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      "author": "artur1972",
      "body": "August 22, 2017\n\n(by Arthur Minasian, Case Western Reserve University, School of law’1995, [email protected], [email protected])\n\nThis is my 2nd review of ICO projects in the area of venture business (the first one was Starta ICO, https://steemit.com/@artur1972). The upcoming Blackmooncrypto ICO (September 12, 2017) is of my interest due to the following 4 points:\n\n•\tThe idea;\n\n•\tCreativity in combining 2 types of tokens (non-security + security);\n\n•\tMuch focus on legal compliance and Deloitte (Big 4 company) as a partner;\n\n•\tBlackmoon security measures against hackers’ attacks.\n\nI will expand on these issues and then give some thoughts on advantages of this ICO, some concerns and lack of information which is additionally needed / desirable for decision-making process regarding participation in this ICO.\n\nI. Advantages\n\n1. The idea\n\nIn short, one stop solution platform in setting up and developing tokenized funds, regardless of whether such funds invest in the fiat or crypto world (tokenized funds are more cost-efficient thanks to lower infrastructure and setup costs). \n\nThis conception seems attractive to me but business part of this project (projected performance of the tokenized funds, forecasted assets, projected costs, actual amounts of proceeds for contributors etc.) is outside of my expertise so I have to rely on the description provided by the founders or to get a special opinion, although it is doubtful that someone can foresee the future of a business project. \n\nThe same refers to the crypto assets’ future: whether it is really a “new era” or just a short / long term bubble due to US Federal Reserve System’s quantitative easing policy aiming to balloon all types of assets (“monetary madness” as some experts say). And if it is so (“quantitative easing policy”), it is good to know whether this policy will be continued or scaled down. This is equally important since my understanding is that your success in crypto world depends not only on the relevant project in this area but mostly on the overall crypto economics growth.\n\n2. Creativity in combining 2 types of tokens (non-security plus security token)\n\nHere is the short description of the token structure (BMC tokens and Fund’s tokens) derived from White Paper and FAQ: \n\nа) The holding company will issue Blackmoon Crypto Platform tokens (BMCs). BMC tokens would not be deemed as securities by SEC based on the Howey test. The holders of BMC tokens will be able to (i) register as Continuous Contributors and (ii) deposit BMCs in a depository wallet linked to their account. \n\nBMC tokens would not be deemed as securities by SEC based on the Howey test.\n\nб) Each Continuous Contributor will receive a share of Fund tokens that operate on the Platform according to the policies specified by particular Funds.\n\nFunds' tokens (FTs) are going to be securities and the holding company is going to comply with all necessary regulation regarding that fact.\n\nTaking into account the recent releases of US (SEC) and Singapore (MAS) regulators the Exchanges are now reluctant to accept security tokens for listing. However, it is very important (or even crucial) to get your ICO token listed on a well-known Exchange since it provides for liquidity and a chance for a significant number of token buyers to speculate, i.e. sell their tokens for a greater price. Therefore, the non-security nature of BMC token allows the founders of the project to collect funds and to list BMCs on a well-known Exchange.\n\nMoreover, this 2 level token structure looks advantageous for FT holders, namely: those who opt to flock to the Blackmoon platform and get FTs as a result of their active participation in the project are supposed to receive more proceeds since many BMC buyers, as it usually happens, may prefer to immediately sell their tokens on a secondary market (instead of holding their BMCs in special depository wallets linked to their accounts).\n\nAccording to White Paper, BMCs provide proceeds to Continuous Contributors who deposited BMCs in depository wallets as follows: \n\n•\tStructuring and promotion fee 0-10% from the amount of the issued FTs (on average 2.5%);\n•\tMaintenance fee (on average it may be equal to 0.5% per annum paid daily in FTs via a smart contract);\n•\tTransaction fee (occurs upon transferring FTs from one wallet to another in the amount of 0.25% from the token amount paid in FTs via the smart contract). \n\nThose who choose to sell their BMCs following the distribution may also benefit since the number of BMC tokens for sale on a secondary market will be limited to some extent since many BMCs will be just deposited to the platform (so BMCs’ supply is lesser – BMCs’ price is higher).\n\nOther advantages:\n\n•\t“Continuous Contributors will receive a distribution of FTs from the first Fund created on the Blackmoon Crypto Platform without having to wait for the company to reach breakeven”.\n•\tFixed number of BMC tokens (“the total number of BMCs to be issued will be calculated at the end of the Distribution Period according to the formula: amount of BMCs sold during the Distribution multiplied by 2”: 50% for public, 30% for Company’s reserve, 20% for team and advisors);\n•\tLock up for 30% for Company’s reserve, 20% for team and advisors;\n•\tDownside protection (“to protect contributors from dumps the Platform will buy back BMC at $0.8 per token from anybody who is willing to sell”).\n\n3. Much focus on compliance with existing laws and regulations\n\nThe fact that, according to White Paper, lots of attention is paid to the legal side of the project provides for some assurance that many of the concerns mentioned below will be somehow addressed, namely:\n \n•\t“Funds’ legal structure will be reviewed and approved by our legal advisors to ensure they are compliant with existing laws and regulations”;\n•\t“Blackmoon Crypto has vetted the proposed structure with several financial institutions and has received an indicative approval that it will pass internal procedures”;\n•\t“We understand the importance of compliance with regulation and are committed to ensuring that our work is done correctly”;\n•\t“By sorting out these risks from the beginning, Blackmoon Crypto will improve investor confidence and provide necessary sustainability of the investment process”.\nBlackmoon promises to \n•\tperform in-house research as well as contract with reputable legal firms to set up a fully transparent, licensed where necessary and auditable investment structure, making sure that the envisioned structure is fully compliant with regulations, \n•\tput emphasis on licensing and structuring for the selling of tokens in the US as the US is the biggest financial market.\n\n4. Blackmoon security measures against hackers’ attacks.\n\nAccording to Blackmoon CTO Ilya Remizov:\n•\tthey use industry-grade high-performance Amazon DNS servers,\n•\tthe access to the administrative tool is well protected (limited and complicated acces),\n•\ttheir servers are placed to dedicated and isolated VPCs (virtual private cloud) and have no direct access from the Internet,\n•\tthey have contingency plan for unlikely scenario of such an attack that brings down Amazon security,\n•\tthe backups are securely stored in bank vaults\n(see details at: https://medium.com/blackmoon-crypto/blackmoon-security-measures-519aa028b0c0).\n\nII. Concerns\n\n1. The main issue regarding this 2 level token structure is whether BMC tokens would not be deemed as securities by SEC based on the Howey test. \n\nThere is no need to dissect the whole Howey test since it is not a legal opinion but the potential BMC buyers have to keep in mind the key element applicable here: “expectation of profits predominantly from the efforts of others”. \n\nIn other words, if BMC token holders have rights to validate transactions in the BMC network, to perform certain other useful tasks for the benefit of the network, to act as individual investment advisors, and to generally actively participate in network operations and derive active income from their efforts, then there is no expectation of profits predominantly from the efforts of others (potential appreciation in the value of BMC tokens after issuance, due to secondary trading, does not matter).\n\nWhite Paper addresses this issue:\n\n•\tContinuous Contributors will have the right to participate in “members-only” discussions regarding the platform strategy and development plan;\n•\tat least once a year or as needed, the Platform will initiate a vote among the Continuous Contributors to gather opinions of the contributing community on strategic development matters (the results of such voting won’t be binding but will be strongly considered by the operational management);\n•\tContinuous Contributors shall from time to time confirm the execution of their roles on the Platform to keep their status and depository wallets active (the process of the status confirmation will be specified for each role);\n•\tto register as a Continuous Contributor the holder of BMC tokens shall choose the role that she/he is willing to execute as a contributor to the Platform;\n•\tthe list of available roles (platform promoters, investment analysts, legal advisors, public auditors, GR advisors, etc.) will be publicly available on the blackmooncrypto.com website and updated as needed to reflect the current needs of the Platform’s continuous development.