Raising capital in the Initial Coin Offering (ICO)
In the recent past, a cheap opportunity to obtain capital for their project on the market has developed, especially for young companies that wanted to raise funds with a new business idea. So they created their own cryptocurrency (referred to as “coins” or “tokens”) that investors could purchase in order to participate in the project at an early stage and thereby acquire certain rights. Based on an initial public offering of a stock corporation (IPO = Initial Public Offering), in which investors could subscribe to shares, the issuance of these cryptokens or coins was called an “Initial Coin Offering” (“ICO” or “ITO” = Initial Token Offering). ). The advantage of an ICO was that raising capital via an ICO/ITO was much cheaper and quicker than going public with a stock corporation, which followed strict regulations and entailed high costs. However, this also entailed the risk that investors were less protected when investing in these cryptocurrencies. The companies that issued such cryptocurrencies often underestimated their own liability risks.
The different types of tokens
Depending on which rights for investors were associated with the cryptocurrencies, the obligation determined whether a prospectus had to be drawn up beforehand for an ICO / ITO. If it was a question of security-like “equity tokens” that granted the holders voting rights and the payment of dividends similar to a share holder, there was an obligation to publish a prospectus in accordance with the Securities Prospectus Act and the Prospectus Ordinance before these tokens were issued. If, on the other hand, the token could not be traded and provided profits, it was more of a profit participation right, for which a prospectus had to be drawn up in accordance with the Capital Investment Act.
Incorrect white paper as a basis for prospectus liability
Only in cases in which the buyer of the token was promised later usage rights to the project (utility token) was there no obligation to publish a prospectus.
However, when these tokens were issued, it was common practice to create a so-called “white paper” for investors, which, similar to a prospectus, provided information about the project and promoted the purchase of the crypto tokens. The content of this white paper could be designed in any way because it was not subject to any prospectus requirements (neither the Securities Prospectus Act nor the Asset Investment Act or the Capital Investment Code).
In this respect, the courts were asked whether such a white paper could be the starting point for a liability claim by investors when issuing crypto tokens if the white paper did not explain all the essential points of the ICO.
Judgment of the Berlin Regional Court of May 27, 2020 (AZ. 2 O 322/18): Prospectus liability for initial coin offerings
The Berlin Regional Court decided on this question in a highly regarded judgment. It came to the conclusion that a white paper – even if the promotional nature is the main focus – can also be the basis for a claim for damages. If this white paper is the only source of information for the investor due to the lack of a prospectus requirement, it must be correct and present the project comprehensively. Especially in cases in which the special legal rules on the obligation to publish a prospectus (Investment Act, Securities Prospectus Act, Capital Investment Code) do not apply, the prospectus liability established by judicial law in the narrower sense according to Section 311 Paragraph 2 of the German Civil Code (BGB) would have to intervene to protect the investor.
Conclusion :
If you have also purchased crypto tokens as part of an ICO/ITO, we would be happy to check for you whether there was an obligation to publish a prospectus, to what extent the white paper contained false information and what claims you are entitled to against the issuers and initiators.
Tags: investment, cryptocurrency, incorrect white paper, liability due to incorrect prospectus
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