Over lunch the in-house coun­sel of a tech com­pany asked me wheth­er I ever decline work. We were mak­ing small talk, but funny she should ask. Because I have indeed chosen not to work on one or the oth­er ini­tial coin offer­ing or token sale lately.

I do what I do for a liv­ing, so I’m not prone to decline work by default. But these pro­jects didn’t smell right.

The Somewhat Dubious Enquiry

Here’s an example. Someone asked for a quote for my leg­al advice on this pro­jec­ted token sale. Sim­pli­fied, its struc­ture was to be as follows.

The Investment…

The pub­lic may invest their money in tokens. The money will be used to fund some­thing strik­ing. Insert descrip­tion of mar­vel­lous stuff here. I don’t know, think of some­thing shiny, the enter­tain­ment industry per­haps. Yes, think of the crowd­fund­ing of films. Tokens as your chance to play a part in upcom­ing, fin­an­cially attract­ive main­stream productions.

A white­pa­per sets out how this will hap­pen. It isn’t very detailed but it presents the pro­spect of good things. There will be a whole spec­trum of perks ran­ging from not yet spe­cified (but maybe in future, or so it said) to dir­ect com­mu­nic­a­tion, even meet­ing with the people appear­ing in the movie you’ve helped fund. Suf­fice it to say this will be an oppor­tun­ity for those who buy more tokens. The more you buy, the closer you will come to the stars. You heard right.

The word invest is all over the place up to a cer­tain point in the white­pa­per. At this point it declares, for the avoid­ance of doubt, that a token shall give the buy­er no right what­so­ever. You heard right again.

…Which Isn’t

In par­tic­u­lar, the tokens pur­chased shall not bestow equity rights in any­thing. Think dividends. Yes, the tokens are to give their buy­ers the oppor­tun­ity to par­ti­cip­ate in and influ­ence the devel­op­ment of enter­tain­ment products, for example by cast­ing votes or by com­mu­nic­at­ing with those involved in mak­ing or appear­ing in them. How­ever, as it states again towards the end of the white­pa­per, the opin­ions and reviews of the token buy­ers will be ‘taken into account’. This shall not mean buy­ers will have a real right to take part in the decision-making.

In oth­er words, one is to part with one’s money in return for – not very much really. What a clas­sic. But keep­ing up with the times, this scheme says things like token and block­chain and crypto, and it comes with a whitepaper.

Could I advise wheth­er they need a licence for this? Because prefer­ably not (the word off­shore was uttered in this con­text). If a licence were neces­sary, could I help apply for it?

Oh, I could. But I don’t want to.

The Legitimate Token Sale

So that’s a token sale I wasn’t com­fort­able with. To bal­ance, here’s an example of what a legit­im­ate one could look like. Sim­pli­fied, it’s an invest­ment scheme run on a block­chain. Let’s also take a look at how a law­yer might be able to help real­ise this token sale.

The Business Accelerator

There is to be a Singa­pore com­pany, let’s call it The Accel­er­at­or Pte. Ltd. (the ‘Accel­er­at­or’). The Accelerator’s only pur­pose is to own shares of prom­ising tech­no­logy start-up com­pan­ies. Not too much, not too little, say up to 10 per cent per start-up.

A law­yer can take care of the cor­por­ate leg­al issues of the Accel­er­at­or includ­ing its found­a­tion and operations.

The Agreements Between the Accelerator and the Start-Ups

Fur­ther, there will have to be agree­ments between the Accel­er­at­or and each start-up com­pany cov­er­ing the terms of the Accelerator’s share own­er­ship and per­haps influ­ence in the busi­ness of each start-up company.

A law­yer can advise on what should go into these agree­ments and help nego­ti­ate and draft them. Once these agree­ments are in place, a law­yer can help check wheth­er the parties observe them. If a leg­al dis­pute arises, a law­yer can help resolve it, in or out of court as the case may be.

The Investment Vehicle

There is to be anoth­er Singa­pore com­pany, let’s call it The Invest­ment Vehicle Pte. Ltd. (the ‘Invest­ment Vehicle’). The Invest­ment Vehicle is to hold 33 per cent of the shares of the Accel­er­at­or. These shares come with cer­tain dividend rights (the ‘Accel­er­at­or Dividend Rights’).

As with the Accel­er­at­or, a law­yer can take care of the cor­por­ate leg­al issues of the Invest­ment Vehicle includ­ing its found­a­tion and operations.