\nBased on the above White Paper wording, I am inclined to agree that BMC is very close to the notion of a digital token and is not likely to be deemed a security under applicable US laws. Nevertheless, it is necessary to keep in mind that \n•\twhen interpreting the reach of the “securities” definition, US courts often start by observing that the purpose of the securities laws is to regulate investments, in whatever form and by whatever name,\n•\tsince the list of available roles will be publicly available on the blackmooncrypto.com website and updated as needed it is still difficult to make a 100 % conclusion in the absence of full information. \n\n2. My other concern in this regard is voting rights of Continuous Contributors (“the results of such voting won’t be binding but will be strongly considered by the operational management”) and its correspondence with the existence of voting rights through the Howey test meaning that the instrument is less likely to be considered a security if:\n\n(i)\tthe holder is provided with significant managerial control - the ability to participate in decisions that will affect the success of the enterprise; \n(ii)\tthe holder has the resources and expertise to make a meaningful contribution; and \n(iii)\tthe holder does, in fact, participate in management decisions.\n\nThe important issue here is how the non-binding voting (what does strong consideration of the voting by the operational management exactly mean?) will be viewed as significant managerial control and participation in management decisions. \n\nThus, the roles of platform promoters, investment analysts, legal advisors, public auditors, GR advisors, etc. as well as their rights to participate, voting rights system and criteria for the compensation linked to the degree of participation (to be yet publicly available) shall closely meet the Howey test requirements in this regard.\n\nShould these requirements will not be finally met, then the US market will not be available for this project and this fact will certainly diminish its value to some extent. However, there is a firm understanding of this risk by the founders since the US persons are excluded at the moment (as a precautionary move) and as a result of this awareness plan B exists:\n\n•\t“When it comes to the US market, tokens of several first funds will be either prohibited for distribution in the US or will be sold only via licensed brokerage firms and only to authorized investors”;\n•\t“So, even without the US, there is a huge market for the investment managers that will choose our platform. Our team has partners and makes deals in 9 countries including the US”. \n\nAnother risk associated with the above-mentioned reasoning – some disputes may arise regarding the level of contribution of the Continuous Contributors to the project and, accordingly, the amount of FTs to be transferred to various Continuous Contributors since the number of FTs to be transferred to the Continuous Contributors depends on 2 factors: the number of BMCs deposited in the wallets and actual contribution.  \n\n3. My serious concern is the fact that US citizens are excluded from the participation in this project as precautionary move. It sounds inconsistently for me: if the founders are sure that BMC token is not a security token, have the relevant confirmation from their advisors as White Paper states and want to persuade the potential token buyers of this fact, then the US citizens should be granted access to the project. I understand that this is just a precautionary move but then a very negative consequence shows up: based on this fact the Exchanges may become extremely cautious and will take their precautionary move – will just refuse to list BMCs fearing the recognition of BMCs as securities under US laws. \n\nTo my opinion, this is a substantial risk and I would seriously consider participating in the project only if this limitation regarding US citizens will be removed.\n\nIII. Lack of some information \n\n(Information needed / desirable for decision-making process: depends on personal risk evaluation level)\n\n1. Token Terms Conditions. Token Terms Conditions is a very important legal document which provides for the description of the relevant legal risks for the token holders (legally binding obligations, if any, towards them) and dispute resolution clause. This document usually shows up closer to the date of distribution and ought to be closely reviewed.\nNote that it is very useful to print, save and confirm (by an attorney or notary) all documents regarding the ICO you participate from the relevant website.\n\nKeep in mind that “Blackmoon Crypto does not guarantee, and accepts no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency, or completeness of any material contained in this white paper”. I understand that this clause is a standard for many ICOs but it irritates a lot. Those who plan to invest their money prefer to see an accurate, reliable and complete information from the founders and not an attempt to avoid any responsibility for their own words. Taking into account that this information was created by the founders themselves (and not just derived from any outside source) I would highly recommend to use at least “bona fide” wording – it will show some respect to the potential token buyers. \n\n2. Approximate time frames regarding the publication of the role descriptions and voting rights system and criteria for the compensation linked to the degree of participation.\n\n3. Presale discounts: whether discounts exist depending on the amount of tokens to be purchased or not (sometimes this info is open to the public sometimes presale discounts are subject to private negotiations).\n\n4. Info regarding listing of BMCs:  It is preferable to know that some negotiations with some well-known Exchanges are in process and whether these Exchanges tend to list BMCs or not. This is important since some Exchanges intend to exclude security tokens (and look like security tokens), other Exchanges intend to suspend services to users from the United States (due to the burden of compliance work) or Russia (due to US sanctions). \n\nIt is not necessary to list tokens immediately after distribution but it is important to know the perspectives due to the current problems.\n\n5. Info on Blackmoon Crypto Pte. LTD, Singapore (“the Company”) which controls the contract and the address to which gathered ether will be sent: confirmation of registration in Singapore to be published on the website. \n\n6. Info on controlling beneficiaries: special tax laws will apply to the controlling beneficiaries depending on their nationalities.\n\nFor instance, should the Company is controlled by Russian tax residents, an obligation arises for such persons to declare foreign company’s income to pay 13 % personal tax. This obligation arises even despite the fact that beneficiary has not \npersonally received money from his foreign company.\n\nStructuring ICO project in a foreign jurisdiction by Russian founders may result in unintentionally obtaining by such foreign company a status of the Russian tax resident. Therefore, such foreign company will acquire obligation to pay income tax in Russia (20%).\n\nThe above-mentioned tax implications may have a very serious negative impact on the Company. \n\nThus, it would be good to hear that the founders are fully aware of such tax risks and Deloitte  (as a partner of the project) duly addressed this issue and confirmed the tax structure of the project to comply with various tax requirements that may arise in this connection. \n\n7. Info on tax regime in Singapore regarding taxation of the proceeds from distribution of tokens. Tax regime in Singapore is quite severe and may have an adverse effect on the Blackmoon Crypto Pte. LTD. For instance, the Company may be required to pay tax on the proceeds received as a result of the token offering. \n\n8. Lock up arrangements: how “lock ups” for Company’s reserve (30%) and for team and advisors (20%) will be guaranteed if there is no escrow agreement (access to the wallet for the limited number of team members is not an escrow).\n\n9. Info on KYC and AML procedures: whether implemented regarding this project or not.\n\n10. Change of control in the Company: how the token buyers’ interests will be preserved in case of change of control in the Company (it may happen for whatever reason). \n\nThis document is for information and illustrative purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. No advisory at all.",
      "json_metadata": "{\"tags\":[\"blackmoon\",\"ico\",\"legal\"],\"links\":[\"https://steemit.com/@artur1972\",\"https://medium.com/blackmoon-crypto/blackmoon-security-measures-519aa028b0c0\"],\"app\":\"steemit/0.1\",\"format\":\"markdown\"}",
      "parent_author": "",
      "parent_permlink": "blackmoon",
      "permlink": "blackmoon-crypto-ico-legal-review-of-some-main-aspects-of-the-white-paper",
      "title": "BLACKMOON CRYPTO ICO:  Legal review of some main aspects of the White Paper."
