Brochure liability at the token sale – What is the risk of a faulty whitepaper?
Fachanwalt Lutz Auffenberg has specialised in the field of fintech and innovative technologies with his law firm Fin Law. In particular, block chain technology and its regulation is the focus of his work. In today’s guest commentary, the specialist solicitor deals with prospectus liability at Token-Sale. In addition, he clarifies the question of what threatens in the event of a faulty „white paper“.
Since around 2015, start-ups in particular have often chosen to finance their company via a so-called Initial Coin Offering (ICO). This involves the creation of their own crypto tokens by Ethereum Code, which are then sold to interested investors. Depending on the project, ICO issuers combine the tokens they issue with other rights for the token holders, such as special discounts or other advantages when purchasing the goods or services offered by the issuer in the business to be financed.
ICO tokens do not usually grant investors real company shares and rarely give them participation rights. In order to promote ICOs, ICO issuers are likely to produce a document called a „white paper“, along the lines of the concept paper on Bitcoin published by Satoshi Nakamoto in 2008, in which they present their project and vision to investors, and possibly some details of the planned token sale.
However, the promotion of investment products is a very sticky issue and providers should be extremely cautious. The legal requirements are determined by the specific nature of the product offered and the rights associated with it.
Special statutory and civil law prospectus liability
As a rule of thumb, any publication for the general public that appears to provide a comprehensive description of an investment product for investors can be considered a prospectus under the prospectus liability rules applicable in Germany.
The specific legal requirements that such documents must meet always depend on the investment product offered
For tokens that are to be classified as transferable securities within the meaning of the EU uniformly regulated securities regulation, the EU Prospectus Regulation determines what content securities prospectuses must have and what legal consequences providers who fall short of the requirements face.
Special prospectus preparation and prospectus liability rules apply to tokens which, for example, are only transferable to a limited extent and therefore qualify as investments under the German Investment Act. If, on the other hand, tokens represent neither securities nor investments, the sales documents used for their sale may nevertheless give rise to prospectus liability claims in accordance with the principles of so-called civil law prospectus liability developed by German jurisdiction.
Thus, all marketing materials used for the public sale of investment products are potential sources of liability. The liability rules do not distinguish whether a provider refers to a marketing instrument as a prospectus, advertising brochure, information leaflet or white paper.