Is it possible today to protect ICO investor’s rights in Russia?
ICO is an attaractive and fast way for projects to get investments and there seems to be more security, gaining the right to vote, and surely expectation of greater level of ROI (in investor’s mind). As always, real economic relations are ahead of their legal regulation. ICOs in Russia are still outside the legal field, which is not a favourable situation for companies and individuals that have decided to invest in this new way.
Technically, it is not so difficult to issue a digital token – there are many local examples, but what eventually happens from civil law point of view? At the moment, Art. 128 of the Civil Code determines rights to property, but in the current situation in Russia legislator may choose to classify tokens similar to cryptocurrency (read article on this subject), which in turn is identified as a digital product with all the consequences. Accordingly, it may turn out that in the Russian Federation the investor in tokens will buy a digital product, but in translation to real economic terms it is clear that by purchasing digital tokens during the ICO, the investor invests money in the company in order to gain profit (in fact this is the case of the matter). Surely corresponding laws will be adopted, and the problem can be solved later, if the solution will be practical! And while there is still no law, lets keep modelling on…
What kind of deal to make with the investor in conducting the ICO? On the one hand, the principle of freedom of contract has not been terminated, on the other hand, you need to understand that choosing classic way of sale of securities cannot be implemented because digital token is simply not a stock or bond, and issuing organizations need to get away from the associations of tokens with securities in the description of the ICO, and generally avoid mention of the profit (dividends) to their holders. Such measures will protect the company from problems with the Federal Commission on the Securities Market, but it is not a panacea and the essence of the process can be viewed in different ways. Then we immediately have another question – how to pay “dividends”?
After all, we must not forget that both the transaction and the subsequent “distribution of profits” will have to be recorded in accounting books (imagin accountant’s facial expression who is offered to carry out such a transaction) and pay the appropriate taxes. The same applies to the option of redemption of tokens (Tax authorities will certainly “enjoy” this record), when checking the primary documentation (“What did you purchase, and where is this on the balance sheet?”).
World practice already exists and most importantly practical experience already exists: in Switzerland, in the USA, in Australia, in Singapore, in Estonia, and at the legislative level they determined what is cryptocurrency and, of course, it is the basis for the further development of FINTECH in the legal field. With regard to the Russian legislaition, one can find few solutions such as loan agreement with interest, where the borrower transfers tokens as collateral, i.e. it is implied that the interest paid on the loan will be a kind of dividend, but the loan will need to be returned and what is the nature of such transaction? There is a risk of it being recognized as a feigned deal, and therefore a fictitious transaction. About other types of agreements in the next article (we’ll talk about rights to property; goods contracts; loyatly points; royalties, etc.)
And will any team be able to create a smart contract, even if they eventually find a suitable legal “design”? The question is mostly technical, but real experts in this field in Russia are quite a unique specimen and their services are expensive.
However, the news is already full of headlines “ICO-incubators are created in Russia”. All is well and good, but the main issue is the legalization of money, and it can turn into a headache (if not big problems) including by virtue of the rules of the Federal Law of August 7, 2001 No. 115-FZ – «On Combating Legalisation (Laundering) of Proceeds from Crime and Financing of Terrorism».
Is it possible to do away with just a cryptocurrency in conducting the ICO and not to withdraw into fiat currecny? There are many cases when the result of the project is the creation of an intellectual property, but even in such cases, it is difficult to do without fiat currency.
In our opinion, the ICO in Russia is still applicable in very limited cases and the risks of the consequences should be thought out to the smallest detail.
The terms and conditions are typically a link at the bottom of the ICO’s website, and investors often acknowledge their existence by clicking “I agree,” without considering what insights they bring to the project. Proper T&Cs should connect an ICO’s tokens with the deal presented. Unfortunately, this is not always the case. T&Cs can include alarming provisions, for instance, some projects T&Cs refer to token purchases as a non-refundable donation.