    }
  ],
  "op_in_trx": 0,
  "timestamp": "2017-08-23T09:31:42",
  "trx_id": "c32e282da8cdeeda823c71612c979e9979267ca1",
  "trx_in_block": 22,
  "virtual_op": 0
}

{
  "block": 14822342,
  "op": [
    "comment",
    {
      "author": "artur1972",
      "body": "August 22, 2017\n\n(by Arthur Minasian, Case Western Reserve University, School of law’1995, [email protected], [email protected])\n\nThis is my 2nd review of ICO projects in the area of venture business (the first one was Starta ICO, https://steemit.com/@artur1972). The upcoming Blackmooncrypto ICO (September 12, 2017) is of my interest due to the following 4 points:\n\n•\tThe idea;\n\n•\tCreativity in combining 2 types of tokens (non-security + security);\n\n•\tMuch focus on legal compliance and Deloitte (Big 4 company) as a partner;\n\n•\tBlackmoon security measures against hackers’ attacks.\n\nI will expand on these issues and then give some thoughts on advantages of this ICO, some concerns and lack of information which is additionally needed / desirable for decision-making process regarding participation in this ICO.\n\nI. Advantages\n\n1. The idea\n\nIn short, one stop solution platform in setting up and developing tokenized funds, regardless of whether such funds invest in the fiat or crypto world (tokenized funds are more cost-efficient thanks to lower infrastructure and setup costs). \n\nThis conception seems attractive to me but business part of this project (projected performance of the tokenized funds, forecasted assets, projected costs, actual amounts of proceeds for contributors etc.) is outside of my expertise so I have to rely on the description provided by the founders or to get a special opinion, although it is doubtful that someone can foresee the future of a business project. \n\nThe same refers to the crypto assets’ future: whether it is really a “new era” or just a short / long term bubble due to US Federal Reserve System’s quantitative easing policy aiming to balloon all types of assets (“monetary madness” as some experts say). And if it is so (“quantitative easing policy”), it is good to know whether this policy will be continued or scaled down. This is equally important since my understanding is that your success in crypto world depends not only on the relevant project in this area but mostly on the overall crypto economics growth.\n\n2. Creativity in combining 2 types of tokens (non-security plus security token)\n\nHere is the short description of the token structure (BMC tokens and Fund’s tokens) derived from White Paper and FAQ: \n\nа) The holding company will issue Blackmoon Crypto Platform tokens (BMCs). BMC tokens would not be deemed as securities by SEC based on the Howey test. The holders of BMC tokens will be able to (i) register as Continuous Contributors and (ii) deposit BMCs in a depository wallet linked to their account. \n\nBMC tokens would not be deemed as securities by SEC based on the Howey test.\n\nб) Each Continuous Contributor will receive a share of Fund tokens that operate on the Platform according to the policies specified by particular Funds.\n\nFunds' tokens (FTs) are going to be securities and the holding company is going to comply with all necessary regulation regarding that fact.\n\nTaking into account the recent releases of US (SEC) and Singapore (MAS) regulators the Exchanges are now reluctant to accept security tokens for listing. However, it is very important (or even crucial) to get your ICO token listed on a well-known Exchange since it provides for liquidity and a chance for a significant number of token buyers to speculate, i.e. sell their tokens for a greater price. Therefore, the non-security nature of BMC token allows the founders of the project to collect funds and to list BMCs on a well-known Exchange.\n\nMoreover, this 2 level token structure looks advantageous for FT holders, namely: those who opt to flock to the Blackmoon platform and get FTs as a result of their active participation in the project are supposed to receive more proceeds since many BMC buyers, as it usually happens, may prefer to immediately sell their tokens on a secondary market (instead of holding their BMCs in special depository wallets linked to their accounts).\n\nAccording to White Paper, BMCs provide proceeds to Continuous Contributors who deposited BMCs in depository wallets as follows: \n\n•\tStructuring and promotion fee 0-10% from the amount of the issued FTs (on average 2.5%);\n•\tMaintenance fee (on average it may be equal to 0.5% per annum paid daily in FTs via a smart contract);\n•\tTransaction fee (occurs upon transferring FTs from one wallet to another in the amount of 0.25% from the token amount paid in FTs via the smart contract). \n\nThose who choose to sell their BMCs following the distribution may also benefit since the number of BMC tokens for sale on a secondary market will be limited to some extent since many BMCs will be just deposited to the platform (so BMCs’ supply is lesser – BMCs’ price is higher).\n\nOther advantages:\n\n•\t“Continuous Contributors will receive a distribution of FTs from the first Fund created on the Blackmoon Crypto Platform without having to wait for the company to reach breakeven”.\n•\tFixed number of BMC tokens (“the total number of BMCs to be issued will be calculated at the end of the Distribution Period according to the formula: amount of BMCs sold during the Distribution multiplied by 2”: 50% for public, 30% for Company’s reserve, 20% for team and advisors);\n•\tLock up for 30% for Company’s reserve, 20% for team and advisors;\n•\tDownside protection (“to protect contributors from dumps the Platform will buy back BMC at $0.8 per token from anybody who is willing to sell”).\n\n3. Much focus on compliance with existing laws and regulations\n\nThe fact that, according to White Paper, lots of attention is paid to the legal side of the project provides for some assurance that many of the concerns mentioned below will be somehow addressed, namely:\n \n•\t“Funds’ legal structure will be reviewed and approved by our legal advisors to ensure they are compliant with existing laws and regulations”;\n•\t“Blackmoon Crypto has vetted the proposed structure with several financial institutions and has received an indicative approval that it will pass internal procedures”;\n•\t“We understand the importance of compliance with regulation and are committed to ensuring that our work is done correctly”;\n•\t“By sorting out these risks from the beginning, Blackmoon Crypto will improve investor confidence and provide necessary sustainability of the investment process”.\nBlackmoon promises to \n•\tperform in-house research as well as contract with reputable legal firms to set up a fully transparent, licensed where necessary and auditable investment structure, making sure that the envisioned structure is fully compliant with regulations, \n•\tput emphasis on licensing and structuring for the selling of tokens in the US as the US is the biggest financial market.\n\n4. Blackmoon security measures against hackers’ attacks.\n\nAccording to Blackmoon CTO Ilya Remizov:\n•\tthey use industry-grade high-performance Amazon DNS servers,\n•\tthe access to the administrative tool is well protected (limited and complicated acces),\n•\ttheir servers are placed to dedicated and isolated VPCs (virtual private cloud) and have no direct access from the Internet,\n•\tthey have contingency plan for unlikely scenario of such an attack that brings down Amazon security,\n•\tthe backups are securely stored in bank vaults\n(see details at: https://medium.com/blackmoon-crypto/blackmoon-security-measures-519aa028b0c0).\n\nII. Concerns\n\n1. The main issue regarding this 2 level token structure is whether BMC tokens would not be deemed as securities by SEC based on the Howey test. \n\nThere is no need to dissect the whole Howey test since it is not a legal opinion but the potential BMC buyers have to keep in mind the key element applicable here: “expectation of profits predominantly from the efforts of others”. \n\nIn other words, if BMC token holders have rights to validate transactions in the BMC network, to perform certain other useful tasks for the benefit of the network, to act as individual investment advisors, and to generally actively participate in network operations and derive active income from their efforts, then there is no expectation of profits predominantly from the efforts of others (potential appreciation in the value of BMC tokens after issuance, due to secondary trading, does not matter).\n\nWhite Paper addresses this issue:\n\n•\tContinuous Contributors will have the right to participate in “members-only” discussions regarding the platform strategy and development plan;\n•\tat least once a year or as needed, the Platform will initiate a vote among the Continuous Contributors to gather opinions of the contributing community on strategic development matters (the results of such voting won’t be binding but will be strongly considered by the operational management);\n•\tContinuous Contributors shall from time to time confirm the execution of their roles on the Platform to keep their status and depository wallets active (the process of the status confirmation will be specified for each role);\n•\tto register as a Continuous Contributor the holder of BMC tokens shall choose the role that she/he is willing to execute as a contributor to the Platform;\n•\tthe list of available roles (platform promoters, investment analysts, legal advisors, public auditors, GR advisors, etc.) will be publicly available on the blackmooncrypto.com website and updated as needed to reflect the current needs of the Platform’s continuous development.\nBased on the above White Paper wording, I am inclined to agree that BMC is very close to the notion of a digital token and is not likely to be deemed a security under applicable US laws. Nevertheless, it is necessary to keep in mind that \n•\twhen interpreting the reach of the “securities” definition, US courts often start by observing that the purpose of the securities laws is to regulate investments, in whatever form and by whatever name,\n•\tsince the list of available roles will be publicly available on the blackmooncrypto.com website and updated as needed it is still difficult to make a 100 % conclusion in the absence of full information. \n\n2. My other concern in this regard is voting rights of Continuous Contributors (“the results of such voting won’t be binding but will be strongly considered by the operational management”) and its correspondence with the existence of voting rights through the Howey test meaning that the instrument is less likely to be considered a security if:\n\n(i)\tthe holder is provided with significant managerial control - the ability to participate in decisions that will affect the success of the enterprise; \n(ii)\tthe holder has the resources and expertise to make a meaningful contribution; and \n(iii)\tthe holder does, in fact, participate in management decisions.