The founders of this whole thing are to hold the remain­ing shares of the Accel­er­at­or. They will also be the dir­ect­ors of the Accel­er­at­or. Put oth­er­wise, these people are to be the major­ity share­hold­ers and man­agers of the Accel­er­at­or. Their major­ity shares will come with cer­tain rights as well (the ‘Accel­er­at­or Major­ity Rights’). The Accel­er­at­or Major­ity Rights will include the Accel­er­at­or Dividend Rights, and then some.

The Agreement Among the Accelerator Shareholders and the Accelerator

As the Accel­er­at­or is to have two frac­tions of share­hold­ers – the Invest­ment Vehicle on the one hand (33 per cent) and the indi­vidu­al founders on the oth­er hand (67 per cent) – there is to be an agree­ment between these two frac­tions cov­er­ing the terms of the Invest­ment Vehicle’s share own­er­ship and influ­ence in the busi­ness of the Accel­er­at­or, and of the Accel­er­at­or Dividend Rights and Accel­er­at­or Major­ity Rights. The Accel­er­at­or itself should be a party of this agreement.

As before, a law­yer can advise on what should go into this agree­ment and help draft it. Once it’s in place, a law­yer can help check wheth­er the parties observe it and help resolv­ing any leg­al dispute.

What About Tokens, Blockchain and All That?

The Invest­ment Vehicle is to offer and sell Accel­er­at­or Dividend Rights to inter­ested parties. The Accel­er­at­or Dividend Rights are rep­res­en­ted by vir­tu­al tokens, so the lingo will be that these tokens are offered and sold to inter­ested parties. The author­it­at­ive register for these tokens will be a blockchain.

The Agreement Between the Investment Vehicle and the Interested Public

There will have to be agree­ments between the Invest­ment Vehicle and each inter­ested party cov­er­ing the terms of the ini­tial pur­chase of tokens (includ­ing repur­chase, as the case may be, and onward sale).

There are dif­fer­ent ways of doing the ini­tial pur­chase of tokens. If you want to raise hard cur­rency (but not crypto­cur­rency), for example as the Invest­ment Vehicle’s cap­it­al con­tri­bu­tion to the Accel­er­at­or, then this will prob­ably require a brick-and-mor­tar con­tract between the Invest­ment Vehicle and each first token buyer.

If you want to allow crypto­cur­rency as pay­ment, the pur­chase of tokens could be based on a brick-and-mor­tar con­tract between the Invest­ment Vehicle and the buy­er. Or you could do it by way of smart contract.

As before, a law­yer can advise on what should go into such an agree­ment and help draft it. Once it’s in place, a law­yer can help check wheth­er the parties observe it. Now, this mon­it­or­ing part may sound less rel­ev­ant when a self-execut­ing smart con­tract is in place. The chal­lenge begins, how­ever, should a smart con­tract give rise to a leg­al dis­pute. A law­yer can advise on that as much as he can on a dis­pute over a brick-and-mor­tar contract.

Token Trade

As each token will form a block in a block­chain, it will be pos­sible to sell one, even trade the tokens like crypto­cur­rency (and for crypto­cur­rency as consideration).

Once the block­chain of tokens is up and run­ning, it might be pos­sible to put the desired terms of their onward sale and oth­er aspects in a smart con­tract included in each token block.

A law­yer can… – you know what a law­yer can do.

Beware of the Regulator

At the out­set, though, one must observe reg­u­lat­ory aspects. An offer of tokens (scil. the offer of interest rights in com­pany shares) will only come without spe­cif­ic fil­ing and regis­tra­tion require­ments (pro­spect­uses and such) if it doesn’t con­sti­tute an offer of secur­it­ies, deben­tures, rights in a col­lect­ive invest­ment scheme or busi­ness trust (or oth­ers if spe­cified). Or, if an offer of tokens does con­sti­tute any of that, spe­cif­ic fil­ing and regis­tra­tion will only be dis­pens­able if the offer is excluded or exemp­ted, whatever this may mean. This reg­u­lat­ory aspect applies as much to Singa­pore as to most if not all rel­ev­ant jurisdictions.

But I Will Do That

The thing is, this isn’t just what your law­yer could do. He would also do it gladly. Because this is legit­im­ate token sale, block­chain and smart con­tract stuff.

Stinky beans
Cool beans