Peter Khokhlov, Brian Konradi, and Andrei Danilov are lawyers and co-founders of Incremint.io, which is planning a token sale.

This article does not constitute legal advice.

Terms and conditions (or T&Cs), the timid cousin of the white paper, are an essential part of the makeup of an initial coin offering (ICO).

With all the ICO hype, “white paper” has become a household term, boldly presented at the top of the ICO landing page. The terms and conditions, however, are typically a link at the bottom of the ICO’s website, and investors often acknowledge their existence by clicking “I agree,” without pausing to consider what insights they bring to the project.

Essentially, the terms and conditions are the formal agreement between an investor and the ICO issuer. Proper T&Cs should connect an ICO’s tokens with the deal presented. Unfortunately, this is not always the case.

T&Cs can include alarming provisions. For example, in the Tezos project’s Terms and Explanatory Notes (the analogue of T&Cs for token purchase purposes) referred to token purchases as a “non-refundable donation.”

The way we generally experience the internet and consume services has conditioned many of us to overlook the less-than-enthralling legal sections of websites. Even lawyers can feel unmotivated to read these provisions.

Most of the time, this approach is not an issue. We analyze the product or service on its alleged merits, prior experience and reviews of other users. We are also sometimes shielded by consumer protection laws.

However, ICO tokens exist in the virtual realm and are typically nothing more than a set of rights. There is often no product to demonstrate, there can be no usage reviews, and, as yet, there is little clarity on legislative protections. In this context, if investing in an ICO, it is imperative to review the corresponding terms and conditions.

If an ICO’s website does not have terms and conditions, that is a red flag by itself. If it is a one-page document or the document does not describe the actual token sale, there should be yet another pause for concern. Terms and conditions are typically lengthy documents, and can be significantly less fun to read than a white paper.

If those bases are covered, here’s what ICO investors should be on the lookout for:

Counterparty

The name of the contracting party should normally be in the first paragraph. If it’s not, that’s a red flag.

Like in any offline contract, an ICO’s T&Cs should be clear about who the counterparties are. The buying party is clear, but who is the potential defendant in a litigation against the seller? Any legal counsel will be keen to know who they’re dealing with if the project fails and litigation is justified.

In most cases a buyer should expect to see a legal entity on the side of the ICO issuer, which at the very least indicates that the issuer is following certain guidelines, has likely considered structures for conducting the ICO, and may have involved lawyers.

Token definition

Terms and conditions might simply refer you to the white paper for token description. This approach is fine. In these cases, terms and conditions should incorporate the white paper by reference, so that token buyers have an understanding of what they are buying.

Alternatively, the rights and obligations associated with the tokens can be spelled out in the terms and conditions. As most tokens are essentially promises of something to happen in the future, investors are better off seeing that promise described in a legal document.

Terms of token sale

Terms and conditions should include provisions on pricing and timing of the token sale. This information is likely available on the ICO landing page, but again, it’s prudent to go beyond the headline and check what is stated in a legally binding document.

Use of proceeds

The ICO is successful, now what? Terms and conditions should include an issuer’s plan regarding how ICO proceeds will be used. If the application of proceeds is critical to the success of the investment, make sure the terms provide a binding description.

Other oddities

Finally, look for anything that just looks odd.

For example, a provision saying that you obtain no rights by contributing to the project is something one should avoid. If there is something confusing, or that looks fishy, contact the issuer.

As important as T&Cs are, they will not unilaterally protect your investment. Keep in mind that a perfect set of terms can be published on a scam ICO website.

Use your common sense, and always vet what others are saying about the potential investment.

Reading T&Cs image via Shutterstock