\n\nThe important issue here is how the non-binding voting (what does strong consideration of the voting by the operational management exactly mean?) will be viewed as significant managerial control and participation in management decisions. \n\nThus, the roles of platform promoters, investment analysts, legal advisors, public auditors, GR advisors, etc. as well as their rights to participate, voting rights system and criteria for the compensation linked to the degree of participation (to be yet publicly available) shall closely meet the Howey test requirements in this regard.\n\nShould these requirements will not be finally met, then the US market will not be available for this project and this fact will certainly diminish its value to some extent. However, there is a firm understanding of this risk by the founders since the US persons are excluded at the moment (as a precautionary move) and as a result of this awareness plan B exists:\n\n•\t“When it comes to the US market, tokens of several first funds will be either prohibited for distribution in the US or will be sold only via licensed brokerage firms and only to authorized investors”;\n•\t“So, even without the US, there is a huge market for the investment managers that will choose our platform. Our team has partners and makes deals in 9 countries including the US”. \n\nAnother risk associated with the above-mentioned reasoning – some disputes may arise regarding the level of contribution of the Continuous Contributors to the project and, accordingly, the amount of FTs to be transferred to various Continuous Contributors since the number of FTs to be transferred to the Continuous Contributors depends on 2 factors: the number of BMCs deposited in the wallets and actual contribution.  \n\n3. My serious concern is the fact that US citizens are excluded from the participation in this project as precautionary move. It sounds inconsistently for me: if the founders are sure that BMC token is not a security token, have the relevant confirmation from their advisors as White Paper states and want to persuade the potential token buyers of this fact, then the US citizens should be granted access to the project. I understand that this is just a precautionary move but then a very negative consequence shows up: based on this fact the Exchanges may become extremely cautious and will take their precautionary move – will just refuse to list BMCs fearing the recognition of BMCs as securities under US laws. \n\nTo my opinion, this is a substantial risk and I would seriously consider participating in the project only if this limitation regarding US citizens will be removed.\n\nIII. Lack of some information \n\n(Information needed / desirable for decision-making process: depends on personal risk evaluation level)\n\n1. Token Terms Conditions. Token Terms Conditions is a very important legal document which provides for the description of the relevant legal risks for the token holders (legally binding obligations, if any, towards them) and dispute resolution clause. This document usually shows up closer to the date of distribution and ought to be closely reviewed.\nNote that it is very useful to print, save and confirm (by an attorney or notary) all documents regarding the ICO you participate from the relevant website.\n\nKeep in mind that “Blackmoon Crypto does not guarantee, and accepts no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency, or completeness of any material contained in this white paper”. I understand that this clause is a standard for many ICOs but it irritates a lot. Those who plan to invest their money prefer to see an accurate, reliable and complete information from the founders and not an attempt to avoid any responsibility for their own words. Taking into account that this information was created by the founders themselves (and not just derived from any outside source) I would highly recommend to use at least “bona fide” wording – it will show some respect to the potential token buyers. \n\n2. Approximate time frames regarding the publication of the role descriptions and voting rights system and criteria for the compensation linked to the degree of participation.\n\n3. Presale discounts: whether discounts exist depending on the amount of tokens to be purchased or not (sometimes this info is open to the public sometimes presale discounts are subject to private negotiations).\n\n4. Info regarding listing of BMCs:  It is preferable to know that some negotiations with some well-known Exchanges are in process and whether these Exchanges tend to list BMCs or not. This is important since some Exchanges intend to exclude security tokens (and look like security tokens), other Exchanges intend to suspend services to users from the United States (due to the burden of compliance work) or Russia (due to US sanctions). \n\nIt is not necessary to list tokens immediately after distribution but it is important to know the perspectives due to the current problems.\n\n5. Info on Blackmoon Crypto Pte. LTD, Singapore (“the Company”) which controls the contract and the address to which gathered ether will be sent: confirmation of registration in Singapore to be published on the website. \n\n6. Info on controlling beneficiaries: special tax laws will apply to the controlling beneficiaries depending on their nationalities.\n\nFor instance, should the Company is controlled by Russian tax residents, an obligation arises for such persons to declare foreign company’s income to pay 13 % personal tax. This obligation arises even despite the fact that beneficiary has not \npersonally received money from his foreign company.\n\nStructuring ICO project in a foreign jurisdiction by Russian founders may result in unintentionally obtaining by such foreign company a status of the Russian tax resident. Therefore, such foreign company will acquire obligation to pay income tax in Russia (20%).\n\nThe above-mentioned tax implications may have a very serious negative impact on the Company. \n\nThus, it would be good to hear that the founders are fully aware of such tax risks and Deloitte  (as a partner of the project) duly addressed this issue and confirmed the tax structure of the project to comply with various tax requirements that may arise in this connection. \n\n7. Info on tax regime in Singapore regarding taxation of the proceeds from distribution of tokens. Tax regime in Singapore is quite severe and may have an adverse effect on the Blackmoon Crypto Pte. LTD. For instance, the Company may be required to pay tax on the proceeds received as a result of the token offering. \n\n8. Lock up arrangements: how “lock ups” for Company’s reserve (30%) and for team and advisors (20%) will be guaranteed if there is no escrow agreement (access to the wallet for the limited number of team members is not an escrow).\n\n9. Info on KYC and AML procedures: whether implemented regarding this project or not.\n\n10. Change of control in the Company: how the token buyers’ interests will be preserved in case of change of control in the Company (it may happen for whatever reason). \n\nThis document is for information and illustrative purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. No advisory at all.",
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      "body": "August 22, 2017\n\n(by Arthur Minasian, Case Western Reserve University, School of law’1994, [email protected], [email protected])\n\nThis is my 2nd review of ICO projects in the area of venture business (the first one was Starta ICO, https://steemit.com/@artur1972). The upcoming Blackmooncrypto ICO (September 12, 2017) is of my interest due to the following 4 points:\n\n•\tThe idea;\n\n•\tCreativity in combining 2 types of tokens (non-security + security);\n\n•\tMuch focus on legal compliance and Deloitte (Big 4 company) as a partner;\n\n•\tBlackmoon security measures against hackers’ attacks.\n\nI will expand on these issues and then give some thoughts on advantages of this ICO, some concerns and lack of information which is additionally needed / desirable for decision-making process regarding participation in this ICO.\n\nI. Advantages\n\n1. The idea\n\nIn short, one stop solution platform in setting up and developing tokenized funds, regardless of whether such funds invest in the fiat or crypto world (tokenized funds are more cost-efficient thanks to lower infrastructure and setup costs). \n\nThis conception seems attractive to me but business part of this project (projected performance of the tokenized funds, forecasted assets, projected costs, actual amounts of proceeds for contributors etc.) is outside of my expertise so I have to rely on the description provided by the founders or to get a special opinion, although it is doubtful that someone can foresee the future of a business project. \n\nThe same refers to the crypto assets’ future: whether it is really a “new era” or just a short / long term bubble due to US Federal Reserve System’s quantitative easing policy aiming to balloon all types of assets (“monetary madness” as some experts say). And if it is so (“quantitative easing policy”), it is good to know whether this policy will be continued or scaled down. This is equally important since my understanding is that your success in crypto world depends not only on the relevant project in this area but mostly on the overall crypto economics growth.\n\n2. Creativity in combining 2 types of tokens (non-security plus security token)\n\nHere is the short description of the token structure (BMC tokens and Fund’s tokens) derived from White Paper and FAQ: \n\nа) The holding company will issue Blackmoon Crypto Platform tokens (BMCs). BMC tokens would not be deemed as securities by SEC based on the Howey test. The holders of BMC tokens will be able to (i) register as Continuous Contributors and (ii) deposit BMCs in a depository wallet linked to their account. \n\nBMC tokens would not be deemed as securities by SEC based on the Howey test.\n\nб) Each Continuous Contributor will receive a share of Fund tokens that operate on the Platform according to the policies specified by particular Funds.\n\nFunds' tokens (FTs) are going to be securities and the holding company is going to comply with all necessary regulation regarding that fact.\n\nTaking into account the recent releases of US (SEC) and Singapore (MAS) regulators the Exchanges are now reluctant to accept security tokens for listing. However, it is very important (or even crucial) to get your ICO token listed on a well-known Exchange since it provides for liquidity and a chance for a significant number of token buyers to speculate, i.e. sell their tokens for a greater price. Therefore, the non-security nature of BMC token allows the founders of the project to collect funds and to list BMCs on a well-known Exchange.\n\nMoreover, this 2 level token structure looks advantageous for FT holders, namely: those who opt to flock to the Blackmoon platform and get FTs as a result of their active participation in the project are supposed to receive more proceeds since many BMC buyers, as it usually happens, may prefer to immediately sell their tokens on a secondary market (instead of holding their BMCs in special depository wallets linked to their accounts).