An Indian law take on coins and tokens and their offer /generation

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COIN OFFERINGS & TOKEN GENERATION: A PRIMER
Initial Coin Offerings and Token Generation Events (interchangeably referred to as “token sales” or “ICOs”) are
no longer the next big thing - they are the current BIG thing. With over 235 ICOs reported in 2017, and about
230 ICOs already conducted in 2018, seems everyone is vying for a piece of the crypto-pie. As the frequency of
these offerings increases, the regulatory outlook across jurisdictions also continues to evolve, reinforcing the
need to think through the proposed offering as well as the structure backing the coin/token and the token
generating company.
We have prepared this guide as a ready reckoner for all things ICO and are more than happy to discuss any
queries you may have, or even any ideas you would like to share or discuss.
WHAT ARE TOKEN SALES?
The simplest way to describe a token sale is as an innovative method of crowdfunding by using cryptocurrencies.
Legally, however, this description would be rife with uncertainty. For instance, in India, is crowd funding legal?
What about cryptocurrencies? With the Indian Finance Minister announcing that cryptocurrencies are not ‘legal
tender’ in the 2018 Budget, or the RBI directing banks and regulated entities to not deal in virtual currencies or
provide services for facilitating any person or entity in dealing with or settling virtual currencies, can it be
concluded that these are illegal? Regulators across jurisdictions have different takes on token sales – while some
jurisdictions like Switzerland, the United Kingdom, and the United States have gone ahead and framed
regulations and guidelines on such offerings, others like China and South Korea have imposed a ban or restriction
on token sales as a means of fundraising.
In a token sale, a business or an individual issues a ‘coin’ or a ‘token’, and offers it online for sale in exchange of
traditional currencies or more often virtual currencies like Bitcoin or Ether. Virtually anyone with access to the
Internet can participate in these sales that are used to raise funds for a variety of projects.
The coins or tokens are typically created and disseminated using distributed ledger or blockchain technology.
Features and purpose of coins or tokens vary across token sales. As noted by the European Securities and
Markets Authority, some coins or tokens serve to access or purchase a service or product that the issuer
develops using the proceeds of the token sale. Others provide voting rights or a share in the future revenues of
the issuing venture. Some have no tangible value. Some coins or tokens are traded and/or may be exchanged
for traditional or virtual currencies at specialised coin exchanges after issuance.
Why a Token Sale?
Token sales are quicker, require lesser disclosure, and offer an unprecedented scale of global fundraising.
Further, investments in token sales are generally secure and allow anonymity and greater liquidity than
traditional venture capital or private equity.
Investing in Token Sales
Investing in token sales involves a high degree of risk. Some of the key risks, also highlighted by several
regulators, include – the traditional purchaser protection regime is inadequate to address a token sale (a square
peg for a round hole?), vulnerability to fraud or illicit activities since limited information is disclosed, high risk of
failure of business or technology (which remains largely untested) and hence loss of investment, lack of exit
options, and extreme price volatility.
A prominent risk associated with token sales is that of frauds and scams. Recent instances of legal actions and
proceedings range from the United States Securities and Exchange Commission (“SEC”) initiating action in
respect of the PlexCoin, DAO Tokens and Munchee Tokens, as well as class action suits filed against Tezos for
alleged violation of securities laws, RIOT Blockchain and its key personnel for a false and misleading name and

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other information, as well as violations of securities laws, Coinbase or aiding and abetting breach of fiduciary
duty, aiding and abetting conversion, negligence and unjust enrichment and of course, the Nano-BitGrail class
action suit. Another example is the KRaken lawsuit, now shifted to private arbitration, with fraud, negligence
and false advertising being the primary issues. There have also been instances of founders and offerors shutting
down operations after raising a significant amount of money. While each token sale needs to be evaluated
individually, one could say possible “red flags” include insufficient information relating to the token sale or
development team, no timelines, no clearly defined projects, etc.
Further, depending on the structure of the token, there is a possible regulatory oversight from consumer
protection authorities. This consumer protection oversight usually applies when tokens are structured as
“utility” tokens (discussed below). Most jurisdictions have a similar set of consumer protection laws though with
varying degrees of severability and enforceability.
