How can ICO prove its innocence? The necessity of project white paper information disclosure

From a global perspective, a new financing model is emerging, or has already emerged - ICO, the full name of which is Initial Coin Offering, which is derived from the IPO in the securities market. Both obtain financing by selling part of the equity (shares or income rights) of the company or project, but there are also great differences in financing methods, financing cycles, and regulatory methods. Through ICO financing, companies obtain seed users, and these users, that is, investors, obtain tokens issued by the company. After the tokens enter the trading market, investors can sell the tokens they hold to obtain profits.

At present, the main ways for investors to participate in ICO are RMB and digital currencies such as Bitcoin and Ethereum. For enterprises, there are no restrictive constraints such as prospectuses and regulatory approvals. They only need to formulate project white papers and decide on the disclosure content independently . However, China has not issued special regulatory regulations for ICO. In the article "Analysis of the Legal Protection of Bitcoin Transactions from Court Cases", the author analyzes the property value of digital currencies and believes that such digital currencies should have substantial property attributes. Therefore, when enterprises conduct ICO, they should disclose project information to the maximum extent in the project white paper, which is of great significance to the enterprise's risk control compliance and gaining the trust of investors . The author believes that the necessity of project white paper disclosure is closely related to the following four aspects.

Regulatory regulations

At present, there are no regulatory regulations directly related to ICO in China. There are only notices issued by the People's Bank of China ("PBOC") on the concept of Bitcoin and restrictions on trading entities, and notices issued by the CSRC on the rectification of equity crowdfunding. First, the legal definition of the nature of Bitcoin . In December 2013, the PBOC and four ministries and commissions jointly issued the "Notice on Preventing Bitcoin Risks", which clearly defined that Bitcoin is not a currency issued by the monetary authority and does not have monetary attributes such as legal compensation and compulsion. It is not a real currency, but a virtual commodity. It is the first time that Bitcoin has been defined.

Second, transaction restrictions . In March 2014, the central bank issued the "Notice on Further Strengthening Bitcoin Risk Prevention", prohibiting mainland banks and third-party payment institutions from providing services such as account opening, top-up, payment, and withdrawal for Bitcoin trading platforms, and limiting the entities that can trade Bitcoin.

Third, it is prohibited to issue equity publicly without approval . On August 3, 2015, the China Securities Regulatory Commission issued the "Notice on Special Inspection of Institutions Conducting Equity Financing Activities through the Internet". On October 14, 2016, 15 ministries and commissions jointly issued the "Implementation Plan for Special Rectification of Equity Crowdfunding Risks", both of which targeted Internet financial platforms for equity crowdfunding and prohibited the financiers on the platforms from issuing stocks publicly or in disguised form without authorization.

Therefore, from the above regulations, it can be seen that although China lacks supervision over Bitcoin and ICO, the corporate financing model is still subject to the normative constraints of existing regulatory authorities on economic activities .

Industry self-regulation

It is precisely because of the lack of clear regulatory norms that the industry requires a high degree of self-discipline. For example, the wild growth period experienced by online lending platforms in the initial stage of their rise was due to the lag in supervision on the one hand; on the other hand, it was also due to the lack of self-discipline of industry players, and the negligence in the management of business activities, underlying assets, and the destination of funds, which led to a large number of problems and forced the regulatory authorities to crack down on the online lending industry . This self-discipline should be reflected in the following aspects: First, the authenticity of the project . In the initial stage of ICO, there were no formed products. Some were new concepts or projects, and some were technical implementations. For different projects, companies should disclose to different degrees. For products, they must be feasible; for a new technology application, the source code of the open source project must not be copied or plagiarized.

Second, the purpose of funds . Since the amount of corporate financing is large, often tens of millions or even hundreds of millions, after the company successfully raises funds, the management of the funds, such as the custody method and the direction of fund investment, should be disclosed to avoid disputes caused by inadequate information disclosure.

Third, post-investment management . Investors invest funds or digital currencies based on their trust in the project, and their returns depend on the project team's operation of the project, risk control, etc. Therefore, the project team's continuous post-investment management is critical to strengthening investor confidence and the successful implementation of the project.

Investment Philosophy

The author learned that the initial participants of ICO were basically some digital currency enthusiasts rather than professional investors. For most investment projects, investors are often driven by potential benefits and make investment decisions after weighing the potential and risks of the project. They expect the token price to continue to rise after the project is released. However , since ICO is unregulated and does not need to be registered with any government agency, all transactions are conducted on the Internet. In addition to the rules of the project platform itself, the investor protection mechanism has not yet been established. And because investors do not have enough understanding of the company, it is very important for the company to let investors fully understand the characteristics and functions of the tokens they purchase, the risks involved, and the benefits of using the network technology in order to form a rational investment awareness .

Bottom-line constraints

Although in most ICO white papers, companies issue disclaimers to inform investors in advance that this is not a sale of securities in order to avoid the risk of illegal fundraising. As for whether the judicial authorities can distinguish it from securities sales, it is still unknown. my country's Criminal Law and related judicial interpretations have made clear provisions for illegal fundraising activities, defining illegal fundraising as "illegal", "public", "inducement" and "non-specific".

Therefore, when disclosing key information about the project in the project white paper, companies must strictly avoid the above four situations and make substantive disclosures about the project goals, ICO deadline, project development strategy, development team, project features and other relevant ICO details rather than exaggerating them .

There is no doubt that ICO is an innovation in the financing model of blockchain technology, which relies on blockchain technology to establish super trust and thus achieve the deregulation of the project. The development potential and practical value of blockchain technology are gradually emerging, and many countries are beginning to pay more and more attention to blockchain technology. As a new model of corporate financing, whether ICO will eventually be recognized by regulatory authorities or even replace IPO, in addition to relying on blockchain technology, it also requires industry self-discipline.