\n\nAccording to White Paper, BMCs provide proceeds to Continuous Contributors who deposited BMCs in depository wallets as follows: \n\n•\tStructuring and promotion fee 0-10% from the amount of the issued FTs (on average 2.5%);\n•\tMaintenance fee (on average it may be equal to 0.5% per annum paid daily in FTs via a smart contract);\n•\tTransaction fee (occurs upon transferring FTs from one wallet to another in the amount of 0.25% from the token amount paid in FTs via the smart contract). \n\nThose who choose to sell their BMCs following the distribution may also benefit since the number of BMC tokens for sale on a secondary market will be limited to some extent since many BMCs will be just deposited to the platform (so BMCs’ supply is lesser – BMCs’ price is higher).\n\nOther advantages:\n\n•\t“Continuous Contributors will receive a distribution of FTs from the first Fund created on the Blackmoon Crypto Platform without having to wait for the company to reach breakeven”.\n•\tFixed number of BMC tokens (“the total number of BMCs to be issued will be calculated at the end of the Distribution Period according to the formula: amount of BMCs sold during the Distribution multiplied by 2”: 50% for public, 30% for Company’s reserve, 20% for team and advisors);\n•\tLock up for 30% for Company’s reserve, 20% for team and advisors;\n•\tDownside protection (“to protect contributors from dumps the Platform will buy back BMC at $0.8 per token from anybody who is willing to sell”).\n\n3. Much focus on compliance with existing laws and regulations\n\nThe fact that, according to White Paper, lots of attention is paid to the legal side of the project provides for some assurance that many of the concerns mentioned below will be somehow addressed, namely:\n \n•\t“Funds’ legal structure will be reviewed and approved by our legal advisors to ensure they are compliant with existing laws and regulations”;\n•\t“Blackmoon Crypto has vetted the proposed structure with several financial institutions and has received an indicative approval that it will pass internal procedures”;\n•\t“We understand the importance of compliance with regulation and are committed to ensuring that our work is done correctly”;\n•\t“By sorting out these risks from the beginning, Blackmoon Crypto will improve investor confidence and provide necessary sustainability of the investment process”.\nBlackmoon promises to \n•\tperform in-house research as well as contract with reputable legal firms to set up a fully transparent, licensed where necessary and auditable investment structure, making sure that the envisioned structure is fully compliant with regulations, \n•\tput emphasis on licensing and structuring for the selling of tokens in the US as the US is the biggest financial market.\n\n4. Blackmoon security measures against hackers’ attacks.\n\nAccording to Blackmoon CTO Ilya Remizov:\n•\tthey use industry-grade high-performance Amazon DNS servers,\n•\tthe access to the administrative tool is well protected (limited and complicated acces),\n•\ttheir servers are placed to dedicated and isolated VPCs (virtual private cloud) and have no direct access from the Internet,\n•\tthey have contingency plan for unlikely scenario of such an attack that brings down Amazon security,\n•\tthe backups are securely stored in bank vaults\n(see details at: https://medium.com/blackmoon-crypto/blackmoon-security-measures-519aa028b0c0).\n\nII. Concerns\n\n1. The main issue regarding this 2 level token structure is whether BMC tokens would not be deemed as securities by SEC based on the Howey test. \n\nThere is no need to dissect the whole Howey test since it is not a legal opinion but the potential BMC buyers have to keep in mind the key element applicable here: “expectation of profits predominantly from the efforts of others”. \n\nIn other words, if BMC token holders have rights to validate transactions in the BMC network, to perform certain other useful tasks for the benefit of the network, to act as individual investment advisors, and to generally actively participate in network operations and derive active income from their efforts, then there is no expectation of profits predominantly from the efforts of others (potential appreciation in the value of BMC tokens after issuance, due to secondary trading, does not matter).\n\nWhite Paper addresses this issue:\n\n•\tContinuous Contributors will have the right to participate in “members-only” discussions regarding the platform strategy and development plan;\n•\tat least once a year or as needed, the Platform will initiate a vote among the Continuous Contributors to gather opinions of the contributing community on strategic development matters (the results of such voting won’t be binding but will be strongly considered by the operational management);\n•\tContinuous Contributors shall from time to time confirm the execution of their roles on the Platform to keep their status and depository wallets active (the process of the status confirmation will be specified for each role);\n•\tto register as a Continuous Contributor the holder of BMC tokens shall choose the role that she/he is willing to execute as a contributor to the Platform;\n•\tthe list of available roles (platform promoters, investment analysts, legal advisors, public auditors, GR advisors, etc.) will be publicly available on the blackmooncrypto.com website and updated as needed to reflect the current needs of the Platform’s continuous development.\nBased on the above White Paper wording, I am inclined to agree that BMC is very close to the notion of a digital token and is not likely to be deemed a security under applicable US laws. Nevertheless, it is necessary to keep in mind that \n•\twhen interpreting the reach of the “securities” definition, US courts often start by observing that the purpose of the securities laws is to regulate investments, in whatever form and by whatever name,\n•\tsince the list of available roles will be publicly available on the blackmooncrypto.com website and updated as needed it is still difficult to make a 100 % conclusion in the absence of full information. \n\n2. My other concern in this regard is voting rights of Continuous Contributors (“the results of such voting won’t be binding but will be strongly considered by the operational management”) and its correspondence with the existence of voting rights through the Howey test meaning that the instrument is less likely to be considered a security if:\n\n(i)\tthe holder is provided with significant managerial control - the ability to participate in decisions that will affect the success of the enterprise; \n(ii)\tthe holder has the resources and expertise to make a meaningful contribution; and \n(iii)\tthe holder does, in fact, participate in management decisions.\n\nThe important issue here is how the non-binding voting (what does strong consideration of the voting by the operational management exactly mean?) will be viewed as significant managerial control and participation in management decisions. \n\nThus, the roles of platform promoters, investment analysts, legal advisors, public auditors, GR advisors, etc. as well as their rights to participate, voting rights system and criteria for the compensation linked to the degree of participation (to be yet publicly available) shall closely meet the Howey test requirements in this regard.\n\nShould these requirements will not be finally met, then the US market will not be available for this project and this fact will certainly diminish its value to some extent. However, there is a firm understanding of this risk by the founders since the US persons are excluded at the moment (as a precautionary move) and as a result of this awareness plan B exists:\n\n•\t“When it comes to the US market, tokens of several first funds will be either prohibited for distribution in the US or will be sold only via licensed brokerage firms and only to authorized investors”;\n•\t“So, even without the US, there is a huge market for the investment managers that will choose our platform. Our team has partners and makes deals in 9 countries including the US”. \n\nAnother risk associated with the above-mentioned reasoning – some disputes may arise regarding the level of contribution of the Continuous Contributors to the project and, accordingly, the amount of FTs to be transferred to various Continuous Contributors since the number of FTs to be transferred to the Continuous Contributors depends on 2 factors: the number of BMCs deposited in the wallets and actual contribution.  \n\n3. My serious concern is the fact that US citizens are excluded from the participation in this project as precautionary move. It sounds inconsistently for me: if the founders are sure that BMC token is not a security token, have the relevant confirmation from their advisors as White Paper states and want to persuade the potential token buyers of this fact, then the US citizens should be granted access to the project. I understand that this is just a precautionary move but then a very negative consequence shows up: based on this fact the Exchanges may become extremely cautious and will take their precautionary move – will just refuse to list BMCs fearing the recognition of BMCs as securities under US laws. \n\nTo my opinion, this is a substantial risk and I would seriously consider participating in the project only if this limitation regarding US citizens will be removed.\n\nIII. Lack of some information \n\n(Information needed / desirable for decision-making process: depends on personal risk evaluation level)\n\n1. Token Terms Conditions. Token Terms Conditions is a very important legal document which provides for the description of the relevant legal risks for the token holders (legally binding obligations, if any, towards them) and dispute resolution clause. This document usually shows up closer to the date of distribution and ought to be closely reviewed.\nNote that it is very useful to print, save and confirm (by an attorney or notary) all documents regarding the ICO you participate from the relevant website.\n\nKeep in mind that “Blackmoon Crypto does not guarantee, and accepts no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency, or completeness of any material contained in this white paper”. I understand that this clause is a standard for many ICOs but it irritates a lot. Those who plan to invest their money prefer to see an accurate, reliable and complete information from the founders and not an attempt to avoid any responsibility for their own words. Taking into account that this information was created by the founders themselves (and not just derived from any outside source) I would highly recommend to use at least “bona fide” wording – it will show some respect to the potential token buyers. \n\n2. Approximate time frames regarding the publication of the role descriptions and voting rights system and criteria for the compensation linked to the degree of participation.\n\n3. Presale discounts: whether discounts exist depending on the amount of tokens to be purchased or not (sometimes this info is open to the public sometimes presale discounts are subject to private negotiations).