Stakeholdering, Token Sales, and Value
To help regulators and the public understand why cryptographic token sales (also known as initial coin offerings, or, for short, “ICOs”) are so revolutionary and integral to future economic development, it helps to start by defining our core proposition:
One difference between old-school small business launches and start-ups in comparison to projects in the crypto space is: crypto projects are all about networks from the get-go.
In a classic business model, an aspiring conglomerate could start by, say, selling books out of a 30-year-old entrepreneur’s garage, with the aspiration of growing into the largest retailer of consumer goods on the planet one day.
Crypto projects resemble this prototype in a fundamental way — seeking to scale up into a vast network from nothing — but there is a distinction: the bookstore remains limited to its retail stock, number of employees, and facilities — whereas crypto projects may begin by facilitating transactions that would already be taking place.
So: crypto business models gear toward connecting community members who exist at this moment — and then activating these connections into network expansion rn.
The holy grail here is, of course, to get as many people involved as early as possible and encourage them to become stakeholders in the project.
Stakeholders combine features of customers, investors, speculators, and network participants (“Old-School” categories) all in one. By purchasing and holding a project’s tokens, stakeholders are staking a claim within project territory. Value enhancement of the shared network resource — a token — flows to everyone involved: founders, token purchasers, and developers alike — provided that longevity and sustainability stay in focus.
An ICO creates a community just like that.
In the Old-School scenario, investors rely on a project’s lead or core team to realize profits. In our world, growth is all about stakeholders. Post-ICO, we suddenly see a big motley crew of smart-ass motherfuckers from any number of countries chomping at the bit to contribute to open-source code development, share about their interest with others, and signal to core team personnel and developers on matters ranging from business road-maps to community guidelines to decisions at (literally) forks in the road — not to mention whatever the hell else we figure out how to optimize.
Let’s call this whole phenomenon “stakeholdering.”
My own view as a lawyer who works on crypto stuff continues to be that benefits can yield to all as we explain — over and over and over again, until either governments hop onto the same page or the page turns to a new chapter — that stakeholdering is what sets true, purposeful ICOs apart from the crypto space albatross, which I repeat here in a:
Oh, boy, is this new ICO actually
a poorly disguised security offering
that violates federal securities laws
and Securities Exchange Commission (“SEC”) registration requirements?
By now everyone in the crypto community can recite the legal test designed to identify a security, as announced in 1946 by the U.S. Supreme Court in SEC v. Howey: whether a scheme (the Court’s word) “involves an investment of money in a common enterprise with profits to come solely from the efforts of others.”
The government’s most detailed crypto guidance to date — an analysis by the SEC of whether tokens offered by “The DAO” comprised securities — is totally LIT… at least insofar as it appears to acknowledge that utility tokens may comprise something other than securities.
Consider an excerpt from the SEC’s analysis of the “managerial efforts of others” prong, where the action concentrates:
Think about what’s going on here.
The SEC is about to determine — after looking at DAO token holders’ limited control over project dynamics — that such tokens were securities because value derived so substantially from people other than token holders. This conclusion flows from “curator” domination, castrated token holder voting abilities, and member dispersion and communication hurdles inherent in the DAO’s structure.
Stakeholdering, I would argue, is the differential that puts us in new territory.
Imagine, if you will, a hypothetical crypto project to change the world for the better.
Say we envision a token, UTOPIA, that seeks to envalue (coining a word, haha!) the socio-economic-political tenants of sustainability, community empowerment, and decentralization — by facilitating a network of members worldwide who share these principles.
For beta, perhaps we could start with an ICO laser-focused on — oh, hell, pick a location — Boulder, Colorado — and then grow from there.
In beta-Boulder, we start connecting homeowners and renters with goods and service providers of like mind — everyone from interior designers to contractors to solar panel companies to plumbers who install tankless water heaters, and so on.
UTOPIA generates value from a symbiosis of shared social ideals and the network that hooks everyone up!
