Initial coin offerings (“ICOs”) are typically accompanied by a whitepaper, or as lawyers like to call them "evidence." I've read many of them and offer some general observations, from the perspective of a lawyer who deals with disputes for a living and who doesn't do token sales.[1] (Are tokens "securities"? I don't address that in this post, but you will find some references in the endnotes.[2])

Jargon isn't a defense. Describing things in complicated technical language won’t help you avoid securities laws. You can Merkle, shard and LaTeX all you want, but if it’s a security and the Man comes after you, no-one will care about formulae or formatting.[3] Here's an exercise: take the text of a whitepaper, and drop into a text editor. Remove every adverb, adjective and mathematical formula. Limit your sentences to 10 words or less. Now ask if it is a security. Everything you write is evidence. Repeat this phrase. Print it out and post it over your desk or make it your screensaver. Everything you write is evidence. Once you write the whitepaper, you can expect to see it placed in front of you with an exhibit sticker on it if there’s ever trouble. (This also includes, Twitter, Reddit, Slack, etc. etc. See #7, infra.) You may feel strongly that the government has no right to tell you what to do. How you express this view can come back to haunt you. Hedge (not the fund, the caveat). An entire industry has developed around writing prospectuses and SEC required filings. The same thing doesn't seem to be the case with ICO whitepapers, which tend to the elegiac and (occasionally) improbable. While disclaimers and hedges may not protect you if you’re engaging in securities fraud, if you’re an honest businessperson who happens to fail for honest reasons, those careful hedges can be a lifesaver. There's a tension here, I know: Under-promising and over-performing may not make the people who write your marketing copy happy — it may save your bacon if you end up under-performing, however. Milestones are a double-edged sword. Let’s say you’ve been told that a “utility token” or “product token” can be sold without having to worry about securities laws. The thing about a product is that it can actually be used at the time it is sold — it doesn’t have to be built to be put to use. If your product can be used now, why are you adding milestone dates to your whitepaper that describe what you will accomplish by specific dates with funds from the ICO? (I said I wasn’t going to get into securities law here, but after you ask about Howey you might also ask your lawyer about something called the “Risk Capital Test”). I realize that it’s good marketing to explain to potential buyers how great your whatever is going to be because they have purchased your token. By the same, um, token, one has to balance between marketing and creating a record that proves that . . . you are actually selling a security. Disclaimers don’t always work. The fact that a whitepaper disclaims liability doesn’t mean that a court will enforce the disclaimer. It depends on the disclaimer, the Court that is considering it, and a variety of facts and circumstances. Very generally speaking, a Court may not enforce a disclaimer if doing so would be against public policy of the place where the Court sits. (See e.g. Franco v. Neglia, 776 N.Y.2d 690 (App. Term. 2004) (children not bound by exculpatory clause for personal injury claims because they lack capacity to enter into such agreements). This is also true of exclusive forum selection clauses and choice of law clauses. You can *say* that all disputes will be resolved in Zug or Aldeberan under Singaporean law. If you sell your token to a 12 year old in Madison County, Illinois, your disclaimers and other fine print may go out the window. This is not to say that Courts won't enforce disclaimers. (See. e.g., PPC Broadband, Inc. v. Transformix Eng'g., Inc., 2015 U.S. Dist. LEXIS 8343 (N.D.N.Y. 2015) (enforcing disclaimer and noting "strong public interest in the enforcement of bargained-for contracts)). It depends. If what you are doing is plainly illegal in a jurisdiction where you are circulating a whitepaper and selling tokens, disclaimers may not mean much. Whitepaper photos make identifying defendants easier. It may be all decentralized blockchain and disruptive today, but your picture in a white paper may makes you a target. Maybe someone created a Swiss Foundation and transferred assets to it. That may work. I’m not suggesting otherwise (though you can pierce the corporate veil of a not-for-profit foundation [4]). You can argue decentralization and corporate shield all you want — if your face makes an appearance in a whitepaper and there’s ever trouble, you have a good chance of seeing yourself after the “v” in the caption of a lawsuit. Are you being paid enough for the risk? Is there D & O or other insurance available if that happens? A corporate indemnity? Limitations or restrictions may create problems if you don’t enforce them. This goes back to paragraph 2. This seems obvious but there are plenty of ICOs that say that they are not offering their tokens for sale in the U.S. but make no effort to enforce this restriction and in some cases even use targeted social media advertising to sell to U.S. citizens. If you have recognized in your whitepaper that U.S. is off limits but do nothing to enforce that limitation (i.p. filtering?) you may have established a duty and broken it at the same time. Things that you say about the Whitepaper may be evidence too. Assume you are taking the position that your ICO is not a token sale — having multiple people answer questions or talk about the Whitepaper or the offering risks creation of a conflicting record. Consider designating a single point of contact on all whitepaper issues. Avoid ad hoc/improvised communication on social media (Twitter, Reddit, etc) or on chat platforms like Slack. This is complicated stuff and getting it wrong can cause great peril. It’s easier to stay on message if responsibility for the message is delegated to one or two people, as opposed to your very pleasant but otherwise quite uninformed community manager. Don’t forget consumer protection laws and class action lawyers. In addition to securities laws, the White Paper may be judged under a variety of consumer protection laws and by a variety of different agencies. If you make what appears to be a promise and you fail to keep it, this can lead to significant damages. In the U.S., class action lawyers also pose a significant threat. The more money you raise, the more of a target you create.

I am not so naive to think that someone who is a planning an eight figure ICO is going to pay much attention to these observations. Money has a way of drowning out common sense sometimes. But if you're considering participating -- or thinking of suing one someday -- just remember that one year's whitepaper is next year's evidence.

Endnotes

[1]. None of this is legal advice and I am not your lawyer. Don't take legal advice from blog posts or twitter. Consult your own lawyer for fact specific legal advice. Also, these are my opinions alone -- I'm not making them on behalf of any client, past, present or future, and I may change my mind. ("I contain multitudes.") Also, this is not authorized by any employer, past present or future.

[2]. Is a token a security? I translated the test into code so that programmers would find the rule easier to understand.

Beyond this, you can also look at Preston Byrne's analysis on the one hand, and pieces by CoinCenter and Marco Santori on the other. I happen to agree with Preston on this point -- most token sales appear to violate US securities laws -- but other perspectives are out there. There are plenty of other resources and the securities question is not the focus of this piece. Also, a reminder to get legal advice from your own lawyer if this is something you're considering.

[3]. The quote is from the SEC's press release in the GAW Miners case. See https://www.sec.gov/news/pressrelease/2015-271.html.

[4]. Yes Viriginia, you can pierce the corporate veil of a not-for-profit foundation. https://twitter.com/palleylaw/status/870723970282160129