\n\n4. Info regarding listing of BMCs:  It is preferable to know that some negotiations with some well-known Exchanges are in process and whether these Exchanges tend to list BMCs or not. This is important since some Exchanges intend to exclude security tokens (and look like security tokens), other Exchanges intend to suspend services to users from the United States (due to the burden of compliance work) or Russia (due to US sanctions). \n\nIt is not necessary to list tokens immediately after distribution but it is important to know the perspectives due to the current problems.\n\n5. Info on Blackmoon Crypto Pte. LTD, Singapore (“the Company”) which controls the contract and the address to which gathered ether will be sent: confirmation of registration in Singapore to be published on the website. \n\n6. Info on controlling beneficiaries: special tax laws will apply to the controlling beneficiaries depending on their nationalities.\n\nFor instance, should the Company is controlled by Russian tax residents, an obligation arises for such persons to declare foreign company’s income to pay 13 % personal tax. This obligation arises even despite the fact that beneficiary has not \npersonally received money from his foreign company.\n\nStructuring ICO project in a foreign jurisdiction by Russian founders may result in unintentionally obtaining by such foreign company a status of the Russian tax resident. Therefore, such foreign company will acquire obligation to pay income tax in Russia (20%).\n\nThe above-mentioned tax implications may have a very serious negative impact on the Company. \n\nThus, it would be good to hear that the founders are fully aware of such tax risks and Deloitte  (as a partner of the project) duly addressed this issue and confirmed the tax structure of the project to comply with various tax requirements that may arise in this connection. \n\n7. Info on tax regime in Singapore regarding taxation of the proceeds from distribution of tokens. Tax regime in Singapore is quite severe and may have an adverse effect on the Blackmoon Crypto Pte. LTD. For instance, the Company may be required to pay tax on the proceeds received as a result of the token offering. \n\n8. Lock up arrangements: how “lock ups” for Company’s reserve (30%) and for team and advisors (20%) will be guaranteed if there is no escrow agreement (access to the wallet for the limited number of team members is not an escrow).\n\n9. Info on KYC and AML procedures: whether implemented regarding this project or not.\n\n10. Change of control in the Company: how the token buyers’ interests will be preserved in case of change of control in the Company (it may happen for whatever reason). \n\nThis document is for information and illustrative purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. No advisory at all.",
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      "body": "What an ICO investor should be aware of buying security tokens. \n\nby Arthur Minasian ([email protected]; [email protected])\n\nMost of ICOs are aimed to raise money by issuing digital tokens that can be spent within its ecosystem (so called “cryptofuel”). You do not need to be a sophisticated investor to buy tokens which are designed for marketplaces or businesses that have yet to be built. Investors who are buying them just take advantage of its consumptive use and are betting that the businesses will become successful so the tokens will become more valuable as more and more people flock to the platforms (product tokens, utility tokens). And in fact, such platforms get thousands of engaged supporters who are highly motivated to contribute in promotion of such platforms (let’s call them fans of innovations, blockchain evangelists or early bitcoin buyers). There is, of course, the possibility that many of the tokens could become worthless but it seems that people fully understand this risk and just place their bets: those who have made money in bitcoin are trying to convert that into other kinds of cryptocurrencies (including cryptofunds that usually have arrangements to buy tokens on an ICO presale stage with a 30-50 % discount).\n\nFor now, most of the companies raising money are tech and blockchain focused but more and more venture companies are considering this method to be applied to their business. However, in order for it to work and get their projects funded these companies have to persuade a different type of potential investors: those who want to participate in a venture business through ICO as small venture capitalists and have to buy bitcoins or ether for fiat money at a current high rate in order to be involved in ICO process. In this case legal risks are of much greater importance since investors are not interested in the consumptive use of tokens or a would be increase in a market prices of ICO tokens and merely rely on dividends or repurchase of the tokens by the issuer in the future, i.e. we are speaking of so called “security tokens” (according to a well-known Howey test, a clear expectation of profits predominantly from the efforts of others is required to consider a token as a security/investment).\n\nMost likely we will be seeing more and more venture projects seeking funding through ICO mechanism. Taking into account the above-said, the recent Strata ICO is of our interest. The scheme is very interesting and, in brief, can be described as follows:\nThe purpose of the tokens is to allow a Singapore based Cross Coin Pte. Ltd. (the “Company”) to purchase 33% stake in a NY limited liability company - Starta Accelerator 16/17 LLC which owns an average stake of 7 % of common stock in 21 early stage private technology companies and to invest any remaining funds in future Starta Accelerator portfolio companies. To the extent that the Company generates a profit from its operations, the Company anticipates using all net profit minus reasonable expenses and 2,5 % administrative fee, to buy-back the tokens.\n\nIt is obvious that such investments in venture capital type assets are speculative in nature and involve substantial risk of loss. But the thing is that investors should carefully read the terms of token sale since by purchasing tokens they expressly acknowledge and assume the risks mentioned there. Investors have to fully understand and detect some legal risks of losing their investments (totally or partly) or receiving less they expected even irrespective of the success of the enterprise.\n\nShould we take a look at Starta ICO terms of token sale just as an example (Terms of token sale (TTS), not Whitepaper which is usually not a legal binding agreement unless it contains certain specific clauses) we will see, inter alia, the following:\n\n1. The Company anticipates using all net profit minus reasonable expenses and 2,5 % administrative fee, to buy-back the tokens. \nThe Company just anticipates, i.e. it is not a legally binding obligation. \n\n2. The Company cannot guarantee that it will be able at any time to buy-back any tokens from the holders of such tokens; the buy-back price of the tokens may be lower than the original price; the buy-back price will be determined by the Company in its sole discretion.\nThere are no limitations on new loans (lack of relevant covenants) and sale of ownership stake in the Company’s capital (lack of change of control clause). Such actions will most likely diminish the buy-back price of the tokens (if any price will be paid at all);\n\n3. The exchanges used for secondary trading of tokens (including buy-back) are subject to little or no regulatory oversight, making them more susceptible to fraud or manipulation.\n\n4. Tokens are uninsured: in the event of loss, there is no insurance whatsoever arranged by the Company.\n\n5. Company may cease operations in a jurisdiction in the event that regulatory actions, or changes to law or regulation, make it illegal to operate in such jurisdiction, or even commercially undesirable to obtain the necessary regulatory approval to operate in such jurisdiction.\nFor instance, some new KYC and AML regulation may come into effect making problematic for the Company to pay any buy-back price to the holders of the tokens without time and money consuming efforts.\n\n6. The Company and/or Starta Accelerator 16/17 LLC may dissolve due to an unfavorable fluctuation in the value of bitcoin or ether or fiat currencies, decrease in the tokens’ utility, the failure of commercial relationships, or intellectual property ownership challenges.\nDue to an extreme volatility of cryptocurrencies this is not a remote risk at all and it can have a negative impact on the investors in both ways: the Company may become short of funds if the value of bitcoin and ether substantially decreases until bitcoin and ether were converted by the Company to fiat money or the Company will not be able to repurchase its tokens if the value of bitcoin and ether substantially increases. And this risk refers even to fiat currencies as well.\n\n7. All decisions involving the network and Company will be made by Company at its sole discretion, including sale or liquidation of the Company (tokens confer no governance rights of any kind with respect to the network or Company, including, but not limited to, any voting, distribution, redemption, liquidation, proprietary, or other financial or legal rights).\n\n8. Ownership of tokens carries no rights, express or implied, other than the right to use tokens as a means to enable usage of and interaction with the network; tokens do not represent or confer any ownership right or stake, share or security or equivalent rights, or any right to receive future revenue shares, intellectual property rights or any other form of participation; the tokens are not intended to be a digital currency, security, commodity or any other kind of financial instrument. \nThis is a very interesting part of TTS: the legal wording per se provides for no legal obligation to share any future revenue or rights in order to avoid “expectation of profits predominantly from the efforts of others” part of the Howey test. However, the US regulator may conclude that investors were, nevertheless, convinced by general wording to buy the tokens because of the expectation of profits (as a result of successful sale of assets as anticipated). That’s why these TTS contain a necessary disclaimer regarding US citizens (along with a general representation on behalf of the investors that purchase of the tokens complies with applicable laws and regulation in investors’ jurisdiction);\n\n9. The bitcoin and ether proceeds from Company’s sale of tokens will be used to compensate staff, cover marketing costs and operating expenses, develop technical infrastructure, exercise the option, and invest into future portfolio companies of Starta Accelerator. \nThis is a good explanation how the proceeds will be used but investors shall keep in mind that promoters of the token sales probably have no legal fiduciary duties to use the proceeds of an ICO for the benefit of token holders;\n\n10. No class actions or representative actions: investors are not allowed to gather in group of individuals to file lawsuit in Singapore meaning that each investor has to bear its own costs associated with arbitration proceedings in Singapore (it is obviously very burdensome and in fact preclude an average investor from filing a law suit in a foreign jurisdiction).