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.
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.
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:
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.
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.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Siak Yong Goh