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What should be in a white paper of the OIC? Expert Take

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The rising popularity of initial coin offerings (ICO) – and an avalanche of fraud and market volatility – prompted a late debate in Washington, DC, and around the world, on appropriate regulatory policies for ICOs and cryptocurrencies more generally. Some of the most common issues involve the proper division of authority between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), and if their authority should reach deep into the heart of the US. cryptocurrency ecosystem, the cash market. Yet others are considering whether or not an entirely new or alternative regulatory regime is needed for cryptocurrency and symbolic fundraising, not only here, but also in Europe and elsewhere.

This article is inspired by Congressional testimony on cryptocurrencies. intends to examine the current regulatory approach that regulators use to monitor and monitor cryptocurrencies and OICs and how to achieve greater regulatory clarity in these markets.

The disclosure system embodied by US securities laws inter alia, important information about the company, management and securities offered, as well as the intended use of products. This information is then filed with the SEC. By contrast, most of the OIC disclosures are facilitated by currently unregulated "white papers", largely focused on existing technology or technology being developed or to be funded through the offer . As a result, there is a significant gap between the disclosures required on Form S-1 (and presumably Form 1-A) and most white papers.

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Buyers of OIC tokens – whether they are investors seeking profits or technology users seeking to support and participate in an innovative product would expect certain disclosures to make a purchase in an informed way. This information, which some entrepreneurs have identified themselves, is particularly relevant as the ICOs move from ecosystems of technical experts to the distribution of instruments that are increasingly likely to attract Daily Investors and the General Public


At least one credible academic study notes that in about 32% of country offices, it is not possible to identify the l & # 39; origin of the issuing entity or promoter. This creates serious information asymmetries on the part of the investor. Without this information, it becomes impossible to know or identify what legal rules and protections could be granted to investors. In addition, investors have few means to contact the competent public authorities in case of fraud, theft or loss. The ICO White Papers should therefore establish a detailed statement (beyond a simple post office box) of the location of the issuer and its key executives. Without verifiable address (es), the ICO White Papers should not be used to raise funds.

Problem and Proposed Technological Solution

For most of the story was more important to investors than the financial statements of the issuer. By reviewing balance sheets, cash flows and income statements, investors can assess a company's past performance, make informed estimates of its future performance and profitability, and estimate the value of the securities held. A company. Due to the centrality of the financial statements in the securities offerings, an entire ecosystem of third-party auditors, accountants and credit rating agencies has been developed and used to ensure the accuracy of the statements and their compliance with best practices. tend to serve a purpose different from most traditional initial public offerings (IPOs). Instead of financing the transition of industrial companies to a more mature development cycle, IFAs involve products developed by start-ups identifying technological problems and proposing the sale or financing of "solutions" based on technology. In exchange for financing, promoters offer coins with varying characteristics of currencies, utility or securities.

For most of these offers, it is not the past performance of a company, nor even the financial statements. perceived, but more the technological proposal of the company. Therefore, ensuring that investors (including retail buyers) understand the basic contours of the underlying technological solution is paramount as IFAs become more popular means of financing

To this end, an optimal system of disclosure As far as possible, a "simple English" description of the problem and the technological solution. In addition, for larger fundraisers, the most technical parts of the white paper would ideally be subject to a third-party validation system (a "technology audit") confirming that the solution described in the white paper is consistent with technical principles. and mathematics. The OIC promoters could be required to disclose what if an audit of their solution was carried out by a third party (and if there was not such an audit, then, that would be disclosed), the material characteristics of this audit system and the results of the audit. verification. Meanwhile, all code, regardless of the size of the fundraiser, would be posted in a public code repository, such as Github, so that potential buyers can perform a due diligence on the code itself or Other powers of attorney.

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Promoters should avoid hyperbole when they describe their solutions, an endemic problem in white papers – and should also be required to identify an objective basis for all forward-looking statements. In this context, information should be provided on whether the post-OIC financial statements will be provided to tokenholders.

Token Description

Tokens can have different qualitative and economic characteristics, for example, utility, securities, and currency. If the tokens are based on a technology format that must comply with certain rules, such as the ERC20 standard, the disclosures must clarify what this means for a typical holder. Similarly, if special efforts are made to list a token, for example to list a securities token on a regulated alternative exchange system, or if there are trading restrictions on the security, these facts must be disclosed clear to the token holder. Token descriptions should indicate the intended use of the coins issued in the bid, their quantity, when and if the founders or advisers will hold reserve coins and how they may choose to liquidate them (including s & rsquo; There are restrictions on their ability to sell). Promoters should also be required to disclose the intellectual property / ownership of the company's protocol (including items borrowed elsewhere), as well as to accurately specify what the legal rights holders of the tokens receive.

Blockchain governance

Investors should be aware of the functioning of the support infrastructure and its impact on token governance. In this context, the consensus mechanism for the blockchain of a virtual currency should be described, as well as how governance decisions and other decisions affecting the network, for example software upgrades, will be coordinated between the two. different stakeholders: developers, users and miners.

Qualifications of the Technical Team

Information on the experience of leaders and administrators is a common disclosure requirement in registered bids. They give investors an idea of ​​the quality of management and the likely success of the company once a company becomes public. In country offices where companies have limited track records and where the technology in question may be exotic, similar information about the technical supply team can be particularly helpful. Coders have a varied background, with some more (and much less) qualified, accredited or experienced than others. In order to provide investors with some sense as to the expertise and credibility of the white paper, founders should be required to provide all the important information relating to key experience in engineering, skills, qualifications and qualifications. other relevant attributes. If applicable, developers should also be required to provide links to their previous work on a public code repository

Risk Factors

Country Offices should include disclosures regarding key Risk factors affecting token holders. offer document. Although most investors realize that even successful businesses could be disintermediated later by more efficient companies, a token holder may be surprised to find that the product is not yet operating as expected or may develop a new use or another goal. technology or, perhaps less predictably, the wishes of the participants of the ecosystem. Holders should also understand the larger sectoral risks, including changes in the industry that could relegate certain blockchain designs to niche roles in the industry, and render many chips worthless. It is essential that buyers are fully aware of their potential vulnerability to hacking, data loss and disruption, as well as legal issues such as confidentiality and data portability across borders.

and should be operationalized as efficiently and effectively as possible. But we have to go in the direction of the ICO market, which would be good for legitimate projects and investors.

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The opinions and interpretations of this article are those of the author and are not.

Chris Brummer is Professor of Law at the Law Center of Georgetown University and Director of the Institute International Economic Law.


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