Meanwhile, in alpha-worldwide, UTOPIA holders have been participating in the project from the beginning through signaling on questions of road-mapping, scaling, and community guidelines development and refinement — all while preparing to kick off their own local hubs and starting to trade with other members internationally.
In this model, network value burgeons through the efforts of token holders all over — dispersed nodes or subgroups or whatever you want to call network members and communities — seeking to connect with one another and bring the value of UTOPIA up to benefit everyone.
Yeah, WHOA: stakeholdering and member activity in alpha means that tokens may assume functionality before a network begins to function.
→ UTOPIA become utility tokens upon release.
Now, from a legal perspective, do we really need an endless stream of token purchase agreements to effectuate UTOPIA? #meh #overkill
And is it really good — or, for that matter, even in a project’s interest — to limit participation to accredited investors, venture capitalists, and institutions — within a quasi-security structure that replicates the very entrenched financial inequities that crypto seeks to redress? #counterintuitive #selfsabotage
So… what would the Terms and Conditions of a UTOPIA token sale — for example, by auction — look like? Pretty short and sweet, I’d think — just enough to cover:
1. A grant of rights and use license;
2. Token functionality;
3. How tokens are provided “as is”;
4. The difference between token holders and core team members;
5. Additional illumination as to (4) — focusing on relationships;
6. Assumption of risks, understanding of token purposes and use license, and monetary value clarifications;
8. Purchase conditions;
10. Non-refundability; and
11. A positive happy note!
And the thread weaving them all together will be a lesson that springs from the SEC’s DAO analysis: network value created of the community, by the community, and for the community.
The sample Terms and Conditions below — based on United Sates case law — are provided for illustration, discussion, and thought purposes only.
I think anyone launching a project in the space should consult a lawyer — and, probably, the sooner in the process, the better. As you will glean, white paper development and legal consultation ideally occur in tandem. Tech aspects are particularly important — for example, I can easily envision a scenario where I’d need to see code on a close question of whether a project might need to register with FinCEN before making a call. But that’s the subject of another post!
Thank you for taking the time to read the first installment of this blog-project-in-progress. My goal is to offer legal-technical pieces such as this one as well as overviews for more general readers — with the aim of overcoming current obstacles, incumbents, and The Establishment.
I look forward to your comments! Also, I am a solo practitioner and my research is self-funded, so I would very much appreciate any tips to signal interest in this undertaking.
Bio materials: My website media page has links to various law-related profiles on the New York Times and other platforms. For more info about me as a person, please check out this video, this story, and my books.
The following terms and conditions (“Terms and Conditions”) apply to any pre-order purchase of UTOPIA, the cryptographic digital token (“Token”) that Utopia, LLC (“Company”) intends for release in connection with the UTOPIA blockchain project (“Project”), by the purchaser (“Purchaser”), through the auction of Tokens on the Ethereum blockchain as detailed in the Project White Paper (“Auction”), for distribution on or about October 3, 2049 (“Release Date”), in conjunction with development of the UTOPIA network (“Network”).
1. Grant of Right to Receive Tokens and Network Use License. Subject to completion of the Auction, Company shall deliver to Purchaser, via smart contract programmed prior to the Release Date, the amount of Tokens to which Purchaser will be entitled pursuant to the Auction outcome. In tandem, Company shall grant to Purchaser a nonexclusive license to use such Tokens on the Network and contribute to development of the Project in harmony with these Terms and Conditions.
2. Projected Token Functionality. As reflected in the White Paper, Company intends the Tokens for two primary utilities: (a) to act as a use license for the Network (subject to the provisions of Paragraph 6 below); and, (b) to facilitate an interactive Network coordination mechanism for establishing and maintaining UTOPIA community guidelines and developing and furthering the Network. With regard to (b) specifically, Company intends to integrate Token-weighted (or, staked) signaling for Token holders to participate with others in member-oriented content quality controls, goods and service providers ranking algorithms, and UTOPIA community and Network governance, growth, and road-mapping. In addition, UTOPIA intends that Token holders may commit (or, stake) Tokens on smart contracts to redeem UTOPIA community goods or services or to pay Network fees. Company reserves the right, in its sole discretion, to modify the functionality of Tokens based on needs and development of the Project, technological factors, or any other consideration that impacts timely and proper Token release or Network functionality.
