Choosing the right venue
Directors' duties in ICOs
Directors' duties to investors of an ICO
Protection for directors
Guidelines for directors evaluating ICOs via Cypriot entities

The rapid expansion of blockchain technology(1) raises a number of corporate governance issues, especially in the context of electronic crowdfunding and venture capital raising. This update addresses directors' considerations when evaluating a company's participation in an initial coin offering (ICO)(2) from the legal perspective of directors' duties.

Choosing the right venue

When choosing the appropriate jurisdiction to develop and implement an ICO, directors should consider the incentives offered by available jurisdictions. Cyprus provides fertile ground as it offers many benefits, including:

  • wide blockchain technology education;(3)
  • certainty afforded by the EU single market; and
  • the availability of various corporate vehicles to facilitate ICOs.

The process of establishing an ICO entails novel elements when compared to the traditional initial public offering (IPO) in exchange for equity. In particular, tokens which are the subject of an ICO do not grant investors ownership to shares, nor do they create a dividend right. Unlike a traditional IPO, where investors obtain a return by investing in the company's shares, investors in an ICO strive to benefit from the company's future business.

Directors' duties in ICOs

When an ICO is structured through a Cypriot company, directors' duties are highly relevant. The directors must approve the framework within which the ICO will be launched. This includes:

  • evaluating all factors leading to the company's decision to launch an ICO;
  • engaging the team that will lead the launch; and
  • creating and following a roadmap for the development of the product or service which will be the subject matter of the ICO.

While doing so, directors are legally required to protect the company's interests in line with their fiduciary duties.(4) When directors also invest their own funds in an ICO, under Cypriot law, they must still maintain a conflict-free position.

Directors' duties to investors of an ICO

Directors owe fiduciary duties to the company and not to individual shareholders. Under Cypriot law, directors hold a fiduciary power that must be exercised in good faith and in the company's interests.(5) When a Cypriot company invests in tangible or even intangible products (eg, intellectual property, patents or trademarks that can be valued and classified by the international financial reporting standards), it is suggested that the onus of directors' duties can easily be discharged by obtaining insights from an appropriate auditor or tax consultant on a particular transaction. A test of reasonableness can be adopted to support their business decision to approve or disapprove pursuing an ICO. However, can the same reasoning be applied to decisions regarding projects which are largely unsecured and dependent on evolving technology which is so novel that the directors may struggle to follow up? Within a largely loosely regulated framework surrounding ICOs, can directors' duties be extended to include a duty to protect investors from rogue projects or the possibility that funds generated by an ICO are misappropriated?

Protection for directors

The absence of specific regulation regarding ICOs can expose directors of Cypriot companies to more questions than answers and even potential liability if they fail to heed known hurdles. However, that is not to suggest that directors are entirely unguided when it comes to evaluating an ICO. When seeking legal advice, directors involved in an ICO will realise that a number of relevant Cypriot laws must be considered when a project is being introduced to the public on a blockchain platform, including laws:

  • against money laundering;
  • governing electronic payments;
  • introducing securities to the public; and
  • governing the entity through which an ICO is being considered.(6)

As such, the absence of ICO regulation in Cyprus does not in itself render ICOs more dangerous to directors. The danger lies in failing to obtain proper advice from practitioners educated and experienced in this new area of corporate and IP law.

Guidelines for directors evaluating ICOs via Cypriot entities

As mentioned above, Cyprus represents an excellent starting point to an ICO because it combines the certainty afforded by existing legislation with knowledge of the technology that powers the projects under ICO. Directors of a Cypriot entity should consider the following:

  • Choose the right entity to facilitate an ICO – which corporate framework will ensure transparency of the funds pooled and the project under development? Should it be a limited liability company?
  • Understand the deal structure – is the project under development commercially viable? Do the directors understand the roadmap set out in the white paper?
  • Comprehend the implications of pursuing an ICO to future revenue – is an ICO the only revenue of the company?
  • Consider compliance obligations – are the company and future project both compliant with key laws?
  • Consider conflicts of interest – is proper disclosure documentation in place?
  • Address human resources and employment issues – does the company employ personnel? Are all team members entrusted with the development of the project contributing equally?
  • Obtain legal advice on corporate law issues – does the ICO trigger the pre-emption rights of existing shareholders (legacy shareholders who invested on a non-token strategy)? Are any anti-dilution adjustments required?
  • Address asset diversification issues – is the company required to sell assets to facilitate the ICO? and
  • Consider investing in legally robust disclaimers setting the boundaries of directors' liability in the course of a successful ICO and beyond.

For further information on this topic please contact Stella Koukounis at Solsidus Law by telephone (+357 22 007700) or email ([email protected]). The Solsidus Law website can be accessed at


(1) According to ICO statistics for 2017, more than $3.7 billion was raised by a total of 235 ICOs. The top ICO was Filecoin, which generated $257 million.

(2) An 'ICO' allows companies to raise funds directly from the public within a set timeframe in exchange for digital coins issued by applying blockchain technology. The aim of an ICO is to generate funds to develop a project.

(3) Blockchain represents a novel application of cryptography and information technology by recording data in a sequential archive. See "Corporate Governance and Blockchains", David Yermack, Review of Finance (2017) 7-31.

(4) Bristol and West Building Society v Mothew [1998] Chapter 1, "A director must not place himself in a position where his duty and his interest conflict", per LJ Millet.

(5) Πέτρος Σιακόλας v Πρίνος Λαχαναγορά Λιμιτεδ, civil appeal E90/2016/23/03/2-17.

(6) Investment Services and Activities and Regulated Markets Law 2007, Prevention and Suppression of Money Laundering and Terrorist Financing Law 2007, Third Money Laundering Directive, Payment Services Law 2009, Electronic Money Law 2012, Prospectus Law 2005, Alternative Investments Funds Law 2014, Companies Law, Cap 113 and Contracts Law Cap 149.