\n\n11. Last but not least: In no event will the aggregate liability of company and the company parties (jointly) exceed the amount investor pay to the Company for the tokens (i.e. nominal value).\n\nGenerally, it should be noted that investors in such venture ICOs shall keep in mind the following:\n\n- the “Howey Test” interpretation (see “Appcoin Law: ICOs the right way” at www.coindesk.com by Marco Santori of Cooley LLP, Oct 15, 2016; the Howey test legal analysis at www.coinbaise.com/legal/securities-law-framework.pdf);                                                                               \n\n- a recent case in Utah, SEC vs Traffic Monson (this case – which does not involve an ICO, but involves what is arguably an analogous offering – is instructive for how the SEC may approach ICO enforcement according to Benjamin Sauter and David McGill of Kobre & Kim LLP and Brian Klein of Baker Marquart LLP, see “Initial Coin Offerings: Where the SEC might stand” of June 16, 2017 at www.coindesk.com);\n\n- lack of covenants prohibiting to take loans that confer new obligations on the company - issuer of tokens);\n\n- lack of change of control clause (prohibits to sell stakes in the company-issuer of the tokens);\n\n- lack of legal opinion regarding the company-issuer of the tokens;\n\n- lack of legal opinion regarding the jurisdiction of ICO.\n\nTherefore, if you are not an early bitcoin buyer, а cryptofund or a hotshot chineese investor, you better wait until new regulation regarding ICO will come into force or some investor protective standards will be applied by ICO organizers to their offerings. Unless you want to feel yourself like a venture capitalist whatever it costs.",
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      "body": "What an ICO investor should be aware of buying security tokens. \n\nby Arthur Minasian ([email protected]; [email protected])\n\nMost of ICOs are aimed to raise money by issuing digital tokens that can be spent within its ecosystem (so called “cryptofuel”). You do not need to be a sophisticated investor to buy tokens which are designed for marketplaces or businesses that have yet to be built. Investors who are buying them just take advantage of its consumptive use and are betting that the businesses will become successful so the tokens will become more valuable as more and more people flock to the platforms (product tokens, utility tokens). And in fact, such platforms get thousands of engaged supporters who are highly motivated to contribute in promotion of such platforms (let’s call them fans of innovations, blockchain evangelists or early bitcoin buyers). There is, of course, the possibility that many of the tokens could become worthless but it seems that people fully understand this risk and just place their bets: those who have made money in bitcoin are trying to convert that into other kinds of cryptocurrencies (including cryptofunds that usually have arrangements to buy tokens on an ICO presale stage with a 30-50 % discount).\n\nFor now, most of the companies raising money are tech and blockchain focused but more and more venture companies are considering this method to be applied to their business. However, in order for it to work and get their projects funded these companies have to persuade a different type of potential investors: those who want to participate in a venture business through ICO as small venture capitalists and have to buy bitcoins or ether for fiat money at a current high rate in order to be involved in ICO process. In this case legal risks are of much greater importance since investors are not interested in the consumptive use of tokens or a would be increase in a market prices of ICO tokens and merely rely on dividends or repurchase of the tokens by the issuer in the future, i.e. we are speaking of so called “security tokens” (according to a well-known Howey test, a clear expectation of profits predominantly from the efforts of others is required to consider a token as a security/investment).\n\nMost likely we will be seeing more and more venture projects seeking funding through ICO mechanism. Taking into account the above-said, the recent Strata ICO is of our interest. The scheme is very interesting and, in brief, can be described as follows:\nThe purpose of the tokens is to allow a Singapore based Cross Coin Pte. Ltd. (the “Company”) to purchase 33% stake in a NY limited liability company - Starta Accelerator 16/17 LLC which owns an average stake of 7 % of common stock in 21 early stage private technology companies and to invest any remaining funds in future Starta Accelerator portfolio companies. To the extent that the Company generates a profit from its operations, the Company anticipates using all net profit minus reasonable expenses and 2,5 % administrative fee, to buy-back the tokens.\n\nIt is obvious that such investments in venture capital type assets are speculative in nature and involve substantial risk of loss. But the thing is that investors should carefully read the terms of token sale since by purchasing tokens they expressly acknowledge and assume the risks mentioned there. Investors have to fully understand and detect some legal risks of losing their investments (totally or partly) or receiving less they expected even irrespective of the success of the enterprise.\n\nShould we take a look at Starta ICO terms of token sale just as an example (Terms of token sale (TTS), not Whitepaper which is usually not a legal binding agreement unless it contains certain specific clauses) we will see, inter alia, the following:\n\n1. The Company anticipates using all net profit minus reasonable expenses and 2,5 % administrative fee, to buy-back the tokens. \nThe Company just anticipates, i.e. it is not a legally binding obligation. \n\n2. The Company cannot guarantee that it will be able at any time to buy-back any tokens from the holders of such tokens; the buy-back price of the tokens may be lower than the original price; the buy-back price will be determined by the Company in its sole discretion.\nThere are no limitations on new loans (lack of relevant covenants) and sale of ownership stake in the Company’s capital (lack of change of control clause). Such actions will most likely diminish the buy-back price of the tokens (if any price will be paid at all);\n\n3. The exchanges used for secondary trading of tokens (including buy-back) are subject to little or no regulatory oversight, making them more susceptible to fraud or manipulation.\n\n4. Tokens are uninsured: in the event of loss, there is no insurance whatsoever arranged by the Company.\n\n5. Company may cease operations in a jurisdiction in the event that regulatory actions, or changes to law or regulation, make it illegal to operate in such jurisdiction, or even commercially undesirable to obtain the necessary regulatory approval to operate in such jurisdiction.\nFor instance, some new KYC and AML regulation may come into effect making problematic for the Company to pay any buy-back price to the holders of the tokens without time and money consuming efforts.\n\n6. The Company and/or Starta Accelerator 16/17 LLC may dissolve due to an unfavorable fluctuation in the value of bitcoin or ether or fiat currencies, decrease in the tokens’ utility, the failure of commercial relationships, or intellectual property ownership challenges.\nDue to an extreme volatility of cryptocurrencies this is not a remote risk at all and it can have a negative impact on the investors in both ways: the Company may become short of funds if the value of bitcoin and ether substantially decreases until bitcoin and ether were converted by the Company to fiat money or the Company will not be able to repurchase its tokens if the value of bitcoin and ether substantially increases. And this risk refers even to fiat currencies as well.\n\n7. All decisions involving the network and Company will be made by Company at its sole discretion, including sale or liquidation of the Company (tokens confer no governance rights of any kind with respect to the network or Company, including, but not limited to, any voting, distribution, redemption, liquidation, proprietary, or other financial or legal rights).\n\n8. Ownership of tokens carries no rights, express or implied, other than the right to use tokens as a means to enable usage of and interaction with the network; tokens do not represent or confer any ownership right or stake, share or security or equivalent rights, or any right to receive future revenue shares, intellectual property rights or any other form of participation; the tokens are not intended to be a digital currency, security, commodity or any other kind of financial instrument. \nThis is a very interesting part of TTS: the legal wording per se provides for no legal obligation to share any future revenue or rights in order to avoid “expectation of profits predominantly from the efforts of others” part of the Howey test. However, the US regulator may conclude that investors were, nevertheless, convinced by general wording to buy the tokens because of the expectation of profits (as a result of successful sale of assets as anticipated). That’s why these TTS contain a necessary disclaimer regarding US citizens (along with a general representation on behalf of the investors that purchase of the tokens complies with applicable laws and regulation in investors’ jurisdiction);\n\n9. The bitcoin and ether proceeds from Company’s sale of tokens will be used to compensate staff, cover marketing costs and operating expenses, develop technical infrastructure, exercise the option, and invest into future portfolio companies of Starta Accelerator. \nThis is a good explanation how the proceeds will be used but investors shall keep in mind that promoters of the token sales probably have no legal fiduciary duties to use the proceeds of an ICO for the benefit of token holders;\n\n10. No class actions or representative actions: investors are not allowed to gather in group of individuals to file lawsuit in Singapore meaning that each investor has to bear its own costs associated with arbitration proceedings in Singapore (it is obviously very burdensome and in fact preclude an average investor from filing a law suit in a foreign jurisdiction).\n\n11. Last but not least: In no event will the aggregate liability of company and the company parties (jointly) exceed the amount investor pay to the Company for the tokens (i.e. nominal value).\n\nGenerally, it should be noted that investors in such venture ICOs shall keep in mind the following:\n\n- the “Howey Test” interpretation (see “Appcoin Law: ICOs the right way” at www.coindesk.com by Marco Santori of Cooley LLP, Oct 15, 2016; the Howey test legal analysis at www.coinbaise.com/legal/securities-law-framework.pdf);                                                                               \n\n- a recent case in Utah, SEC vs Traffic Monson (this case – which does not involve an ICO, but involves what is arguably an analogous offering – is instructive for how the SEC may approach ICO enforcement according to Benjamin Sauter and David McGill of Kobre & Kim LLP and Brian Klein of Baker Marquart LLP, see “Initial Coin Offerings: Where the SEC might stand” of June 16, 2017 at www.coindesk.com);\n\n- lack of covenants prohibiting to take loans that confer new obligations on the company - issuer of tokens);\n\n- lack of change of control clause (prohibits to sell stakes in the company-issuer of the tokens);\n\n- lack of legal opinion regarding the company-issuer of the tokens;\n\n- lack of legal opinion regarding the jurisdiction of ICO.\n\nTherefore, if you are not an early bitcoin buyer, а cryptofund or a hotshot chineese investor, you better wait until new regulation regarding ICO will come into force or some investor protective standards will be applied by ICO organizers to their offerings. Unless you want to feel yourself like a venture capitalist whatever it costs.",
