Compilation of the original text: Hu Tao, Chain Catcher
Original title: "11 Tips to Avoid Crypto Startup Legal Pitfalls》
Compilation of the original text: Hu Tao, Chain Catcher
There is a lot of noise in the market about crypto regulation: the armchair IANAL¹ opines on the Howey test, while most real lawyers are limited to offering simplified generalizations. I used to beStellarThe first lawyer in the company, now speaks to many Dragonfly portfolio startups on their legal and regulatory issues. I've come to realize that most people are completely clueless about how to navigate crypto law and regulation from an operational perspective. Finding good practices can be difficult and time-consuming. Thus, I present a distillation of practical legal considerations "from zero to one" of operating a crypto project. ²
sincere thanksMarc BoironandHaseeb Qureshi、Zack SkellyandCelia Wanfirst level title
why the law is so important
Crypto startups start out focusing on technology, marketing, and community, but often ignore the law. It's natural to build something cool and treat legality as a secondary aspect ("...but I'm decentralized!").
However, even if you consider yourself Anonymous³, this is a mistake: class actions, enforcement actions, criminal investigations, consumer harm, and unexpected taxes could be waiting around the corner. If it doesn't hit you now, it might in five years. Don't let Kruger himself think you've legitimately figured it out just because your Twitter image is PFP and you've memorized the four dimensions of the Howey test.
Laws affect products, operations, marketing, partnerships, and corporate structures. Given the rapidly evolving laws and regulations, there is no boilerplate in crypto law, and different lawyers may tell you different things depending on how conservative they are and their interpretation of current trends. Additionally, your personal risk appetite will significantly affect your approach, so it is imperative that you know your boundaries.
The purpose of this article is to provide startup founders with some how-to tips, drawn from years of close experience. How can crypto startups build legitimacy so they can prepare themselves for the long term? What are some common pitfalls? What kind of infrastructure should they build?
The purpose of this article is not to explain Cryptography 101. Curated by Jason Somensatto0x Legal WikiWhile a little outdated, it's still the best place to read about the basic legal regime of encryption. Additionally, nothing in this article is legal advice. It is vital that companies receive targeted legal advice from reliable, experienced external advisors.
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1. Structuring Your Company Right
Before you can secure venture capital funding, you will need an investable entity that has completed corporate registration in the jurisdiction of your choice, with organizational documents in place and (if applicable) intellectual property agreements with employees, contractors and affiliates. ⁴
Corporate structure can have a significant impact on tax liability, regulatory risk, regulatory obligations and general liability. You should consider where you want to set up your business, if you want to use more than one entity, which entity performs what function, who manages the entity, and which corporate form you wish to use for each entity. Many agreements involve multiple entities, such as a token generation entity that may be located offshore, a software development entity located in a jurisdiction with strong legal protections for software development, and an entity that hosts front-end interfaces or performs business development. If the entities are properly structured and follow corporate formalities, you should be able to segregate risks and obligations between entities.
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2. Formulate internal policies
You need to set expectations with your co-founders, employees, contractors, and key ecosystem members about acceptable behavior. One bad apple can tarnish the reputation of the entire project. Some policies I recommend all companies consider⁵:
1) Communication Policy:
As a company, be consistent in how you communicate what your product is, what your token does, your company’s role in interacting with users and funding, and what your roadmap is. You can work with users to set expectations of what you can and cannot deliver due to your technical limitations. ⁶ If your project is new, be sure to explain to users that your technology is under development and use is very risky and may result in lost funds. Tell your team not to pitch or promise anything related to token prices (how can you really know?) or non-hard-and-fast partnerships.
complaintcomplaintAll instances where Ripple executives and employees are cited. Make sure your teams (especially marketing) understand the boundaries of how they communicate.
2) (Token Project) Trading Policy:
If your project has tokens, you might consider creating a team trading policy so that the team does not trade or scoop up cryptocurrencies based on material non-public information, nor execute or direct trades that could lead to market manipulation. This builds community trust and avoids allegations of market manipulation.
You might consider developing an internal policy that sets out lock-down schedules and sales limits for your team.
3) Sanction Policy:
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3. Know that all your documents and communications can be discovered - the true privacy is rare
Avoid making bad jokes in internal communications. During a regulatory subpoena or private class action discovery process, you may be required to turn over all messages you have sent and all documents pertaining to a matter. This may also include recollections of phone calls and other fleeting messages. Avoid saying things out of context.
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4. The content is accurate
Make sure your website, social media, and other external-facing information is accurate and not misleading. Your website, marketing, and public messaging are top of mind for potential plaintiffs and regulators when they bring a lawsuit against you. Your users will also learn about your product from your content, and users can be hurt if they misunderstand the product.
