A carefully drafted White Paper can increase transparency and buyer confidence while minimizing reputational harm and legal liabilities against the offeror.
We considered the Singapore regulatory framework with respect to Initial Coin Offerings (ICOs) in a previous LawFlash. We now discuss a curated selection of best practices involved in drafting the offeror’s White Paper.
What is a White Paper?
The present dearth of codified ICO guidelines has resulted in reliance on market practice when structuring an ICO. Current market consensus is that, at a bare minimum, there must be a “White Paper” to accompany each ICO (a White Paper). A typical White Paper sets out the technology of a blockchain project, and contains a detailed description of the system architecture, its interaction with users, current market data, anticipated growth, and requirements for the issue and the use of tokens. It should also provide a list of project team members, cornerstone investors (if any), and advisors.
Parallels may be drawn between a White Paper and a prospectus, a document designed to inform the investing public of the business, assets, and nature of a particular company. Both documents ultimately allow the investing public to make informed decisions on whether to subscribe for or purchase the securities or tokens (as the case may be) on offer. Best practice with respect to the inclusion of material information within a White Paper may therefore be drawn from prospectus requirements, which in Singapore are prescribed in the 5th Schedule of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005.
Best practices for White Paper drafting
As an ICO’s keystone document, it should be noted that, while a White Paper’s principal initial function is as a marketing document, it takes on and retains contractual force upon the ICO launch. Offerors should be cautious of making statements that may be construed as binding representations. Offerors of digital tokens (even those that do not fall within the ambit of securities and thus avoid the need for a formal prospectus) may therefore take valuable lessons from content requirements applicable to prospectuses:
- Clear definition of the ICO’s parameters: Each White Paper should clearly describe the token protocol, provide a clear and compelling reason for the token’s existence, and offer a detailed technical description of its proposed implementation. Clear statistics for total token supply, distribution, and price should be set. A comprehensive development timetable should also be considered. This ultimately allows buyers to understand the offeror’s token and its unique characteristics and functionality. The White Paper should further set out the legal implications of the token features, in particular which rights are granted to its holder. It should describe whether the token gives a share in the profit of the issuer or creditor’s rights or is just a tool allowing access to future services and products.
- Risk factors and business overview: Offerors may consider including language to assist buyers in fully understanding development risks, challenges, and cost benefits of using the particular token within its most relevant markets. Buyer optimism may be elevated by including a brief history of the offeror, a business overview, its organizational structure, and financial statements. Offerors should also seek legal and tax advice on the most robust and effective organizational structure best suited to their company and anticipated future growth.
- Warranties by the offeror: The current practice is that a White Paper does not contain dedicated representations and warranties. With cryptocurrencies and ICOs fast entering the public vernacular, offerors may face increased public pressure to stand by their offerings. Offerors may therefore consider giving comfort to potential token buyers without exposing themselves to unnecessary liability. These may include reassurances that
- the offeror has obtained the necessary licenses and approvals to start its business in its incorporation jurisdiction;
- the intellectual property rights to the underlying technology are owned by, or are properly licensed to the offeror, and relevant trademarks are registered and patents applied for, as the case may be; and
- the rights, in particular any economic rights, attached to the tokens are enforceable.
Whilst the inclusion of such language in the White Paper will necessarily require a high degree of caution on the offeror’s part, it will also simultaneously serve to increase buyer confidence in the ICO. If forward-looking statements are to be included, the requisite disclaimers, exclusion of liability, and disclosure language should also be included.
4. Jurisdiction and compliance requirements of intended buyers: When marketing the token, it is essential to seek legal, financial, and tax advice to ensure compliance with the regulatory frameworks of each jurisdiction in which buyers might be resident, and will be equally important for the offeror itself and its stakeholders. A jurisdiction with a favourable tax regime will help the offeror maximize value, and clear anti-money laundering (AML), know your client (KYC), and data privacy regimes will facilitate compliance. In certain circumstances, it may be worth considering excluding from the ICO buyers resident in certain jurisdictions which have adopted regulations restricting or prohibiting access to ICOs.
For context, readers will recall Tezos’s $232 million token sale, which was one of the largest initial coin offerings at the time. Tezos is now currently embroiled in a management controversy, unable to deliver the tokens purchased by the public. The multi-faceted dispute concerns issues of executive compensation and infighting within a Swiss foundation governance structure viewed by certain commentators as opaque. This necessarily highlights the importance of thorough planning, transparent and careful drafting of the White Paper, and robust corporate structuring.
A well-drafted White Paper that fully addresses commercial and legal issues will ultimately increase transparency and buyer confidence while minimizing exposure to reputational harm, misrepresentation, and other unintended legal liabilities on the offeror’s part. Prospective offerors, intermediaries facilitating or advising on an offer of digital tokens, and platforms facilitating trading of such tokens should consult with their legal advisors to ensure compliance.