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      "body": "What an ICO investor should be aware of buying security tokens. \n\nby Arthur Minasian ([email protected]; [email protected])\n\nMost of ICOs are aimed to raise money by issuing digital tokens that can be spent within its ecosystem (so called “cryptofuel”). You do not need to be a sophisticated investor to buy tokens which are designed for marketplaces or businesses that have yet to be built. Investors who are buying them just take advantage of its consumptive use and are betting that the businesses will become successful so the tokens will become more valuable as more and more people flock to the platforms (product tokens, utility tokens). And in fact, such platforms get thousands of engaged supporters who are highly motivated to contribute in promotion of such platforms (let’s call them fans of innovations, blockchain evangelists or early bitcoin buyers). There is, of course, the possibility that many of the tokens could become worthless but it seems that people fully understand this risk and just place their bets: those who have made money in bitcoin are trying to convert that into other kinds of cryptocurrencies (including cryptofunds that usually have arrangements to buy tokens on an ICO presale stage with a 30-50 % discount).\n\nFor now, most of the companies raising money are tech and blockchain focused but more and more venture companies are considering this method to be applied to their business. However, in order for it to work and get their projects funded these companies have to persuade a different type of potential investors: those who want to participate in a venture business through ICO as small venture capitalists and have to buy bitcoins or ether for fiat money at a current high rate in order to be involved in ICO process. In this case legal risks are of much greater importance since investors are not interested in the consumptive use of tokens or a would be increase in a market prices of ICO tokens and merely rely on dividends or repurchase of the tokens by the issuer in the future, i.e. we are speaking of so called “security tokens” (according to a well-known Howey test, a clear expectation of profits predominantly from the efforts of others is required to consider a token as a security/investment).\n\nMost likely we will be seeing more and more venture projects seeking funding through ICO mechanism. Taking into account the above-said, the recent Strata ICO is of our interest. The scheme is very interesting and, in brief, can be described as follows:\nThe purpose of the tokens is to allow a Singapore based Cross Coin Pte. Ltd. (the “Company”) to purchase 33% stake in a NY limited liability company - Starta Accelerator 16/17 LLC which owns an average stake of 7 % of common stock in 21 early stage private technology companies and to invest any remaining funds in future Starta Accelerator portfolio companies. To the extent that the Company generates a profit from its operations, the Company anticipates using all net profit minus reasonable expenses and 2,5 % administrative fee, to buy-back the tokens.\n\nIt is obvious that such investments in venture capital type assets are speculative in nature and involve substantial risk of loss. But the thing is that investors should carefully read the terms of token sale since by purchasing tokens they expressly acknowledge and assume the risks mentioned there. Investors have to fully understand and detect some legal risks of losing their investments (totally or partly) or receiving less they expected even irrespective of the success of the enterprise.\n\nShould we take a look at Starta ICO terms of token sale just as an example (Terms of token sale (TTS), not Whitepaper which is usually not a legal binding agreement unless it contains certain specific clauses) we will see, inter alia, the following:\n\n1. The Company anticipates using all net profit minus reasonable expenses and 2,5 % administrative fee, to buy-back the tokens. \nThe Company just anticipates, i.e. it is not a legally binding obligation. \n\n2. The Company cannot guarantee that it will be able at any time to buy-back any tokens from the holders of such tokens; the buy-back price of the tokens may be lower than the original price; the buy-back price will be determined by the Company in its sole discretion.\nThere are no limitations on new loans (lack of relevant covenants) and sale of ownership stake in the Company’s capital (lack of change of control clause). Such actions will most likely diminish the buy-back price of the tokens (if any price will be paid at all);\n\n3. The exchanges used for secondary trading of tokens (including buy-back) are subject to little or no regulatory oversight, making them more susceptible to fraud or manipulation.\n\n4. Tokens are uninsured: in the event of loss, there is no insurance whatsoever arranged by the Company.\n\n5. Company may cease operations in a jurisdiction in the event that regulatory actions, or changes to law or regulation, make it illegal to operate in such jurisdiction, or even commercially undesirable to obtain the necessary regulatory approval to operate in such jurisdiction.\nFor instance, some new KYC and AML regulation may come into effect making problematic for the Company to pay any buy-back price to the holders of the tokens without time and money consuming efforts.\n\n6. The Company and/or Starta Accelerator 16/17 LLC may dissolve due to an unfavorable fluctuation in the value of bitcoin or ether or fiat currencies, decrease in the tokens’ utility, the failure of commercial relationships, or intellectual property ownership challenges.\nDue to an extreme volatility of cryptocurrencies this is not a remote risk at all and it can have a negative impact on the investors in both ways: the Company may become short of funds if the value of bitcoin and ether substantially decreases until bitcoin and ether were converted by the Company to fiat money or the Company will not be able to repurchase its tokens if the value of bitcoin and ether substantially increases. And this risk refers even to fiat currencies as well.\n\n7. All decisions involving the network and Company will be made by Company at its sole discretion, including sale or liquidation of the Company (tokens confer no governance rights of any kind with respect to the network or Company, including, but not limited to, any voting, distribution, redemption, liquidation, proprietary, or other financial or legal rights).\n\n8. Ownership of tokens carries no rights, express or implied, other than the right to use tokens as a means to enable usage of and interaction with the network; tokens do not represent or confer any ownership right or stake, share or security or equivalent rights, or any right to receive future revenue shares, intellectual property rights or any other form of participation; the tokens are not intended to be a digital currency, security, commodity or any other kind of financial instrument. \nThis is a very interesting part of TTS: the legal wording per se provides for no legal obligation to share any future revenue or rights in order to avoid “expectation of profits predominantly from the efforts of others” part of the Howey test. However, the US regulator may conclude that investors were, nevertheless, convinced by general wording to buy the tokens because of the expectation of profits (as a result of successful sale of assets as anticipated). That’s why these TTS contain a necessary disclaimer regarding US citizens (along with a general representation on behalf of the investors that purchase of the tokens complies with applicable laws and regulation in investors’ jurisdiction);\n\n9. The bitcoin and ether proceeds from Company’s sale of tokens will be used to compensate staff, cover marketing costs and operating expenses, develop technical infrastructure, exercise the option, and invest into future portfolio companies of Starta Accelerator. \nThis is a good explanation how the proceeds will be used but investors shall keep in mind that promoters of the token sales probably have no legal fiduciary duties to use the proceeds of an ICO for the benefit of token holders;\n\n10. No class actions or representative actions: investors are not allowed to gather in group of individuals to file lawsuit in Singapore meaning that each investor has to bear its own costs associated with arbitration proceedings in Singapore (it is obviously very burdensome and in fact preclude an average investor from filing a law suit in a foreign jurisdiction).\n\n11. Last but not least: In no event will the aggregate liability of company and the company parties (jointly) exceed the amount investor pay to the Company for the tokens (i.e. nominal value).\n\nGenerally, it should be noted that investors in such venture ICOs shall keep in mind the following:\n\n- the “Howey Test” interpretation (see “Appcoin Law: ICOs the right way” at www.coindesk.com by Marco Santori of Cooley LLP, Oct 15, 2016; the Howey test legal analysis at www.coinbaise.com/legal/securities-law-framework.pdf);                                                                               \n\n- a recent case in Utah, SEC vs Traffic Monson (this case – which does not involve an ICO, but involves what is arguably an analogous offering – is instructive for how the SEC may approach ICO enforcement according to Benjamin Sauter and David McGill of Kobre & Kim LLP and Brian Klein of Baker Marquart LLP, see “Initial Coin Offerings: Where the SEC might stand” of June 16, 2017 at www.coindesk.com);\n\n- lack of covenants prohibiting to take loans that confer new obligations on the company - issuer of tokens);\n\n- lack of change of control clause (prohibits to sell stakes in the company-issuer of the tokens);\n\n- lack of legal opinion regarding the company-issuer of the tokens;\n\n- lack of legal opinion regarding the jurisdiction of ICO.\n\nTherefore, if you are not an early bitcoin buyer, а cryptofund or a hotshot chineese investor, you better wait until new regulation regarding ICO will come into force or some investor protective standards will be applied by ICO organizers to their offerings. Unless you want to feel yourself like a venture capitalist whatever it costs.",
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