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Initial Coin Offering (ICO) – How to Avoid Investor Protection Claims

Initial Coin Offerings (ICOs) have established themselves as an alternative form of corporate financing at least since 2017. Compared to conventional methods like share issues or venture capital financing, ICOs offer various advantages. In most cases, they are cheaper and faster to implement, easier to distribute to the public, and often the entrepreneur does not need to give away any capital or voting rights in his company. Therefore, ICOs offer excellent opportunities especially for young companies, start-ups and FinTechs.

Numerous advantages over conventional forms of financing

However, the prospect of raising several million euros in a short period of time may tempt some people into running an ICO without applying the necessary care. Although ICOs are easier to implement than a capital increase including a stock exchange listing for example, ICOs are not completely exempt from regulation. In fact, even a crypto token issued by way of an ICO may be subject to a prospectus requirement which needs to be approved by the Federal Financial Supervisory Authority (BaFin).

Dealing with regulatory and civil law issues

We recommend all prospective ICO issuers to thoroughly examine the regulatory requirements for their project. The civil and especially corporate law aspects also require close attention. This involves not only the definition of the tokens and the terms and conditions of the token sale agreement, but also the adequacy of the company’s organizational structures. In this context, it is particularly important to reconcile the various interests of the managers, owners and ICO investors.

Envion: A successful ICO gone wrong

If these preparations are not made with adequate care from the outset, even a successful ICO can easily go wrong. This is what happened to Envion, one of the most successful ICOs in Germany (100 million euros raised), which is now making headlines. Not only are the founders in dispute with the CEO in the regional court of Berlin. About one third of the investors also consider filing investor protection claims based on prospectus liability.

Companies interested in running an ICO are hence recommended to seek full legal advice prior to starting their ICO project. Our experienced crypto-team will be pleased to assist you from the outset. Please feel free to contact us for any queries, without any obligation, of course.

Continue reading:
How Does Financing a Start-up Through an ICO Work in Germany?
Bitcoin Taxation in Germany

Benjamin Kirschbaum

Attorney Benjamin Kirschbaum, based at our Berlin office, mainly works on matters relating to blockchain and cryptocurrencies. In this field, he offers our clients comprehensive advice on all aspects of tax law, financial supervision, and civil law. In addition, Benjamin Kirschbaum works on matters relating to general civil law, administrative law, canon law and the law on religions.

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