3. Tokens Provided on an “As Is” Basis. Notwithstanding Paragraph 2 above, Purchaser understands and agrees that Tokens shall be provided “as is,” with no further representation or warranty of any kind.
4. No Claim, Loan, or Ownership Interest. Purchaser understands and agrees that pre-order purchase or receipt of Tokens: (i) does not provide Purchaser with any claim with respect to Company and its assets; (ii) is not a loan to Company; and, (iii) does not provide Purchaser with any ownership, proprietary, shareholder, or investor interest in Company or the Project.
5. No Partnership and No Agency. Nothing in these Terms and Conditions shall constitute, or be deemed to constitute, a partnership, association, joint venture, or other co-operative entity or endeavor between Purchaser and Company. Nothing in these Terms and Conditions shall constitute, or be deemed to constitute, a designation of either Purchaser or Company as an agent of the other for any purpose.
6. Assumption of Risk: Purchaser Sophistication; Understanding of Token Purposes and Revocable Network Use License; No Guarantee of Monetary Value. In placing this pre-order purchase, Purchaser affirms that s/he has conducted adequate research and possesses sufficient knowledge and experience in blockchain technology and cryptographic tokens to evaluate the risks and merits of the Tokens, and that s/he is able to bear the risks thereof. Purchaser further affirms his/her understanding that the Tokens are intended for utility purposes in powering the Project and facilitating Network functions and UTOPIA Network and community growth, governance, and development, and that Purchaser’s primary reason for this pre-order purchase is an intention to join the Network and participate as a UTOPIA member. Purchaser agrees to hold, use, or transfer Tokens lawfully, and to forfeit his/her license to participate in the Network as a UTOPIA member if, in Company’s sole discretion, Purchaser violates any of these Terms and Conditions or any fair and reasonable Network community guideline(s) duly adopted for implementation in the course of the Project. Purchaser acknowledges that his/her use license shall expire upon the sale, transfer, or loss of Tokens, and that safe and secure storage of private cryptographic keys required for access to any purchased Tokens is Purchaser’s sole responsibility. Additionally, Purchaser affirms his/her understanding that, to the extent that Tokens may assume monetary exchange value at any point, such value may experience volatility, or increase or decrease, over time. No guarantee is made concerning the value, if any, of Tokens, or any market platform for their resale or transfer outside the Network.
7. Compliance. Protection of UTOPIA member and user privacy in accordance with Network participant and industry standards is a top priority. Purchaser understands that Company and the Project may be subject to certain regulations that necessitate legal compliance mechanisms and/or preservation of Purchaser information and Network data pursuant to law.
8. Purchase Conditions. The Auction is not open to residents of the People’s Republic of China or the Republic of Korea. By participating in the Auction, Purchaser represents and warrants that: (a) s/he has reviewed and understood these Terms and Conditions and the White Paper and Company website; (b) neither the purchase of Tokens nor anything related to Company or the Project violates any law of the country and legal jurisdiction in which s/he resides; and, (c) any and all personal identifying information or identity documentation provided by Purchaser is true and correct.
9. Indemnification. Purchaser agrees to defend, indemnify, and hold harmless Company against liabilities, costs, damages, and expenses (including settlement costs and reasonable attorneys’ fees) arising from any claim from anybody that results from or relates to Purchaser’s use of Tokens.
10. Non-refundability. All Token pre-order purchases are final.
11. Please enjoy and have fun!
(Aaron Wright and Marco Santori have exhausted the law to reach limits of our current understanding of crypto in the context of a securities framework, and I recommend their work here and here, respectively, if you are a lawyer or have the patience of one. I am publishing this post because — as much as I respect those analyses — I believe seizing the bull by the horns and owning shit for what it is, rather than what it isn’t, will be fruitful.)