What to be aware of when communicating a token sale

August 2018

Communications around any form of token sale can be a legal minefield.  Projects need to think about what the token looks like, who they wish to engage with and where they are located before they can figure out what requirements on publicity they need to comply with.

There are, however, a number of underlying standards that will be relevant in any scenario, both to meet one of the key objectives of regulators to protect consumers, and also to protect projects from class actions from disgruntled participants. Yet sadly what is considered the industry norm regularly falls short of these requirements either willfully or through naive ignorance. As a consequence, a well-executed project is often seen as unusual and even criticised for not following other token sale conventions despite them being borderline, and in some cases outright, illegal.

Therefore we thought it important to list the key principles we consistently advise projects should factor into their communications planning.  

 

This document does not constitute legal advice. Specialist legal advice should be taken in relation to specific circumstances.  

 

Talking about sales

Your project might involve private sales and/or public sales.  A general rule of thumb is that if any sale is upcoming or ongoing, it probably shouldn’t be being talked about in any public way.  This includes sale mechanics, distribution, pricing, valuation etc.  Even once a sale is closed, there may be certain things that you shouldn’t talk about publicly (e.g. pricing). There is a distinction here between public and private communications. In private communications you may be able to disclose this information, but you should be conscious of your audience: the jurisdiction that they are located in, if they are an accredited investor, potential user, press etc., as this may dictate what information can be communicated and what disclaimers are appropriate.  This is definitely one to discuss with your legal advisors.

 

Expectation of returns

Raising expectations around returns from tokens can cause multiple issues, including potentially resulting in the characterisation of the token as a security in some jurisdictions.  Forecasting is an inherently risky business and there is a possibility that buyers could even lose money, so it could be misleading to suggest that they will benefit from a return on their investment. In addition, inflated expectations of returns are one of the hallmarks that regulators look for in scam token issuances.  

 

Accuracy

You should make sure that any information that is released is true and accurate and not misleading (including, potentially, by omission).  It is therefore important that communications are properly verified and validated.  If, after a token sale, it emerges that some of the information disclosed to purchasers was inaccurate, then this opens up the possibility for claims.

 

Consistency

If you’re telling different people different things, and especially if information in sales documentation is not consistent with other communications, then the chances are that some of it may not be accurate (see above) and it will likely result in confusion and queries, which could take time to resolve as well as giving rise to potential claims.  It may be helpful to prepare a set of FAQs for the team to use from the outset to avoid inconsistencies.  

 

Selective disclosure

You should ensure that information (especially if it is not otherwise publicly available) is not released to some potential purchasers, but not others.  

 

External publications

If any external publications include information that you should not be talking about, then even though the communication doesn’t originate from you, just acknowledging it (in any way) could fall foul of securities laws.  If it’s actively wrong, then you might want to get in touch with the author to ask them to remove or correct the information, but in doing so it’s definitely better to err on the side of caution and not provide the author with any information that isn’t already in the public domain.  

 

Exchanges and secondary markets

Until any public sale is concluded, there should not be any reference in communications of any potential listing on an exchange, or discussions with exchanges, or secondary trading of the tokens.  Otherwise, you could be raising people’s expectations of potential returns.

 

The above provides a high level overview of some of the considerations that you should keep in mind for communications about a token sale, but ultimately, if you are looking to carry out a token sale and you want to know what you can say about it, who you can say it to and where you can say it, you should be talking to your legal advisors.