Want to Advise Initial Coin Offerings? Here Are 5 Things to Know

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By Michaela Ross

Ethereum is well-known as the technology that has launched hundreds of cryptocurrencies, helped entrepreneurs raise billions of dollars, and disrupted global venture capital markets.

But before any of that, Ethereum’s creators had to train their lawyers.

“We took eight months to get them up to speed on the technology so they had a deep understanding of how that worked,” Ethereum Project co-founder Joseph Lubin told Bloomberg Law.

Demand for blockchain legal expertise is rising, blockchain companies, attorneys, and advocacy groups told Bloomberg Law. Initial coin offerings (ICOs), which allow companies or individuals to raise funds by selling digital assets known as coins or tokens, are allowing people to raise money in a process that is often quicker and less expensive than turning to traditional venture capital or an initial public offering.

Even so, many attorneys are still trying to figure out the technology and how laws and regulations apply to it.

“A labor shortage on the legal side is already apparent,” Jeff Garzik, CEO and co-founder of Chicago-based blockchain technology platform developer and advisor Bloq, said. “The products that are coming into these law firms, they don’t fit into normal legal boxes—you have to guess what regulators might do.”

Here are five things for attorneys to know about advising token developers on ICOs:

Embrace Your Inner Nerd

It’s essential for attorneys to understand how blockchain technology—the power behind Bitcoin, Ethereum, and other digital assets—works in order to advise clients that are basing business models on it, attorneys, companies, and advocacy groups told Bloomberg Law. Law firms must grasp the technical nuances in order to classify a token sale as a security, cryptocurrency, or utility—and plan their legal approach accordingly, Carol Van Cleef, partner with BakerHostetler LLP’s financial technology practice, said.

Blockchain technology allows transactions among up to millions of computers, including the creation and exchange of cryptocurrencies and tokens, to occur instantaneously on an auditable, transparent ledger. Investors exchange fiat currency or other coins and tokens to purchase these digital assets created as code on blockchain platforms. While some tokens can be issued as utilities, which sell future access to a product or service such as a game or cloud storage, others may be classified as securities or currencies, making them subject to compliance standards.

Buyers of coins or tokens that act as a currency or equity in a company hope they will see a return on investment as the currency’s or company’s value rises, much like shareholders in public companies hope their shares will increase in worth.

“You can plug any good securities lawyer into the analysis, but you have to understand what you’re working with first and the fact that even if it is a ‘security,’ there are other nonsecurity issues to address,” Van Cleef said, adding that she spends a lot of time making sure she understands her clients’ business strategies.

Know The Client

Soaring valuations of token sales in 2017 have attracted a swarm of developers raking in revenue from fraudulent or hastily designed sales that promise buyers large returns or services they cannot deliver. A law firm’s typical know-your-customer background checks may not be enough to filter out bad actors, attorneys said.

“Your firm’s regular process may not be sufficient, you may want to go above and beyond this,” Lewis Cohen, a partner at Hogan Lovells LLP, told Bloomberg Law. “We look to have some relationship with our client—they’ve been referred to us or we know people in common. That’s very helpful for reputational purposes.”

Careful client screening also gives firms time to ensure they understand the business proposition and can adequately advise on it, Van Cleef said.

Field a Dream Team

The legal and regulatory gray areas of applying blockchain technology require counsel specializing in multiple areas, attorneys told Bloomberg Law.

Cohen and other blockchain attorneys suggested tailoring a legal advising team based on what a client is trying to accomplish with a token offering. For example, a securities lawyer can give crucial advice if a token is intended to be an equity instrument. But companies selling tokens as utilities redeemable for goods or services might need attorneys who know consumer protection law, they said.

Token-developing companies may also benefit from counsel specializing in money transmission, commodities and derivatives, cybersecurity, privacy, intellectual property, and sanctions, according to attorneys, advocacy groups, and companies.

“You need a deep bench with varying expertise to reasonably trust your lawyer when launching a token,” Peter Van Valkenburgh, research director at the blockchain advocacy organization Coin Center, told Bloomberg Law. “The thing I’d look for above all is, is there really multidisciplinary expertise at the firm, that’s the most important thing.”

Companies and firms also often overlook the need for good legal tax advice, Nathalie Salami, a blockchain attorney with Fintech Portfolio, which helps companies raise funds online, told Bloomberg Law.

“I have seen security lawyers giving advice to people launching an ICO that have negative tax implications, even at the largest firms,” Salami said.

Have a Worldly Reach

With token developers launching ICOs from Singapore to Switzerland among a global pool of investors, firms also benefit from having a presence in or knowledge of all relevant jurisdictions, Lubin told Bloomberg Law.

Lubin went on to found ConsenSys, which advises, incubates, and funds companies in the blockchain ecosystem and develops blockchain tools and technologies. He said his company focuses on complying with Securities and Exchange Commission rules because the U.S.-based agency is considered the strictest and most far-reaching regulator. Still, ConsenSys’ in-house counsel doesn’t stop with the SEC.

“When we’re doing a token launch, we also look to interpretations from other jurisdictions where they might have some quirky rule we have to pay attention to,” he said.

Beware of Bad Legal Actors

The red-hot ICO market isn’t just attracting fraudulent and unskilled token developers looking to cash in. Attorneys not qualified to give legal advice about the technology or its risks are also exploiting the need for counsel in this area to drum up new business, Van Valkenburgh told Bloomberg Law.

Attorneys can establish credibility—and distinguish themselves from bad actors—by staying up to speed on the rapidly evolving space, joining industry meetups and panels, or writing white papers, attorneys and advocacy groups said.

“I think we’re probably not far away from a wave of malpractice lawsuits that would inevitably follow a wave of enforcement actions brought by the SEC or even plaintiff attorneys in response to the ICO boom,” Van Valkenburgh told Bloomberg Law. “I worry about anyone getting bad advice from a law firm that makes it sound like entering the space is safer than it actually is.”

Garzik said currently only a few law firms have a sufficient understanding of ICOs. For them, business is booming.

“These law firms are picking their customers because there’s so much demand for this and they have limited bandwidth,” Garzik said.

To contact the reporter on this story: Michaela Ross in Washington at mross@bna.com

To contact the editor responsible for this story: Keith Perine at kperine@bna.com

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