Crypto Exchanges
Several token sales offer tokens that may be used as a mode of exchange over centralized or decentralized
cryptocurrency exchanges. Cryptocurrency exchanges are mediums where customers can exchange their
cryptocurrencies and tokens for other cryptocurrencies and tokens or for fiat money. Cryptocurrency exchanges
come with their own set of legal hurdles. For example, exchanges usually need to be registered under securities
laws in most jurisdictions, the most notable being the United States, Switzerland and Japan, and there are a
number of compliances to be undertaken, such as reporting requirements, disclosure requirements, and know
your customer norms. Other than licensing and associated compliances, another kind of legal hurdle is the
treatment of cryptocurrencies by regulators, and availability of appropriate banking and conversion channels
for the exchange. For instance, with RBI’s notification dated April 6, 2018, banks and other registered financial
institutions (or any regulated entity for that matter, as stated in the notification), are prohibited from engaging
with entities ‘dealing in’ or ‘settling’ virtual currencies. While this prohibition stands challenged before the High
Court at Delhi, this could in a practical sense end up nulling the entire exchange set up if dependent on banking
and conversion channels based out of India.
STRUCTURING A TOKEN SALE
Keeping in mind the current regulatory sentiment across jurisdictions, it is extremely important to think through
the various aspects of a token sale – the entity(ies) generating and offering the ‘coin’ or ‘token’, the nature of
the ‘token’, the documentation and disclosures involved, and the terms of the token sale itself. While many
token sales will fall outside the regulated space, depending on their structure, some token sales may involve
regulated investments or activities.
Set out below are some of the key considerations and steps to be undertaken before a token sale goes live.
Jurisdiction
The first step in setting up a token sale is identifying the jurisdiction where the token generation and offering
would be undertaken. Presently, most jurisdictions can be broadly classified into: (i) legally accepting or “token-
friendly”, such as Switzerland, Estonia and Canada; (ii) legally averse, such as China and South Korea; and (iii)
token agnostic, such as the United States, India and the Cayman Islands.
Needless to say, one has to decide between those jurisdictions that are token friendly and those that are
agnostic. Jurisdictions that clearly specify the type of rules that may govern token sales – and whether they will
be governed at all – are preferable as they provide clear indications of regulatory risks and future actions. A
jurisdiction that remains silent on cryptocurrencies and ICOs may be problematic because there may not be any
indicator regarding which way its regulators may turn.
“Token friendly” jurisdictions include Singapore, Switzerland, Estonia, Gibraltar, Japan and Canada. These
countries provide regulatory guidance as well as different forms of tax benefits, and several successful token

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sales have been offered in these countries. Almost all these jurisdictions warn of securities regulators’
supervision if the token being offered in the ICO constitutes a “security”. Compliance requirements under such
guidelines usually involve seeking an exemption for the ICO from the relevant security regulator.
In Singapore, the Monetary Authority of Singapore (“MAS”) clarified that digital tokens being offered through
ICOs could constitute securities under Singapore’s Securities and Futures Act (“SFA”). It issued guidelines to
clarify that securities regulations would be attracted if the offering constituted products (such as securities,
debentures, collective investment schemes, etc.) under the SFA. In December 2017, the MAS went on to warn
against investments in securities, noting that such investments had no regulatory safeguards.
Similarly, in the United Kingdom, The UK Financial Conduct Authority (“FCA”) released a statement on
distributed ledger technology in December 2017 (“FCA Guidance”), defining ICOs as a digital way of raising
finance online using digital currency and distributed ledger technology. Whether or not an ICO falls within the
FCA’s regulatory purview can only be decided on a case by case basis. The FCA issued warnings against the risks
associated with ICOs. It also warned of possible regulatory supervision under securities laws, depending on the
structure of the ICO.
Canada offers a “regulatory sandbox” option for conducting token sales, and Estonia provides different types of
licence options with regards to cryptocurrency offerings. Australia is one of the first countries to formally launch
token sales regulations, it requires token sales that involve combined investment to adhere to the Corporations
Act, to keep track of those shares (if the token sale issues shares) and to issue a disclosure document and acquire
a financial services license if the token sale offers financial advice to customers.
On the other hand, in a legally silent jurisdiction like India, the Reserve Bank of India (“RBI”) has periodically
cautioned the public against virtual currencies - In 2017, it issued different press releases, one warning the public
of risks of virtual currencies, and another clarifying that it did not authorise entities to operate schemes
surrounding virtual currencies. Simultaneously, the Securities and Exchange Board of India (“SEBI”), India’s
securities regulator, set up a committee to advise on the possible approaches it could take to address changes
in the fintech sphere. In January 2018, the finance minister has announced that cryptocurrencies do not
constitute legal tender, and now RBI has prohibited banks and regulated entities from dealing in virtual
currencies. However, there is talk of a digital fiat currency, which we should hear more about in the near future.