Provide proper disclaimers and disclosures where appropriate so your users know what they're getting into. Don't make outlandish claims (9000% APY) without proper warnings and definitions. ⁷ For the front-end interface, clarify what the front-end does and does not do. Don't use words from the TradFi world to describe your product because there isn't a prominent enough warning that the product is different. Maybe just create a separate word for your product instead of using TradFi terms.
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5. Has a terms & conditions page and a privacy policy page
You might want the terms & conditions page to include disclosures about your technology, limitations of liability, disclaimers of warranties/guarantees, risk disclosures and assumptions, descriptions of marketing terms (e.g., what does "free" or "APY" really mean? ), eligibility criteria, prohibited actions, and geographic restrictions for users to use your frontend or participate in certain benefits (such as airdrops). Mandatory individual arbitration is now the standard and helps avoid class actions or class arbitrations. If your product involves community interaction, please consider the Community Conduct Policy and Content Moderation Policy.
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6. Know Your Intellectual Property (“IP”) Strategy
Most encryption protocols are licensed under permissive open source licenses such as Apache 2.0 or the MIT license. The industry generally supports these licenses as they facilitate rapid iterative innovation, but some projects may benefit from a custom approach, such as a license that prevents fast-following forks. For example, the Uniswap 3.0 license blocks forks for two years, while MetaMask's license makes its software open to use unless you commercialize the fork and have more than a certain number of monthly users.
If your code base is open for public contribution, you should ensure that contributors assign the appropriate IP rights to their code to entities that can make the project's code available under the license of your choice. This is usually done with a Contributor License Agreement, which is sometimes automatically embedded into the contribution process if you use GitHub.
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7. Understand the tax implications of token offerings
If your project involves tokens, make sure your company is properly structured at the time of the token offering or sale. Once tokens are issued and the fair market value is determined by the market (or, when token interests are sold through a token purchase agreement or SAFT), the tax valuation of your company and tokens may change, so you can no longer Provide grants to employees that enable them to earn significant benefits. This can also have significant and irreversible tax consequences, depending on your local tax regime.
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8. Don’t succumb to the trap of crypto marketing
It can be tempting to have a celebrity hype your product. But paying an influencer (or anyone else) to promote your project is a bad idea, unless you make sure the influencer discloses that they are being paid for such promotion. ⁸
It's a bad idea to make outlandish promises that have no basis in fact - if those promises aren't kept, you could be investigated for fraud.
In general, using token-related viral marketing techniques (e.g., recommend five people to get X tokens) will receive more scrutiny from regulators and may not be suitable for your project.
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9. Ensure access to experienced outside legal counsel
A good cryptocurrency lawyer is worth a fortune, possibly literally.
Hire consultants with prior crypto experience. While I am open to new crypto attorneys, working with an attorney who has not done crypto-related product consulting, regulatory consulting, or financing transactions before can be risky and time-consuming. It's best to hire someone who already knows how to spot and navigate pitfalls.
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10. Imitation is risky
It's tempting to try to "copy and paste" strategies from other seemingly successful protocols. However, you still need to do your own research. Just by observing a project's public existence, you won't get a full picture of what structures other protocols have built internally to protect themselves. Depending on the various characteristics of their teams or products, they may also be subject to different legal regimes, risk exposures and risk appetites.
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11. Don’t forget about decentralization
in conclusion
in conclusion
A great legal strategy is only one component of startup success, but it is essential. Many pitfalls can actually be easily avoided if you are knowledgeable and strategic from the start.
As your project gains traction⁹, you should strongly consider hiring in-house counsel. An in-house lawyer will have in-depth knowledge of your product, operations, marketing and business and be able to provide better risk-adjusted advice on your project.
footnote
footnote：
[1] A popular acronym for "I'm not a lawyer," for those who aren't fluent in the language of the internet.
[2] I am a lawyer, but not your lawyer. Nothing in this article is and should not be construed as legal advice. My suggestion may be wrong or not suitable for your project. Please hire outside consultants.
[3] Being "anonymous" may help protect yourself from unwanted publicity in the short term, but most people are not paranoid and/or skilled enough to remain anonymous consistently in the long term.
[4] Unless you are a DAO, in which case you may still be asked about your corporate structure, as some people may not be involved without an affiliated entity.
[5] I said "companies", but these suggestions can also be applied to people in "teams".
[6] For example, if you are a non-custodial wallet, make it clear on your website that you do not manage private keys and cannot provide recovery services. This is critical in helping users understand their relationship with your company.
[7] For example, if you specify that your protocol can give someone XXX% in return, you should explicitly state the conditions required for this to happen.
[8] This is serious business, seehttps://www.sec.gov/news/press-release/2020-246。
[9] This milestone will look different for different projects, but usually after a Series A or ~$50 million post-money valuation, it will be a good time to start looking seriously. If the law is an integral part of your product or strategy, it would make sense to look at it earlier.
