There is no doubt that an ICO (Initial Coin Offering) is an increasingly attractive option for businesses looking to generate external investment. It is also an increasingly attractive option for those looking to invest in new businesses particularly as the news continues to report the incredible short-term returns many investors are currently enjoying.
However, as is unfortunately so often the case, with success comes fraud. Alongside the success stories we’ve seen, we’ve also been approached by more and more would-be investors who have found out the cruellest way that the innovation the invested in was little more than a good story and a shiny wrapper.
As solicitors who specialise in helping our clients resolve disputes involving every conceivable type of digital fraud we have come to the conclusion that one of the most effective ways to avoid becoming a victim of a scam is to make sure you do your homework before you invest a penny. This means finding out about the company, its technology, its plans and the people behind the business. It also means double-checking the legal structure of the deal including:
- Jurisdiction
Find out whose laws will govern the contract you enter into when you buy the company’s crypto-tokens. Moreover, make sure that should the deal sour, you have a strong enough position to fight for and recover the monies you have invested without having to commit to a lengthy and expensive legal battle or, worse, have to admit defeat before that battle even starts.
If you are unsure as to how strong your position will be if the ICO doesn’t pan out as you’d expected or want to make absolutely sure the country whose laws will govern the contract don’t have a questionable history legally speaking, always check with a lawyer before you enter into the contract.
- Enforceability
Find out how the contract will be legitimised and enforced. You no longer need to physically sign a contract to make it binding; technology can be used to prove you have read the contract behind the ICO and, by extension, agreed to it. Once you have entered into a contract you will be bound to it and the terms that underpin it.
Our advice is to always to be very wary of entering into any contract that doesn’t have a specific box for either your electronic signature or, at the very least, to tick to show you have unequivocally agreed to enter into the contract.
- Check the small print
Make sure there are no ‘weasel clauses’ in the contract designed to insulate the company you are investing in from any blame or responsibility should the offering tank. Make sure there aren’t any catch-all clauses designed to force you into accepting a list of terms that have not been listed out elsewhere in the contract.
If you are unsure about the terms you are entering into or are concerned about the phrasing used in any part of the contract, always talk to a lawyer before accepting.
- A brochure isn’t a legal document
Marketing material only delivers good news. It is not designed as a contract and therefore the content can never be considered to be a promise, a projection or legally binding. Never make an investment decision on the back of what you’ve read in the sales collateral and always make sure that any promises are supported by a credible contract.
If you are in any doubt as to the terms of the supporting contract (or indeed whether a contract even exists), always consult a lawyer before you invest.
- Is a ‘puff of smoke’ exit a possibility?
Make sure that the contract offered by the business you are looking to invest in doesn’t give them any opportunity to simply rescind their offering and disappear with your money if the offering hits rocky ground. Similarly make sure that the contract includes an assurance that if they do hit rocky ground, you will recoup your investment.
And again if you are in any doubt as to whether that reassurance exits, contact a lawyer.
All of this advice is borne out of our experience of helping clients navigate the fallout from fraudulent ICOs. If you need any help either assessing a potential investment based on the criteria outlined above or need us to recover any money you may have lost as a result of any type of digital fraud, call us today on 020 7792 5649 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it..
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