However, even cumulatively, these views, all issued by the top finance and regulatory watchdogs in India,
provide little guidance on how an investment by individuals or ‘non-regulated’ entities in cryptocurrencies will
viewed, so long as Indian banking channels aren’t used.
Further, should SEBI extend its jurisdiction to token sales, crucial issues will have to be addressed in order to
sufficiently comply with its regulations. For example, the structure of many token sales mimic those of “IPOs”,
and should the regulator decide that the ‘coin’ or ‘token’ amounts to a ‘security’, there are disclosure
requirements that will have to be complied with. There is also a risk of a token sale being considered a “collective
investment scheme” under securities’ regulations; this too, attracts heavy compliances. Further still, token sales
are most akin to crowdfunding, and in India, SEBI has issued draft guidelines that require a set of compliance
requirements for those undertaking crowdfunding activities.
The risks do not end with the conduct of a token sale. Another issue that is now being raised is the tax treatment
of both, the funds that are raised in token sale as well the amount exchanged for the token. There are also talks
of the conversion of coins – say, from Bitcoin to Ether – being taxed, and little guidance on the matter from
regulators. Thus, though India remains silent on token sales, the risks associated with offering one from India
seem large.
In the United States, the SEC has clarified that if the token is determined to be a security as per existing
regulations, an ICO / TGE would have to comply with American securities laws. There have been instances of the
SEC, notably in the case of the DAO token, initiating an investigation and determining that tokens being offered
were indeed securities. In the case of DAO token, the SEC did not issue any charge against the partners of the
organization, however, it issued cautions to the public. The general federal principle is that the underlying

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characteristic of what is being offered is what determines whether the same is a security or not. The Howey Test
(see ‘Structuring the token’ below), framed by the Supreme Court, is popularly used to determine whether an
offering constitutes a security. To avoid this uncertainty, there have been instances of founders restricting US
citizens from participating in several ICOs.
Corporate Structure
Once a jurisdiction has been identified, the next question that usually arises is that of structuring the sale. In
general, there are two popular methods of conducting a token sale: the first being an onshore structure, and
the second an offshore structure. Within these structures, there are different permutations and combinations
that permit different types of ICOs / TGEs.
In an onshore structure, the ‘coin’ or ‘token’ is offered by an entity (usually a company) within a jurisdiction. In
an offshore structure, by an entity that is based in another, more ICO-friendly, jurisdiction. In the offshore
structure, there are instances of having in place two entities: (i) an operating entity that may own the technology
and intellectual property on which the ICO is going to be based, and (ii) an entity that “offers” the coin or token
(or some variation, thereof). The technology and profits are transferred between both entities. Such a structure
offers added benefits, especially tax advantages and limited liability. Of course, the permutations with respect
to the types of structures thatcan be adopted areplentiful, but key considerations include the number of entities
one chooses to adopt, incorporation and compliance costs, bank account fees, commercial considerations and
the tax treatment of cryptocurrencies offered by the relevant jurisdictions. In the United States, the money
raised in an ICO is taxable, the amount taxable is determined based on the fair market value of the
cryptocurrency received from the ICO on the date it ends
In either case, the appropriateness and legality of each structure must be evaluated on a case-to-case basis.
Pre-ICOs
An option commonly used by offerors, a pre-ICO can be thought of as a “beta ICO”. Aims of conducting a pre
ICO may differ: they are sometimes held to gauge purchaser interest in the actual ICO, as a marketing strategy
to raise awareness, and/or to raise funds before the ICO is underway.
In most cases, participants in pre-ICOs are usually bigger purchasers, whether accredited, institutional, or HNIs.
The trend in pre-ICOs issuing a SAFT – or a Simple Agreementfor FutureTokens – to interested purchasers which
promised a future issue or offering of tokens in exchange for money also recently came under the SEC’s radar,
pushing offerors to now enter into what are called token purchase agreements (either a single agreement for
both the pre-sale as well as the public sale of tokens/coins, or separate) with the investors, and details of the
risks associated with the offering seem to be becoming more and more robust in the agreement. All going to
show that the same level of thought and structure that goes into an ICO is advisable for a pre-ICO, as the risks
of regulatory supervision remain the same.
KYC
Conducting a token sale invariably requires some form of “Know Your Customer” safeguards. Most countries
have issued statements highlighting risks associated with token sales, and a recurring risk is that of money
laundering and financing terrorist activities. To avoid possible regulatory oversight, it is often recommended
that entities offering token sales structure in a form of global KYC norms. These usually include a requirement
for participants to submit valid photo and address identification proof. Under these norms, issuers in an ICO
should have robust mechanisms to verify the authenticity of information being submitted, as well as undertake
further due diligence on participants, should the need arise. Many jurisdictions, such as United States,
Switzerland, and Canada, have KYC norms in place; these can be used as a base before participants are actually

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permitted to contribute to the token sale. In India, while no explicit regulations or norms have been prescribed,
some of the key cryptocurrency exchanges have opted to self-regulate and have included a uniform KYC
approach.
