Initial Coin Offerings – give me back my money?
Kemp Little has advised in respect of several Initial Coin Offerings (“ICOs”) in particular in relation to the existing UK financial regulatory framework and how… Read more
Kemp Little has advised in respect of several Initial Coin Offerings (“ICOs”) in particular in relation to the existing UK financial regulatory framework and how it may indirectly apply, the tax treatment of ICO contributions, and the legal terms that govern ICOs.
We have recently examined a sample of ICO terms available on the internet. The table showed that currently there are very few trends in terms of what is considered ‘market standard’.
One complex area that is being treated differently by issuers is whether contributors are entitled to a refund of their contributions. This is an interesting issue because it demonstrates the tension between the practical nature of blockchain technology which provides for an immutable record of transactions that is incapable (hard-forks aside) of being reversed, on the one hand; and the right for a consumer to cancel a distance contract in accordance with Regulation 29 of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013[i] on the other.
Immutability means that deleting out a transaction is not possible. Further, the non-fungible nature of cryptocurrencies means that the contribution funds are often instantly commingled. This means the exact same cryptocurrency from the contribution cannot be returned to the contributor – only an equivalent amount of cryptocurrency can (which may or may not have the same fiat value at the time of the return).
It is clear from our research that:
- some ICO issuers are likely to have been in breach of EU law by failing to offer their contributors a right to cancel and/or a refund; and
- some ICO issuers have gone above the requirements of EU law by offering a broader right to refund than required.
In the context of the immutable and non-fungible features mentioned above, this second observation raises interesting questions as to whether such issuers could actually honour the refund right they guaranteed and whether tokens distributed as part of an ICO are even capable in practice of being refunded.
A possible route through this may be found in Regulation 36 of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013[ii]. Depending on the technical set up and timing of alt-coin distributions under the ICO it may be possible (both legally and practically) to offer a refund to contributions provided the related distribution has not yet been made. If the issuer has already made the distribution then it is possible that the services have been ‘fully performed’ and therefore, provided the terms have been drafted appropriately the contributor’s right to a refund may fall away.
This is far from a clear-cut area and is undergoing rapid developments: the exact rights that the contributor receives under the ICO terms and conditions will turn on the drafting and technical set up of the ICO. Issuers should be wary however that structuring their ICO in certain ways (particularly in relation to the timing of when the contract is entered into and when the distribution is made) could inadvertently lead to the tokens being considered a financial contract (e.g. a future) that may be subject to additional financial regulations.