors were issued before ICO phenomenon started, which had to be taken into account by the issuers involved in fundraising process.

Closing notes

The goal that we wanted to achieve with this communication was to draw the attention of the projects to main areas of tokenization process where certain best practices were formed during the past couple of years. We do not provide any kind of advice, as the specifics of each particular case and jurisdiction have to be taken into account for such purposes.

BetterTokens is open to any feedback from the community and the projects in order to contribute to the development of Waves ecosystem together.