Structuring the token
As stressed above, the reason most securities regulators’ interests are piqued when it comes to token sales is
due to the nature of the token or coin being offered. More often than not, these tokens are structured in a
manner that attracts the ambit of securities laws across most common law jurisdictions.
The US Supreme Court had laid down certain guidelines to help determine whether a sale is that of a security –
some variation of this test is applied in many common law countries. As per this test, securities laws would apply
if the sale or offer of a coin or token involves cumulatively:
• an investment of money
• an expectation of profit
• investment in a common enterprise
• profits from the efforts of a promoter or third party?
It is prudent to ensure that the underlying characteristic of the coin or token is a‘utility’, as opposed to a security,
derivative or loan. ‘Utility’ could be providing access to a certain platform or technology through the token, or
even ‘loyalty points’ that may be exchanged on a platform. Allowing tokens to provide voting rights or
shareholders’ benefits (akin to dividends) to the token-holder could bring them into the regulatory space.
It is also advisable to remain cautious about allowing tokens to be offered as “bounties” or “rewards”. In certain
jurisdictions, like Singapore, allowing a token to be a form of reward may bring its scope under the ambit of laws
relating to collective investment schemes.
DOCUMENTATION
While conducting an ICO / TGE, it is advisable to have the following documentation in place to avoid possible
regulatory hurdles:
Whitepaper
The whitepaper is the heart of the ICO - a technical document that describes the existence of the problem the
company / project (and subsequent tokens/business) aims to solve, the solutions offered, and the technical
aspects of both. There are no fixed rules or universal standard with respect to whitepapers. Generally, however,
they may comprise of (i) the problem at hand; (ii) the product that aims to provide a solution to the problem;
(iii) how the coin or token will function, its advantages, implementation, etc.; (iv) the future plans of the
business; and (iv) details of the team/ founders. While a whitepaper is a business document, it is advisable that
it vetted by a legal advisor, as any potential liability of the offeror that might accrue may be determined from
the whitepaper.
Some whitepapers include the legal terms of and risks associated with the token or coin, such as the whitepaper
issued in the LAToken ICO. However, it is advisable to have in place separate documents that specifically address
the terms of the token sale.
Token Purchase Agreement + Terms of the Sale
This is a crucial legal document that addresses the terms and conditions which will govern the sale and purchase
of tokens and associated rights and obligations of the offeror and the purchasers. Generally, this document
should account for all possible legal aspects of the token sale and should be drafted by legal advisors. All legal

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and regulatory risks should also be accounted for, for example, it should expressly prevent participation from
users from countries that have banned ICOs, necessitate KYC norms, limit the liability the entity offering the ICO
may incur, etc.
Other than the acknowledgement and assumption of risks that participants in the ICO would be assumed to
undertake, security concerns of the ICO and the business, the procedure and specifications of the token sale,
refund mechanisms, handling of taxes for ICO-related transactions, limitations on liability and governing laws
and venue for dispute resolutions would also be included.
Terms and conditions of the business
It is advisable to have in place terms and conditions that will govern the business of the entity once the token
sale has been carried forward. This document should be drafted or vetted by a legal advisor to ensure
compliance with applicable laws and should cover inter alia the services offered by the website /
business platform (including any occasional modifications that may occur), intellectual property rights, the
period for which the terms will operate, representations and warranties of users, any threats of anti-money
laundering and terrorism financing, limitations on liability and governing law and jurisdiction in the event of a
dispute, and the dispute resolution process.
CONCLUSION
ICOs have emerged as a widely used alternate to traditional forms of fundraising – but they need to be
undertaken cautiously and responsibly. It is imperative to consult advisors and experts and be aware of the (fast-
evolving) regulatory framework while determining the relevant jurisdiction, nature of the coin or token on offer
and the corporate and ICO structure and documentation.
Do reach out to our Fin-tech, Blockchain & Crypto-currency Group, should you have any comments or question.
Mathew Chacko Aashima Johur Aadya Misra Ankita Hariramani
mathew@spiceroutelegal.com aashima.johur@spiceroutelegal.com aadya.misra@spiceroutelegal.com ankita.hariramani@spiceroutelegal.com
Disclaimer
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